Tax season is upon us and while we know that you’d never intentionally try to get on the IRS’ bad side, it’s worth the quick reminder to be wary of how you do your taxes and avoid mistakes. If you’re a new business owner, it can be hard to know every single thing you need to do to have a successful tax season. But making a mistake can mean you get hit with an inaccurate tax bill or, worse, an audit.
Your best bet is usually to work with a certified tax professional who can give you year-round guidance. But if you’re doing it alone for now, here are tools to help you avoid tax mistakes, plus the mistakes that might actually get your business flagged for an audit.
Start preparing your taxes with these options
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The Deluxe plan comes with priority support and live chat, while the Pro Support tier adds access to a tax pro, phone support, live screen share and help on federal and state returns
Guarantees 100% accuracy and maximum refund
Tools to help you avoid tax mistakes
Using comprehensive tax and accounting software is one of the easiest ways to manage tax time and avoid making mistakes. The best accounting software connects to your bank accounts, business credit cards and payroll services to automate expense tracking and ensure accuracy. Then, you’ll want tax software that integrates with those accounting platforms to automatically import all that data.
QuickBooks is a strong accounting option that we often recommend because it integrates with your bank accounts and credit cards, plus third-party apps like PayPal and Square so you barely have to lift a finger to track your transactions. Plus, the most basic QuickBooks plan lets you track income, sales and expenses, organizes receipts, create invoices, runs P&L reports and more.
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Costs may vary depending on the plan selected but take advantage of a limited time offer – 50% off for 3 months
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Tracks your business expenses as they happen, as well as your income. Users can use app to do invoicing, accept payments, manage their cash flow, maximize tax deductions, track travel miles, run reports, send estimates, manage bills and 1099 contractors, plus pay employees
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Yes, bank and credit cards, plus third-party apps like PayPal and Square
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Accessible from any web browser and also offered in both the App Store (for iOS) and on Google Play (for Android)
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Verisign scanning, password-protected login, firewall protected servers and the same encryption technology (128 bit SSL) used by the world’s top banks. QuickBooks also offers multiple permission levels that you can set for additional users’ access
Pros
- Offers a 30-day free trial
- Syncs to your bank accounts, credit cards and third-party apps like PayPal and Square
- Offers real-time dashboards so you can stay updated on all financial transactions related to your business
- The most basic “Simple Start” plan tracks income, sales and expenses, organizes receipts, creates invoices, helps you prepare your taxes, categorizes your business and personal trips, offers a QuickBooks Cash account, runs reports like P&Ls and balance sheets and includes 1 user
- “Essentials” plan, in addition to the above, helps you pay your bills, clock employee time and billable hours and includes up to 3 users
- “Plus” plan, in addition to the above, lets you oversees projects, track inventory and includes up to 5 users
- “Advanced” plan, in addition to the above, provides business analytics and insights, speeds up transactions, gives users access to VIP service QuickBooks Priority Circle that includes a dedicated account team and free online QuickBooks training includes up to 25 users. QuickBooks offers a fourth “Self-Employed” plan for freelancers
- Security features include Verisign scanning, encryption technology (128 bit SSL) used by the world’s top banks and customized access for other users
Cons
- Some user reviews complain of glitches in app and a not so user-friendly interface
FreshBooks also offers some handy capabilities, like categorizing your expenses and itemizing them to make it easier for tax season. It also allows you to take photos of business receipts — an added layer of efficiency for expense tracking.
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Costs may vary depending on the plan selected – click “Learn More” for details
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Extremely easy to get started; Lite plan offers a lot of features; it’s easy to upload receipts (including mileage) and create invoices. App offers time tracing. Very mobile friendly interface.
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Yes, credit cards and bank accounts
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FreshBooks utilizes a 256-bit SSL encryption. The program collects a minimal amount of personally identifiable information, and if your information is ever lost, it’s backed up in multiple databases so you can retrieve it again.
Pros
- Lite plan is a great affordable option for for teams under 10.
- Good for self-employed and freelance team members
- Pricing incentives and discounts for first 3 months with sign-up
- Automatically categorizes your expenses and itemizes them to make it easier on you when tax filing season comes along
- Allows you to take photos of the receipts and to store them on the cloud.
Cons
- Can get pricey once you begin adding on other FreshBooks software integrations
On the tax front, TurboTax is one highly recommended tax platform because it syncs directly with QuickBooks so you can import your data automatically. It also offers on-demand advice from tax experts.
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Costs vary depending on plan
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S Corp, C Corp, partnerships, sole proprietors
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Available for an additional charge
Pros
- Fully integrates with QuickBooks
- TurboTax Expert Assist provides on-demand advice from a tax expert
- Accuracy and maximum refund guarantees
Cons
- More costly than other software programs
- Expert assistance costs extra
*Click here for TurboTax offer details and disclosures
Another option, H&R Block offers unlimited on-demand support over chat or video with certain plans and is also a popular name in the tax space.
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Price varies depending on plan
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S Corp, C Corp, sole proprietorships, partnerships, self-employed
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Available with some plans
Pros
- Unlimited on-demand chat or video support with Online Assist plans
- Over 11,000 branches nationwide
- 100% accuracy and maximum refund guarantees
Cons
- One of the more expensive options
- Speaking with a tax expert costs more for federal returns
Mistake: Making too many deductions
One of the more glamorized benefits of running a business is getting to make deductions like dinners where business was conducted, business travel, a portion of your rent and more. These are pretty normal deductions for certain businesses, but if you have too many write-offs, it can raise some eyebrows — especially if it may not be considered a reasonable, ordinary expense for the type of business you run.
Deductions lower your taxable income and having too many of them can be seen as if you’re trying to claim personal expenses as business ones, or even trying to evade taxes.
Mistake: Claiming too many losses
A loss is when your business’ expenses and deductions are greater than its gross income. Losses are normal for a business, especially new ones. However, claiming a loss every single year can raise some flags around the legitimacy of your business.
It calls into question whether your business expenses are truly ordinary and necessary expenses, or whether you’re just trying to offset your personal tax bill by claiming business losses.
After too many losses, the IRS may consider your business a hobby and you won’t be allowed to claim deductions for it.
Mistake: Incorrectly reporting your income
The IRS cross-references many income documents (including 1099s, bank statements and other forms), so they’ll know if there are any discrepancies between what you report as your income and what your income actually was. These discrepancies may lead to an audit.
Underreporting business income is a common mistake and sometimes it’s not even done intentionally. Sometimes, you may forget about income from freelance or one-off gigs. Other times, you may think it’s fine to just estimate or round up or down on your income but when it comes to your taxes, you need to provide exact numbers.
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FAQs
How much should I set aside for taxes in my business?
Your exact tax bill depends on many unique factors, but experts suggest setting aside at least 25% of net profits for taxes.
What kinds of taxes do small businesses pay?
There are several taxes you may pay as a small business including federal income tax, payroll taxes and even a self-employment tax, but for a more accurate idea of what you will personally be responsible for, work with a certified tax professional.
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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of small business products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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