Key Takeaways:
- Business accounting involves reporting, tax preparation, financial analysis, and forecasting, and it’s crucial to ensure your operations keep running.
- Common accounting issues include classifying expenses wrong, keeping inaccurate records, poor cash flow management, and others
- To avoid business accounting issues, improve your recordkeeping, work with a tax pro, and use accounting software
Every business depends on a successful accounting process to keep it running. Your operations won’t succeed without putting financial reporting and bookkeeping systems in place to understand how your business is doing – and where it’s headed in the future. You need to prioritize visibility and organization.
Unfortunately, no business is immune to the complexities of accounting workflows. You have to track all of your expenses, run detailed financial reports, make accurate projections, and analyze data. With all of these moving parts, many pitfalls may arise, especially if you don’t have a dedicated accounting team member focused on these tasks.
Overcoming accounting issues is important so you’re never behind on tax preparation or reporting. This guide covers what business accounting entails, the most common business accounting issues, and how to tackle them.
What Proper Business Tax Accounting Entails
Many business owners fail to realize that tax accounting could be what’s holding them back from revenue growth. These issues can be a big burden for both small and large businesses. Accounting should be a top priority and critical component of your operations.
Ensuring accounting practices are in order helps you set up your business for long-term growth and success by giving you accurate financial information and helping you stay organized and efficient. Generally, business accounting includes these key areas:
- Reporting: Generating documents like income statements, balance sheets, quarterly reports, expense reports, and more.
- Tax preparation: Organizing each month’s expenses and income to help the business prepare for taxes, including employee tax documents, payroll tax responsibilities, vendor and contractor tax forms, quarterly tax payments, and reporting to the IRS.
- Business financial analysis: Running reports to gather data on business functions and their ROI and helping teams make adjustments as needed. Analyses help you understand which parts of operations need more resources and attention and help business leaders uncover how the business is performing.
- Forecasts: Using the data gathered in analyses to come up with realistic cash flow forecasts and projections, whether to make key business decisions or to influence potential investors.
Stay on top of accounting workflows so you always know where your business stands and where it’s headed. Organizing records and tracking financial activities are crucial parts of tax preparation and management.
15 Common Business Tax Accounting Issues
Some businesses don’t (or can’t) prioritize accounting like they should, or they need to update their processes for more efficiency. Here are five of the most common business accounting challenges and how they happen:
1. Improper Classification of Expenses
This is a very common mistake, especially for small business owners. Improper classification occurs when an expense is recorded incorrectly, which can impact internal reports and tax reporting. Business owners sometimes mix up their personal and business expenses, which leads to this problem, or they fail to document their business expenses properly. The result could be that they have a higher tax liability than they should.
2. Failure to Keep Good Records
Recordkeeping may sound like a fairly routine and simple task. Unfortunately, many business owners fail to keep accurate, up-to-date, or complete records. They may not have the time, technology, or staff resources to make this happen, or they just don’t understand how to do it. Poor records make it hard to accurately track expenses and income and can easily lead to errors in financial statements. These mistakes can lead to serious issues with the IRS.
3. Failure to Accurately Separate Expenses
When you own a small business you’ll need to separate personal and business expenses for the purposes of filing taxes. If you’re not meticulous about record keeping, this process can really become difficult.
For instance, you’ll want to deduct for the mileage from the trip you took to the post office when mailing out packages to customers. Be mindful that the deductible mileage stops when you make a second stop to pick up your groceries.
When it comes to these types of expenses, it may become impossible to accurately separate personal and business expenses if you’re not tracking them day to day. You can make this process much easier and more successful in a few ways.
First, you should have a separate credit card and bank account for your business. Consistently use the designated account and keep all of your business receipts and records separate.
Also, consider paying yourself a salary instead of just drawing from your business earnings as needed. This will make tracking and reviewing your spending much more clear. This is one of many cases we come across where careful record keeping is your primary method to avoid scrutiny from the IRS. In the case that your business is ever audited, it will make things much easier for you.
4. Lack of Financial Technology
Saving receipts, invoices, and bank statements won’t get you very far if you don’t have a way to make sense of it all. Some businesses use simple spreadsheets to track income and expenses and create reports, but sometimes doing so can lead to errors and discrepancies, especially as the business grows and its services expand. Using software to help monitor cash flow, track transactions, and pull reports is a big piece of your accounting success. Automation features within the software can help you avoid mistakes and stay organized.
5. Changing Tax Laws and Regulations
Business owners need to keep up with any changes made to tax laws to ensure they stay compliant. For instance, the COVID-19 pandemic led to many new payroll and tax considerations for businesses as well as new forms of relief. Tax credits like the Employee Retention Credit and programs like the Paycheck Protection Program have complex guidelines employers must follow to reap all the benefits. Sometimes business owners aren’t sure what to do in their accounting processes to comply with all of these changes, which can lead to oversights that impact their finances and taxes.
6. Failure to Manage Cash Flow Effectively
Cash flow is the reason many businesses fail. It’s easy to think you have plenty of income to cover your expenses, but managing timelines is an art. You have to account for any upcoming payments and be sure the dates line up so you have enough income coming in. Some business owners don’t consider that customers may be late with a payment or they may take on too many unnecessary business expenses. Cash flow can be tricky, especially when there isn’t a specific person regularly working on it.
Accounting issues can unfortunately lead to many problems for a business, like inaccurate recordkeeping, tax reporting mistakes, and imprecise forecasts. Proper accounting is a key component of ensuring your business stays on the track to growth, so better practices are a must.
7. Misclassifying a Hobby as a Business
First, be certain that the business venture you’ve started qualifies as a business for tax purposes. If you have not yet generated enough income, the IRS may still classify the business you’re starting as a “hobby.” This designation can have a profound impact on how you file your small business taxes.
It’s important to understand this because when starting a business you may be counting on certain tax deductions for things like supplies or even home office space.
Make sure you’re aware of the requirements so you can avoid a financial setback. Take some time to familiarize yourself with IRS resources for small business owners.
8. Insufficient Record Keeping Throughout The Year
Good record keeping includes saving all of your receipts, tracking and categorizing all sales and all expenses, and logging business activities. No matter how small your business operation is, it’s never worth it to slack on your record keeping throughout the year.
First of all, keeping good records and analyzing your progress is the only way to effectively improve business strategies and plan for better business practices. Additionally, it can be greatly beneficial when it comes to filing you small business taxes.
It may be tempting to simply stash all your receipts in a box or store digital copies in a folder on your computer. You might think it will be easy enough to just sort through it all at tax time. Underestimating the importance of diligent record keeping is a common mistake and a regrettable one to make.
If you wait until you’re nearing tax time you’ll be creating an unnecessary headache for yourself. Worse than that, you will probably find that you’re rushed. This is how you can easily miss deductions or make other mistakes that you’ll pay for later.
You may find detailed and persistent record keeping and analysis difficult. You can always hire staff for that purpose or outsource the role to a professional bookkeeping firm.
9. Missing Applicable Deductions
There are so many ways to miss out on tax deductions for your small business. If you lose receipts or fail to record mileage you won’t be able to claim those expenses. You also may not be aware of certain tax benefits that apply to you.
Here are some examples of deductible expenses for your small business taxes:
- Office furnishing and supplies
- Licensing expenses
- Insurance
- Advertising
- Business equipment
- Interest on your business debts
- Legal fees
- Travel expenses (including meals)
- Accounting, bookkeeping, and tax professionals
- Certain federal, states, local, or foreign taxes
It’s possible that your business could also be eligible for tax credits, like the business energy credit or tax benefits for job-related education.
Understanding your eligibility and applying for the tax credits can be a complicated process. If you want to try to tackle it yourself, be sure to review IRS guidelines carefully.
Keep in mind that carelessly claiming deductions that you’re not entirely sure you’re eligible for is a good way to attract IRS scrutiny. Of course, that’s the last thing you want to do, especially because penalties for incorrectly claiming a deduction can be severe.
10. Inaccurately Reporting Business Income
Under-reporting or over-reporting your business income can be an honest mistake, but it’s one you should be very careful to avoid.
At the same time, purposefully under-reporting to pay less in taxes can be a tempting prospect, and it does happen often enough. Doing so makes attracting the attention of the IRS more likely and can put your business at serious risk.
The IRS takes action continuously, in an attempt to shrink the “tax gap.” That’s the difference between how much is reported and paid in taxes and the amount that is actually owed.
The under-reporting of income, especially from cash transactions, is the biggest contributor to the tax gap when it comes to small business taxes. Therefore, any red flags in the reporting of income is the first indicator the IRS is looking for to target their audits.
Whether you have inaccurately reported your business income or not, an audit can cause a lot of stress and additional work. It can even create more expense if you don’t already have a full time professional on staff to handle the work.
If you have reported your income inaccurately, the consequences may be as small as paying slightly more in taxes than you owe. However, in the worst case scenario, you could be facing serious fraud charges. Civil penalties may include large fines, and potential criminal penalties
Mistakes can occur from a simple oversight. For example, your clients’ pay periods may overlap different tax periods, leading to some confusion. If you discover you’ve made any errors on your taxes you should promptly submit corrected forms.
These errors can occur because you have not taken enough care to keep records that are clear, detailed, and accurate. It’s important you are mindful with record keeping and certain you have the information you need to report accurately.
11. Filing Incorrectly for your Employees
When you’ve hired employees you’ve put your business in a new position with additional tax complications. You need to be certain you know how to file for W-2 employees differently than when hiring 1099 contractors.
It’s very important that you accurately comply with mandatory payroll deductions and submit them to the appropriate tax agency. Failure to do so can result in penalties and fees.
You may also have employees who opt into voluntary payroll deductions for certain benefits.
With so many complications, it requires meticulous record keeping and attention to detail. This is how you can ensure that both you and your employees are contributing fully to the taxes owed.
12. Falling Behind on Estimated Tax Payments
Sometimes people running very small businesses, especially when just starting up, mistakenly believe that estimated tax payments are optional in their case. If you own a small business, it’s likely you’ll have to pay estimated tax, unless your business income is very small.
As a business owner, you’ll have to pay taxes quarterly. That entails estimating your total yearly earnings and paying quarterly based on that amount.
When starting a small business, money is tight and it’s possible to be faced with difficulty keeping up with these payments. It’s important that you’re attentive to these tax payments because failure to pay or underpaying can result in penalties and interest owed.
One way to play it safe is to pull money from your earnings as it comes in. Create a separate account to cover your quarterly tax payments.
This is another instance where tax and accounting professionals can be very helpful. If you’re doing tax preparations on your own you should start by referring to IRS information on estimated taxes to determine if you must pay estimated tax and how to do so.
13. Paying Employees Under the Table
Taxes are expensive and the process is a lot of work. It might be tempting to sidestep part of these responsibilities by keeping some employees off the books (paying them under the table).
This kind of tax evasion is accomplished by treating workers that should be employees on your payroll as independent contractors, or by simply paying in cash and not reporting it.
The IRS has very clear cut rules about what constitutes an employee. If you’re thinking about cutting expenses or just making things easier for yourself by not reporting employment accurately, you should first know the risk.
If you pay workers as independent contractors and the IRS determines they should have been classified as employees, at best, you will be forced to pay back taxes and penalties.
If it is determined to be a case of willful misconduct or fraudulent tax reporting, the penalties can be very strict. Of course, you should always be certain that you’re accurately reporting.
14. Filing and/or Paying your Taxes Late
This might seem obvious and simple enough to avoid. But of all the mistakes you’re likely to make, this is one that could end up costing you the most. So it’s worth taking into consideration.
When filing taxes late, you could face penalties and fees. Monthly interest will add up very fast and can be a major setback in the progress your business is making.
When filing late the IRS could impose a 1% penalty for each month you’re late. Paying this tax debt late has much higher penalties.
If your business earnings are small enough, you may not be required to make estimated quarterly payments. In that case, you could fall behind on preparing for annual tax payments and end up being late.
It’s always an option to elect to make estimated payments quarterly.
If you do find yourself in the position where you’re running late on filing your small business taxes, you should definitely be sure to file for an extension.
But do not think that means the deadline is essentially “suggested.” It’s very important that you’re sure to leave more than enough time for tax filing.
15. Not Working With a Tax Accountant or CPA Firm
You may want to save money by preparing and filing your small business taxes yourself. There is business tax software to help with the process. But it’s important to understand what you’re missing by taking that less expensive route.
Any competent tax professional or CPA should be able to ensure that you avoid all of these common filing mistakes for your small business taxes. When taking the work into your own hands you’re much more likely to miss valuable deductions and perks simply because you’re unaware that they exist or apply to your business.
Hiring a professional has other major benefits as well. Tax preparation means recording an analyzing income and expenses to some extent.
This is the start of the work that’s necessary to more effectively run your business. It is necessary to develop your vision for growth and your plan to achieve it.
Five Ways to Avoid Business Accounting Issues
Fortunately, you can take steps right now to improve your business’s financial practices and resolve your accounting issues. Let’s walk through five ways you can get past common accounting issues:
1. Improve Recordkeeping and Organization
Your first step will probably be to get organized. This means putting processes in place for how you track financial data, where it’s stored, who’s in charge of it, and how often it’s updated. Ensure you’re storing employee and financial records in a safe and secure location so no information is breached. Keep them for at least three years for tax purposes (and four for some employee documents).
2. Work With a Tax Attorney for Proper Expense Classification
You may have the best intentions to separate your personal and business expenses but are unknowingly making mistakes. It’s easy to do when your business is so close to your personal life. Accounting may not be your forte, and that’s OK. Try working with a tax attorney who can help you understand how to properly classify your expenses so you never run into trouble with taxes or pay more than you owe.
3. Get Help With Financial Statements
Financial reports help you gather and analyze data needed to make business decisions. You also may need reports to discuss profitability with investors or do your taxes each year. Ask for help from an accountant or other financial professional so you know which reports you need and when. A professional can also guide you through the process of properly generating reports.
4. Use Accounting Software
Consider incorporating an advanced accounting software like QuickBooks, to your workflow. These platforms do a lot of the work for you by tracking your expenses and income, categorizing transactions, pulling reports, saving information for tax time, and generating invoices. A software program can help you stay organized and help ensure your financial data is accurate.
5. Improve Payroll Management Practices
Payroll is a big reason many businesses run into accounting errors. Small businesses in particular may have a hard time without a full human resources or payroll department to process employee information, tax forms, and salary payments. Consider working with an outside professional who can help you put the right payroll practices in place. You can also use software to take on some of these tasks, like staying compliant with payroll regulations.
There are many easy fixes for whatever accounting issues you’re facing. Make sure you fully identify what’s going wrong and involve any relevant stakeholders in accounting decision-making. Your best bet to resolve accounting issues is to turn to a tax professional for help.
More Small Business Accounting Tips
Small business accounting issues are common and may never seem to end, no matter how many technologies you incorporate or how clean your books are. What can you do to improve your workflows even more and ensure your business can keep growing? Here are a few additional tips to improve the way you approach accounting:
- Triple-check your data: Errors are common when you’re working with numbers. Even when you use technology to help with accounting, make sure you double- and triple-check everything to ensure nothing important is missed.
- Keep software up to date: Implementing software isn’t the end of the story. Most platforms have regular updates, and keeping up with them is a must so your data is never lost and your numbers stay accurate.
- Pay close attention to changing laws: The IRS and other government entities regularly alter regulations or introduce relief programs that could impact you. Always stay aware of what’s changing. Ask a tax professional if you’re unsure how something affects you.
- Use accounting tools for your industry: Some industries have their own accounting software and resources that can help you create a strategy customized to your unique needs. Find out what tools businesses similar to yours are using and see if they work for you.
- Follow record storage best practices: Remember that financial records may need to be kept for a period of time in the event your business experiences a tax audit. Create a plan for securing any financial or tax documents for your business.
- Tap into expertise: You are surrounded by accountants, tax professionals, financial experts, and tax attorneys who can answer any questions you have about accounting and reporting. Use these resources when you’re in doubt.
Follow these tips to set up best practices within your organization. Accounting is never something you should overlook, even if you believe your pay structure and cash flow are simpler than other businesses. Staying organized and accurate helps you win in the long run.
Contact Silver Tax Group With Accounting Questions
Small business owners face many accounting challenges that aren’t always easy to overcome. Start by updating your systems to incorporate technology and prioritize accuracy. Turn to a tax attorney when you just can’t seem to get on top of your accounting woes and need a better solution.
The team at Silver Tax Group is ready to help you succeed. We understand the nuances of running a business and know how overwhelming it can be when you’re trying to do it all yourself. We can help you analyze your accounting needs and uncover the root cause of any accounting issues you’re facing. Our experienced tax attorneys can also help with audit defense, tax preparation, tax fraud investigations, tax debt resolution, and much more. Get your accounting organized and accurate with expert help – reach out to Silver Tax Group today to speak to a tax professional about your accounting needs.
