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Avoiding Common Tax Filing Mistakes: Tips for Small Business Owners

Is it that time again? One quick look at the calendar and some start to perspire. Yes, tax season can be a stressful time for small business owners. Let’s face it — it can be a stressful time for accounting office staff as well.

The complexity and continual revision of Canadian tax laws, combined with the pressure to file correctly (and on time), can make the process a bit nerve-wracking. However, with thoughtful planning and attention to detail, many common tax filing mistakes can be easily avoided. This blog will explore some of the most frequent errors small business owners make and provide a few practical quick tips to ensure your tax filing process is as smooth and easy as possible. By following the recommendations, you will breeze through tax time like a pro.

Mixing Personal and Business Finances

One of the most common mistakes we see small business owners make, is failing to separate personal and business finances. This makes it much more difficult to track expenses and deductions accurately. It also means opening long paper trails to establish correct allocations to avoid costly mistakes when it comes time to file your taxes.

Quick Tip: Keep separate bank accounts and credit cards for your business. This will not only make your bookkeeping easier it virtually eliminates the risk of commingling funds.

Misclassifying Employees and Independent Contractors

The CRA is very particular about the distinction between employees and independent contractors. Don’t make this mistake. Misclassifying workers can result in penalties and back taxes, as well as having to pay additional payroll taxes.

Quick Tip: There are clear guidelines on who is an employee and who performs as an independent contractor. Employees are typically subject to more control regarding how, when, and where they work. Contractors, on the other hand, usually work independently, often for multiple clients. If you’re unsure, or have an unusual employee requirements, contact our office to confirm that you’re classifying your workers correctly.

Failing to Keep Adequate Records

Poor record-keeping is a major cause of tax filing errors. Without proper documentation, it’s easy to overlook deductions, misreport income, or fail to substantiate expenses in the event of an audit. This usually means extra money for the taxman.

Quick Tip: When making a business-related transaction, write down the details on the receipt at time of transaction. Few remember key details later. Then, organize your document records. These records will include receipts, invoices, bank statements, and any other documentation related to your business income and expenses. If you are not using accounting software to help automate and manage your records, consider it. It will save you untold time throughout the year.

Overlooking Deductions

Many small business owners miss valuable deductions simply because they’re not aware of them. That’s like stepping over free money. The most common overlooked deductions?

• office expenses
• mileage
• start-up costs
• shareholder’s contributions

Quick Tip: Become familiar with the deductions available to small business owners. For example, if you use part of your home exclusively for your business, you may qualify for a home office deduction. The same is true of your car or truck. If you use your personal vehicle for business purposes, you can deduct the mileage. Keeping track of these expenses throughout the year makes it easy to maximize your deductions at tax time.

Incorrectly Calculating Estimated Taxes

The CRA requires some business owners to make quarterly estimated tax payments. The CRA also gets to make the estimation. Underpaying or overpaying these taxes can result in penalties and / or a strain on your cash flow.

Quick Tip: Estimate your tax liability accurately by reviewing your previous year’s income, deductions, and credits. If your income or expenses change significantly throughout the year, you can adjust your estimated payments. If you’re unsure how to calculate estimated taxes, the Deeth & Co. staff can provide guidance.

Missing Deadlines

Failing to file your taxes or make payments on time is the most stress inducing filing mistake. It can also lead to penalties and interest charges. The CRA imposes strict deadlines for filing returns and paying your taxes, and missing these deadlines can be costly.

Quick Tip: Instead of marking your tax deadline in your reminder calendar, set the reminder well in advance. This way you won’t be rushed last minute. If you’re unable to file by the due date, consider requesting a filing extension. However, remember that an extension to file does not extend the time to pay any taxes owed.

Failing to Report All Income

All income earned by your business, whether through sales, services, or other means, must be reported on your tax return. Underreporting income is a serious tax offense that can not only lead to large fines and penalties, but also criminal charges.

Quick Tip: Maintain a continual accurate record of all income sources, including cash sales, online payments, and barter transactions. Use your accounting software to help track and report this income accurately. The best course of action? When in doubt, report the income. It’s always better to over-report than to under-report.

Not Planning for Taxes Year-Round

Many entrepreneurs view tax filing as a once-a-year event, but effective tax planning is a year-round activity. Failing to plan usually leads to last-minute scrambles, missed deductions, and cash flow issues.

Quick Tip: A tax advisor can help you develop a year-round tax planning strategy. They can also regularly review your financial statements, track your income and expenses, and make any adjustments as needed. By planning throughout the year, you can reduce your tax liability and avoid any unwanted surprises at tax time.

Ignoring Provincial and Local Tax Obligations

Yes, there is more than one tax person to satisfy. In addition to federal taxes, small business owners must also comply with provincial and local tax laws. Failing to pay these taxes can result in penalties and interest, as well as legal trouble —just like your federal obligations.

Quick Tip: Research the tax obligations in your province and city, including sales tax, property tax, and any other applicable taxes. Ensure that you’re registered with the appropriate authorities and that you file and pay these taxes when required.

Not Seeking Professional Help

Finally, one of the biggest mistakes small business owners make is trying to manage their taxes entirely on their own. As stated earlier, tax laws are complicated and everchanging, and even a small error can have significant financial consequences.

Quick Tip: Consider hiring a tax professional to help with your tax filing. An accountant or tax advisor can provide valuable guidance, help you identify deductions and credits, and ensure that your tax return is accurate as well as compliant. The cost of this type of professional help is often outweighed by the savings and peace of mind the professional can provide you.

Hopefully, we have identified most common pitfalls for business owners when it comes to staying tax compliant. By avoiding mistakes and following these tips you can reduce your stress and minimize your taxability at the same time. Remember, the key to a successful tax filing strategy is preparation, organization, and knowing when to seek professional help.