For many business owners, taxes can be one of the largest expenses they face each year. The good news? There are many strategies available to help you minimize your tax bill and keep more money in your pocket while staying fully compliant with tax laws. In this post, we’ll walk you through some of the most common tax pitfalls we see and how you can avoid them.
Problem #1: Missed Deductions
One of the most significant ways business owners leave money on the table is by missing out on eligible tax deductions. In our experience, roughly 80% of our new clients have been overpaying on taxes simply because they weren’t aware of deductions they qualified for. Whether due to a lack of understanding from their tax accountant or a DIY tax approach, these missed opportunities can add up to thousands of dollars in tax overpayments.
Let’s look at some of the most commonly overlooked tax deductions that could help reduce your tax bill significantly:
- Home Office Deduction: If you use a portion of your home exclusively for business, you may be eligible to deduct related expenses like utilities, rent or mortgage interest, and property taxes. This deduction is particularly valuable for remote business owners, yet many miss out because they’re unsure of the qualifications or how to calculate it accurately.
- Cell Phone and Internet: Your cell phone and internet costs may be partially or fully deductible if they’re used for business purposes. Many business owners don’t realize that these everyday expenses are valid deductions, especially if they have a dedicated business line or a significant portion of their phone usage is work-related.
- Travel Expenses: Business-related travel can be deductible, covering expenses such as flights, hotels, transportation, and even meals while you’re on the road. This doesn’t mean you can turn every vacation into a tax deduction, but if your trip has a legitimate business purpose, the associated costs could be partially or fully deductible.
- Meals: Meals with clients, prospects, or referral partners for legitimate business purposes can be deducted, as can certain meals while traveling for work. The rules around meal deductions have changed frequently, but currently, meals purchased for business purposes (like taking a client out for lunch) are generally 50% deductible. This can add up quickly if meals are a regular part of your client or networking engagements.
- Health Insurance: Self-employed business owners may be eligible to deduct health insurance premiums. This can apply to coverage for you, your spouse, and dependents, which is especially valuable for solo entrepreneurs and small business owners who pay out-of-pocket for their health insurance.
- Vehicle Expenses: If you use a car for business purposes, there are two ways to calculate your deduction: the standard mileage rate or actual expenses (like fuel, maintenance, insurance, etc.). Many people fail to track their mileage or expenses diligently, missing out on valuable deductions. Make sure you’re keeping detailed records of business use, as this is an area the IRS scrutinizes closely.
These are just a few of the most commonly missed deductions. Depending on your business, there could be additional areas where you’re eligible for savings, but you’ll need a knowledgeable tax professional to help you identify them.
The Solution: To ensure you’re maximizing your deductions, consider working with a tax accountant who specializes in working with entrepreneurs and understands the full range of deductions available to you. Look for someone who will provide proactive tax planning before the year ends, giving you the chance to review your spending and maximize any available deductions before tax season.
Problem #2: Inaccurate Records
Disorganized or inaccurate financial records can lead to serious tax issues and costly mistakes. Recently, one of our new CFO clients had their business income overstated by more than $100,000 across two tax years due to errors in recordkeeping. Because of these inaccuracies, they were facing a much higher tax bill than they should have. When our team stepped in, we corrected their financials and filed amended returns, securing them a refund of $25,000! This case highlights how critical accurate recordkeeping is, as even clients who pay accountants for financials may still experience costly errors if there’s no system in place to verify the accuracy.
Why Do These Mistakes Happen?
Financial misstatements like this are particularly common among business owners who track finances manually or DIY their accounting software setup. Without a clear understanding of bookkeeping best practices or the specific requirements for business tax records, it’s easy to overlook details, misclassify expenses, or even duplicate income entries. For example, a small mistake like double-recording an invoice payment (which happens more often than you’d think) can inflate your revenue and trigger a larger tax bill.
Additionally, it’s important to remember that many bookkeepers focus on daily transactions rather than ensuring tax-readiness. Bookkeepers may not review entries for tax compliance, so mistakes often go unnoticed until tax season. This creates a major problem if your tax accountant is only preparing your return based on the financials without reviewing your financial statements in detail.
The Consequences of Inaccurate Records
Beyond higher tax bills, disorganized records can have other serious consequences:
- Missed Deductions: When financials are incorrect, deductions are often missed. For instance, a poorly tracked expense may be categorized incorrectly and not deducted.
- Potential Penalties: Inaccurate filings may attract penalties if the IRS identifies discrepancies. This can lead to an audit and increase your tax liability.
- Cash Flow Issues: With overstated income, you may end up paying more taxes than necessary, reducing your business’s cash flow and impacting your ability to reinvest in growth.
The Solution: Take charge of your tax preparation by addressing financial records well before the end of the year. A proactive tax planning session allows your accountant to review financials early, spotting and correcting issues before tax season. Additionally, using a checklist or standard operating procedure for your bookkeeper or accounting software can help ensure that entries are consistently recorded accurately. This extra step can make all the difference in building a strong financial foundation, minimizing errors, and positioning your business for tax savings.
Or better yet, hire the Young and Co team to take care of your accounting and taxes for you!
Problem #3: Huge Unplanned Tax Bills
One of the most stressful situations for business owners is receiving a large, unexpected tax bill. Recently, we worked with a new client who found themselves blindsided by a six-figure tax bill after a highly successful first year. Their business had experienced rapid growth, pushing their revenue into the high six figures very quickly, yet they had no tax plan in place. Without knowing what to set aside throughout the year, they were left scrambling at tax time to cover the amount owed, impacting both their cash flow and financial stability. Fortunately, after working together, we were able to help them reduce their future tax bill by implementing tax-saving strategies and establishing a proactive savings plan.
Unexpected tax bills can be a massive strain on cash flow. Even for smaller businesses, an unplanned tax bill of $5,000, $10,000, or more can cause significant stress, especially when it means diverting funds away from business growth, payroll, or other essential expenses.
Don’t Let Your Tax Bill Catch You By Surprise
There are a few key reasons why tax bills catch business owners by surprise:
- Inadequate Estimation: Without guidance, business owners often underestimate how much they’ll owe, particularly as their revenue grows year over year. Tax liability increases with income, so hitting higher revenue milestones brings a larger tax bill that many business owners don’t see coming.
- Overlooking Quarterly Tax Payments: Many small business owners should be making estimated quarterly tax payments. Without a proper plan, it’s easy to fall behind or pay too little, resulting in an unmanageable balance due at tax time.
- Lack of Tax Strategies: Most new business owners aren’t aware of all the tax strategies that can reduce their tax bill. When no one is proactively looking for ways to minimize taxable income or optimize deductions, the business’s tax liability is often far higher than it needs to be.
The Domino Effect of a Surprise Tax Bill
When a large, unexpected tax bill arises, the impact goes beyond financial stress. Often, business owners must dip into emergency funds, delay key investments, or even take on debt to cover the bill. This not only disrupts business operations but can lead to cash flow issues for months, if not longer.
The Solution: Proactive Tax Planning
For business owners, proactive tax planning is essential to avoid tax surprises and manage cash flow effectively. A tax planning session with your accountant can help you estimate your tax liability and put strategies in place to reduce your bill. This process may involve:
- Income Projections: Estimating end-of-year income based on current trends to anticipate total tax owed.
- Quarterly Payment Adjustments: Reassessing quarterly tax payments to ensure they’re aligned with your actual income, which helps avoid year-end shortfalls.
- Strategic Deductions: Identifying high-impact deductions and timing expenses strategically to minimize taxable income, including potential investments in business growth that also reduce tax liability.
- Entity Structure Review: For some businesses, switching from a sole proprietorship to an S-Corp, for example, can lead to substantial tax savings, especially as income grows.
With proactive tax planning, you’ll have a clear estimate of what you’ll owe, know how much to set aside each month, and have a strategy to lower your tax bill. Rather than facing a stressful tax season, you can manage payments and cash flow with confidence, knowing you’re prepared for what’s ahead.
Ready to Upgrade Your Tax Support?
Our Tax Prep Suite is designed to provide small business owners with everything they need to stay compliant and minimize their tax bill. This service includes:
- Annual income tax preparation for both business and personal returns
- Guidance on deductions, payments, and entity structure
- Annual tax planning one-on-ones to keep you on track
We also offer à la carte options to customize your support level based on your business needs.
Want to get started? Complete our tax questionnaire and book your free tax assessment today!
Young and Co empowers service-based business owners to make an impact in their world through strategic financial services. Let us be your partner in understanding how to confidently handle growth in your business. Together, we’ll build a strategic plan that sets you up for long-term financial success. Learn more about our services and how we can support you in your business endeavors by visiting our website today!
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