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Accounting, Clutch Report

6 Tips For Filing Taxes for the First Time (And Common Tax Mistakes to Avoid)

June 23, 2020

Although the delayed tax-filing deadline was intended to ease tax anxieties, 33% of Americans lack confidence in or are neutral about filing their taxes in 2020. If your small business lacks confidence in filing its taxes, too, follow these 6 tax-filing tips to alleviate stress.

In March 2020, the IRS made the decision to delay Tax Day for the first time in history. The IRS pushed the deadline for filing and paying taxes back to July 15, 2020.

This decision came as businesses and individuals were facing the financial challenges of COVID-19

Taxes were the last thing on many small business owners' minds. According to a special report conducted by the U.S. Chamber of Commerce, almost half (46%) of small businesses predict that permanent shutdowns will be inevitable if they remain closed for six months. 

Small businesses were relieved to have more time for taxes later in the year. Joshua Rodenborn, CEO of real estate company Jax Nurses Buy Houses, is one of many small business owners feeling a sense of calm. 

“The extended tax deadline is helpful because it reduces the stress of filing right now,” Rodenborn said. “Business is currently stressful enough as we emerge from the quarantine and start to rebuild the economy.”

“The extended tax deadline is helpful because it reduces the stress of filing right now."

However, the new tax date will also delay refunds, which some small businesses are using to stay afloat while temporarily shut down. Gabriella Braddock, co-owner of No Plan B Coaching, needed her refund to weather COVID-19. 

“We were planning on holding off, however, we decided to go through with the original tax-filing deadline,” Braddock said. “Our refund ended up helping us immensely with our usual expenses since we were, and are, still closed.”

“Our refund ended up helping us immensely with our usual expenses since we were, and are, still closed.”

On top of dilemmas posed by the deadline shift, some small businesses and Americans lack confidence in their ability to file and pay their taxes as July 15 approaches. We surveyed 351 Americans to understand how they plan to approach filing taxes in 2020.

Are Americans Confident About Filing Their Taxes in 2020?

  • One-third (33%) of Americans lack confidence in or are neutral about their ability to file and pay their taxes for the first time. 
  • Two-thirds of Americans (67%) are confident about filing and completing their taxes.
  • The uncertainty about filing taxes may result from financial difficulties caused by the COVID-19-related shutdown. It’s also possible that some Americans approach tax season with uncertainty every year. 

graph showing Americans' confidence in filing taxes in 2020

Even with an extended tax deadline in place, businesses and individuals alike may be uniquely challenged by the global pandemic to file and pay on time. 

Small companies filing their taxes for the first time this year are navigating an atypical process in an abnormal time for business. Clutch spoke to tax experts and business owners to aggregate helpful tips and common tax mistakes for small businesses filing taxes for the first time.

Tips for Filing Taxes for the First Time

  1. Hire an experienced accountant
  2. Correctly classify your business
  3. Record and keep detailed cash flow records
  4. Apply for a business credit card
  5. Amend your tax returns up to 3 years after filing
  6. Be aware of relevant deductions

Common Tax Mistakes to Avoid

  1. Waiting until the last minute to file
  2. Forgetting different tax rules for different states
  3. Letting business and personal expenses mix

TIP 1: Hire an Experienced Accountant

The majority of small business owners are not CPAs, nor did they become entrepreneurs looking forward to tax season. Hiring an experienced accountant can ease anxieties about filing taxes correctly. 

According to a Small Business Accounting survey from Accounting Today, 88% of small businesses are at least somewhat satisfied with their accounting services provider. Small businesses typically stick with their accountants year-to-year, a strong indicator of their satisfaction.  

Tax and financial experts advocate for hiring professional accountants because accountants:

  • Save businesses time and money
  • Avoid audits more effectively
  • Help companies spot deductions

Above all, accountants have the technical understanding of rules and regulations to maintain awareness of changing policies and opportunities for major savings.

Joe Wilson, a senior career advisor at professional development firm MintResume, made some costly mistakes when his previous company began filing its taxes. He recalled significant improvements, however, after hiring an accountant and bookkeeper.

“IRS rules and regulations are rapidly changing, and it's just a pain to keep yourself updated with every new regulation and prepare your taxes accordingly,” Wilson said. “Unlike what many small business owners think, hiring an accountant may actually save you money because you can deduct fees you pay to an accountant to help you prepare your taxes.”

“Unlike what many small business owners think, hiring an accountant may actually save you money because you can deduct fees you pay to an accountant to help you prepare your taxes.”

With an accountant, it’s much easier for business owners to identify opportunities for deductions with confidence. This saved Wilson’s company money, even after paying the accountant’s fees. 

Accountants avoid mistakes by keeping up with changing IRS policies. Tackling tax season with an experienced advisor on-hand decreases the likelihood of mistakes and subsequent penalties that may trigger audits in the future.

Having their accountant serve as a business advisor was small businesses’ most desired quality (78%) while seeking professional services.  

graph showing what businesses look for when hiring an accountant

Source: Accounting Today

Companies also indicated that their ideal accountant:

  • Responds quickly when contacted (74%)
  • Understands the client’s industry (74%)
  • Is affordable (70%)
  • Communicates technical information effectively to non-accountants (69%)

Why does serving as a trusted advisor beat out popular accountant qualities such as affordability?

An accountant’s guidance and experience is uncommon within most in-house teams and can minimize the stress and financial consequences of filing taxes incorrectly.

With Professional Public Accountants, LLC, Suzanne Vanzant-Ladas commonly works through tax stress with first-time filers.

“Most clients who own a business and are filing taxes for the first time experience a certain amount of anxiety due to the unknown,” she said. “This is normal, but speaking to a professional who can direct you is a great start to relieving that anxiety.”

Experienced accountants demystify classification, dedication, and form-related uncertainties by taking that stress off the plates of small business owners. 

Accountants are essential to cutting small business costs, identifying opportunities to save, and avoiding financial consequences during tax season. 

TIP 2: Classify Your Business Correctly

All small businesses fall into one of several classifications. Understanding the specifics of a business’s classification can unearth relevant tax credits while avoiding penalties.

According to a recent survey conducted by the National Small Business Association, the most common business classification is an S-Corp (38%), followed closely by LLC (36%).

table of types of businesses

Source: NSBA COVID-19 Relief Data

LLC and Sole Proprietorship

For businesses classified as sole proprietors (5%), financial experts advise forming a limited liability company (LLC). An LLC will remove personal liability for debts from company owners: The sole proprietor tax-paying process often causes small businesses to pay more than they need to.

MyCorporation.com CEO Deborah Sweeney suggests forming an LLC to avoid some of the negative tax effects of classifying as a sole proprietor.

“If you incorporate as an LLC, you may elect to be taxed as an S-Corporation,” she said. “This avoids double taxation and makes the owners responsible for reporting taxable activity of the business on their personal income tax returns.”

Strategically examining classification and business operations may help companies steer clear of double taxation, so they’ll never fear paying income tax twice.

S-Corp and C-Corp

Small businesses must also make sure that they are classified correctly and accurately during this process.

It can be difficult for small businesses to decide between the benefits of classifying as an S corporation versus a C corporation, for instance. Both classifications have similar business structures, function as separate legal entities, and subject people to personal income tax. Companies looking to choose between the two should evaluate their federal income tax priorities.

C corporations are considered the standard corporate classification of businesses. The most notable difference between S corporations and C corporations is that C corporations are subject to double taxation of their shareholders, while S corporations are exempt from that responsibility.

Wade Schlosser is the CEO and founder of Solvable, a personal finance education marketplace. He recommends that small businesses avoid sticking with the C corporation classification.

“C-corps pay both corporate taxes, and then, owners pay personal income tax on the salary they draw from the corporation,” he said. “Filing incorrectly can increase the taxes you owe.”

Operating within an S corporation, shareholders aren’t taxed on the corporate level and losses pass through to shareholders.

summary of federal income taxes to small businesses

Source: Small Business Administration

There are shareholder benefits to classifying as a C corporation, but for small businesses worried about taxes, an S corporation offers more flexibility. 

The tax benefits from classifying as either an S-Corp or LLC are significant, so it's no surprise that they’re the most popular options. Companies unsure of how to navigate classification may be optimally positioned by considering these tax-friendly options.  

TIP 3: Keep Detailed Records Throughout the Year

When filing taxes, maintain detailed records of cash flow throughout the year to keep the process as simple as possible. 

Experts recommend keeping detailed cash flow records to maximize deductions and avoid possible penalties. 

Sam Hawrylack, a co-founder of How to FIRE, recalls learning to juggle 1099-MISC documents, for one-off business engagements, to make for a smoother tax experience. 

“As a new small business owner, there was a lot more involved in the process than I expected,” she said. “I learned to keep more organized and comprehensive records for each client transaction so that the next tax season [would] feel less chaotic.”

Proper documentation means additional paperwork for small businesses with numerous clients. Hawrylack attests, however, that the paperwork will be worth the effort for small businesses to file with confidence. 

TIP 4: Apply For a Business Credit Card

A business reward credit card separates personal and business expenses fairly easily.

Small businesses may understand that they’re likely to miss out on deductions without detailed records from the year. Other small businesses, however, may not know where to start. 

Accountants like Scott Patterson of Core Financial Resources recommend getting a business rewards credit card to use for all expenses. Business rewards credit cards make it easier to track and record expenses.

Although experts advise small businesses to pay off bills on the card as soon as possible to avoid interest charges, Patterson offered a trick for making the most out of outstanding balances.

“If you do happen to carry a balance, interest on business credit cards is considered a tax-deductible expense,” he said. “You can’t deduct interest accrued on your personal credit cards.”

That makes business rewards credit cards a unique asset to businesses looking to document expenses and maximize deduction opportunities. 

TIP 5: Amend Tax Returns Up to 3 Years Afterward

Companies can retroactively amend past tax returns to get the most out of their return.

Businesses are able to get a second opinion on their past returns from an accounting services firm.

1040-X is a form businesses can use to amend their original tax returns. If your accountant finds mistakes in the original return, Schlosser advises companies to file a 1040-X with the corrections.

“Think you may have missed out on deductions in the past? One little-known trick is that you can go back three years and amend your returns to get the refunds you deserve,” Schlosser said.

You can change your return up to three years after filing for a refund or tax credit. 

TIP 6: Be Aware of Relevant Deductions 

Opportunities for savings during tax season are always welcome. Deductions are designed to save small businesses money.

IRS Section 179 contains dedication rules and regulations. Section 179 allows businesses to make deductions over time for equipment purchased for business use. Limitations often change, however, so it’s important to keep track of them from year to year.

Christian Brim, CPA at Core Group, suggests small businesses look into deducting the following, as relevant to your business.

What Can I Deduct as Expenses When Filing Taxes?

  • Vehicle expenses
  • Home office
  • Equipment
  • Charitable work
  • Health insurance 
  • Professional services
  • Meals and entertainment for employees

Brim encourages businesses to deduct anything that’s reasonable for business. He also reminds business owners that deductions should be documented in case of an IRS inquiry. 

There are also specific deductions for small businesses filing for the first time. Sherry Mae, CMO of aquarium company Tankarium, advises new businesses to deduct their startup expenses. 

These may include accounting fees, legal fees, licensing, permits, advertisements, employee training, and equipment procurement or rental.

After deducting business expenses, small business owners can save even more on taxes by looking into carryover deductions. Shane Dutka, founder and general manager of Review Home Warranties, recommends that companies use carryover deductions to continue to save year-to-year.

“Keep that savings momentum up by knowing what carryover deductions you can continue writing off past that first year, or hire a tax specialist or consultant to research these for you,” Dutka said. “This lowers your total taxable profits.”

Small businesses will be able to make the most of their tax-filing by keeping track of deductions both in the first year of business and over time.

MISTAKE 1: Waiting Until the Last Minute to File Taxes

When handling a process as complex as filing taxes for a business, having sufficient lead time helps limit errors and oversights that may impact your company negatively. 

Companies paid over $6.4 billion in civil tax penalties in 2018.

graph of business penalties from taxes for 2018

Source: IRS

For the most part, these expensive penalties are completely avoidable, especially for businesses that take a proactive approach to filing.  

Two common penalties result from taking care of taxes too late: 

  • Penalty for paying late
  • Penalty for filing late

Both penalties require additional payment. However, the penalty incurred for filing late can be 10–50 times more than the interest penalty for paying late.

penalties for filing taxes late are more than the interest penalty for paying late

Even if business owners are uncertain about their ability to pay taxes in full, filing on time will keep potential penalty costs down. 

SaaS marketing consultant Bruce Harpham proactively sets aside money so he’s able to pay his taxes before the deadline. 

“As a general rule, I set aside approximately 30% of gross revenue for taxes,” Harpham said. “Think of taxes as a critical bill payment and take steps to plan for it accordingly.” 

Thinking about taxes like a bill is effective and can help you avoid the costly mistake of filing or paying taxes late.

MISTAKE 2: Forgetting Tax Rules For Different States

Filing taxes may require some extra work for those operating their business in more than one U.S. state. Each state has individual tax policies and regulations that businesses may be subject to.

Patterson deems these differences, called state nexus, one of the most consequential tax mistakes. 

“Business owners will do business in multiple states and think nothing of it,” Patterson said. “Each state has its own rules for how much business you can do in its state before you're required to file a tax return.” 

While filing in several states is a hassle, states may require it depending on your business presence. 

Companies may also lose money by ignoring state-specific deductions and credits. 

State-level deductions are more difficult to discover and apply for a company filing on its own because they are unique to different regions. An accountant is best able to help companies determine these opportunities.

MISTAKE 3: Letting Personal and Business Expenses Mix 

The tax laws that govern individuals and businesses often differ. Keeping personal and business expenses separated can help avoid confusion, redundancies, and even fines.

David Walter, the owner of Electrician Mentor, an electrician coaching company, advises creating clear, formal separations of business and personal funds for two reasons:

  • Simplifies tax-filing and payment
  • Enables you to explain expenses in case of an IRS audit   

For businesses looking to get the most out of available deductibles, acquiring a bank account and credit card for business use is essential to keeping personal and business expenses separated.  

Accounting Resources Are Available for First-Time Tax Filers

Navigating tax season for the first time is certainly intimidating. Even after years of experience, some businesses and individuals remain unconfident about filing.

Hiring a professional accountant provides companies with the guidance, confidence, and expertise necessary to file without stress. 

Businesses can make sure their federal tax requirements align with their needs and preferences by accurately classifying their company.

Carefully tracking expenses throughout the year makes it easier for companies to write off transactions as deductions, as long as they remain informed on relevant, appropriate deductions.

However, these tips won’t save businesses from the consequences of common tax mistakes. Waiting until the last minute, letting their personal and business expenses mix, and forgetting about state-specific tax rules will hinder businesses.

Putting these tips and recommendations into practice will assist small businesses in filing and paying their taxes with more confidence.

About the Survey

Clutch surveyed 351 people across the U.S. May 12-May 14, 2020.

About 44% of respondents are female; 36% are male; 21% chose not to identify.

About 24% of the respondents are ages 18-34; 36% are ages 35-54, and 41% are ages 55 and older.