Xero Survey Reveals Biggest Tax-Time Mistakes Small Business Owners Make
By Frank Byrt
Six Tax Tips for Small Business Owners from Xero
1. Record all receipts: Out-of-pocket expenses and business-related auto mileage were the most frequently overlooked deductions, so it's important to establish and maintain an accurate system for storing your receipts. One relatively new approach to accomplish that is to use Cloud-based storage technologies.
2. Business equipment expenditures deductions: Section 179 of the IRS Code allows small businesses to deduct the full purchase price of qualifying equipment and/or software up to $500,000, in both the 2012 and 2013 tax years.
3. Home office deductions: Starting in 2013, the home office tax deduction allows small business owners and employees who work from home and who maintain a qualifying home office to deduct up to $1,500 per year.
4. Accounting season is every season: Meet with an accountant year-round. Select an accountant with a fixed fee and value price that includes tax and accounting services. An accountant's planning and financial counsel can take some of the anxiety out of managing a small business.
5. Note the payroll tax rate change: Because the American Taxpayer Relief Act didn't extend the payroll tax reduction put in place in 2010, the tax rate reverted back to the original amount of 6.2 percent for employees and 12.4 percent for the self-employed.
6. High earners need to be aware of health care tax changes: Under the Patient Protection and Affordable Care Act, beginning in 2013, higher-income taxpayers must pay a 3.8 percent additional tax on net investment income, money that will not be deducted from paychecks. And, there will be an additional Medicare tax of 0.9 percent on wage and/or self-employment income in excess of $200,000 for single filers, $250,000 for joint filers, and $125,000 for married taxpayers filing separately.
- 42 percent of the accountants surveyed said small business clients should meet with their accountant on at least a monthly basis.
- 63 percent said business owners should prepare for tax season all year long; in particular, they should keep their financial records up to date.
- Excessive deductions to income – 43 percent
- Misidentifying their workforce (e.g., employees versus contract workers) – 27 percent
- Home office deductions – 11 percent
- Mixing business and personal expenses in deductions – 1 percent
- Other – 9 percent
- Not sure – 10 percent
- Out-of-pocket expenses – 34 percent
- Auto expenses (gas, parking, tolls) – 14 percent
- Depreciation – 20 percent
- Office improvements – 7 percent
- Hiring new employees – 9 percent
- A family vacation veiled as a business trip – 30 percent
- Pets and pet food – 15 percent
- A deadbeat relative – 8 percent
- Nothing – 16 percent
- Other – 8 percent (traffic tickets, SpaghettiOs, daughter's wedding, alcohol, escort, clothes for their dog, gambling losses)