Top 5 Common Tax Mistakes Small Businesses Make

As a small business owner, managing your taxes can be a daunting task. 

There are numerous rules, regulations, and deadlines to keep track of, and even the slightest misstep can result in hefty penalties and fees. In this article, we will be discussing the five most common tax mistakes that small businesses make, and how you can avoid them. 

From late tax payments to missed deductions, we’ll cover everything you need to know to stay on top of your taxes and keep your business running smoothly. 

Tax planning.

Misreporting income

One of the most common mistakes small businesses make is misreporting their taxes. This includes incorrectly reporting, overreporting them, or failing to report them altogether. Small business owners who are not familiar with the tax code may not know which expenses are deductible or how to properly calculate their taxes. They may also be unaware of changes to tax laws that could affect their businesses. 

One of the most important things small business owners can do to avoid misreporting their taxes is to keep accurate records. Here, good bookkeeping is key. This includes tracking all income and expenses, maintaining receipts and invoices, and keeping detailed records of all financial transactions. By doing this, small business owners can ensure they have a clear picture of their financial situation and can accurately report their taxes. Additionally, they can avoid costly mistakes and ensure their business remains in compliance with all tax laws. 

Mixing personal and business finances

Mixing personal and business finances is a very common mistake that small business owners make. This mistake can lead to a lot of difficulties and complications. For example, if you mix your personal and business finances, you may find it difficult to keep track of your expenses and revenues. You may also have difficulty in preparing accurate financial statements or in obtaining financing from banks or lenders. 

Therefore, small business owners need to keep their personal and business finances separate. They should have separate bank accounts, credit cards, and accounting records. This will help them to monitor their expenses and revenues more easily and accurately. It will also make it easier for them to prepare financial statements and obtain financing. They should also avoid using their personal credit cards for business expenses, and instead obtain a separate credit card for their business. By keeping their personal and business finances separate, small business owners can avoid many problems and ensure the success of their businesses.

Small business tax.

No tax planning

Another common mistake made by small business owners is a lack of tax planning. Tax planning is a crucial aspect of managing your finances. Tax planning refers to the process of legally optimising your tax liability by identifying and taking advantage of available deductions, allowances, and exemptions. This involves careful analysis of your income, expenses, investments, and other factors that can impact your taxes. 

Business tax planning can be done on a short-term or long-term basis, and can involve strategies such as deferring income, accelerating deductions, and investing in tax-advantaged accounts. 

By planning ahead, you can minimise your tax burden and keep more of your hard-earned money. It is important to note, however, that tax laws and regulations are constantly changing, so it is important to stay up-to-date with the latest developments and seek professional advice when needed. 

A business tax planning strategy to consider is the Enterprise Investment Scheme (EIS). The EIS is designed to encourage investment in small businesses by offering tax relief to investors. Investors can receive up to 30% income tax relief on investments of up to £1 million per year, as well as capital gains tax relief on any gains made from the investment. This can be a valuable source of funding for small businesses looking to grow and expand, while also providing investors with tax benefits. 

Business tax planning.

Paying taxes late

One common mistake made by small businesses is paying taxes late. Late payments can result in penalties and interest charges, which can add up quickly and impact your bottom line. 

It is important to stay organised and keep track of your tax deadlines, as well as set aside funds to cover your tax liabilities. To avoid any potential issues with HM Revenues & Customs, small businesses should implement a system for timely tax payments. This includes setting up automatic payments or reminders, keeping track of tax deadlines on a calendar, or working with a business accountant with expertise in tax. By taking proactive steps to ensure timely tax payments, small businesses can mitigate the risk of financial penalties and maintain a healthy bottom line.

Missing tax deductions

Small businesses may not be aware of the numerous tax relief and deductions available to them. In reality, these can be a great way to reduce your overall tax liability, freeing up more money to reinvest in your business. 

An important aspect of business tax planning that small businesses should understand is capital allowance. They allow businesses to deduct the cost of certain assets from their taxable profits. The Annual Investment Allowance (AIA) is a type of capital allowance that provides a 100% tax deduction on qualifying capital expenditure, which is most types of plant and machinery, up to a certain limit. 

There is also Research and Development (R&D) tax relief, which can provide a significant reduction in corporation tax for businesses engaging in innovative activities. You can also claim tax relief on expenses such as rent, utilities, and travel costs, as long as these are incurred for business purposes. As a small business owner, it’s important to be proactive in seeking out these opportunities, as they can help you grow your business and achieve long-term success. 

Small business corporation tax.

While these are the pitfalls that small businesses most commonly fall into, they can all be easily avoided. It is important for small business owners to educate themselves on the tax laws and regulations that apply to them, so they can avoid costly mistakes and take advantage of all available tax breaks. One way to do this is by consulting with a tax professional or business accountant who can provide guidance and advice on how to properly manage a small business’s taxes. 

At Wilkinson Accounting Solutions, our expert team of business accountants have the knowledge and expertise to craft a tax plan that is uniquely tailored to your business’s circumstances and will adapt to shifting markets. To learn more about how our services could benefit you, get in touch with us today.

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