Mistakes to Avoid When Filing Income Taxes for Your New Business
Chosen theme: Mistakes to Avoid When Filing Income Taxes for Your New Business. Starting strong means filing cleanly, confidently, and on time. In this friendly guide, we spotlight avoidable traps, founder stories, and practical fixes to help you keep cash in your company—where it belongs. If this resonates, subscribe and join the conversation with your questions and experiences.
Choose the Right Foundation: Entity, EIN, and First-Year Setup
Picking an entity because a friend did can backfire at filing time. S corporations promise savings but require payroll discipline, while single-member LLCs offer simplicity with self-employment tax trade-offs. Talk to a pro before you file; switching later can be expensive.
Recordkeeping Pitfalls That Snowball at Tax Time
Mixing Personal and Business Expenses
Jamal swiped a personal card for vendor lunches and software trials, then guessed at deductions in April. The result was overstated expenses and a risky return. Keep a dedicated business card, and annotate receipts weekly to avoid tax-season guesswork.
Missing Receipts and Weak Substantiation
The IRS requires documentation for travel, meals, and many asset purchases. Without receipts, you risk losing deductions even if the expense was legitimate. Use a receipt-capture app, tag the purpose immediately, and store backups in the cloud for audit-ready filing.
Not Reconciling to Bank Feeds and 1099s
If your books do not reconcile to bank statements and 1099-K or 1099-NEC forms, expect mismatches and notices. Reconcile monthly, tie reported revenue to third-party statements, and document timing differences. Clean reconciliations make filing faster and reduce post-filing headaches.
Quarterly Estimates Are Not Optional
Maya assumed first-year losses meant no estimates. A surprise profit left her with underpayment penalties. If you owe at least a modest amount, calculate quarterly estimates and pay on time. It is easier to pre-pay than to fight penalties later.
The Extension Myth
Extensions extend time to file, not time to pay. If you wait to calculate a payment until October, expect interest and penalties. File Form 4868 or the business equivalent when needed, but send a good-faith payment with your extension to stay safe.
Payroll and Sales Tax Calendars Collide
New employers juggle payroll deposits, quarterly returns, and sometimes sales tax. Missing one deadline can cascade into liens and notices. Set automated reminders, assign ownership, and reconcile deposits monthly so income tax filing does not get derailed by compliance chaos.
Dangerous Deductions: Getting Write‑offs Right
Home Office Deduction Myths
You need a regular, exclusive business space to claim the home office. The simplified method can be easier, but documentation still matters. Take accurate measurements, document exclusive use, and keep utility and rent records. Done correctly, this deduction is safe and valuable.
Startup and Organizational Costs
Many founders forget they can deduct certain pre‑launch costs. Up to a portion may be deducted in the first year, with the remainder amortized. Track legal fees, entity setup, and research costs separately, so your return reflects every allowed dollar without confusion.
Meals vs. Entertainment
Business meals are generally 50% deductible when directly related to business, but entertainment remains nondeductible. Mixing the two on one receipt is a filing landmine. Split charges clearly, note the business purpose, and keep attendee names to defend the deduction confidently.
Credits New Businesses Commonly Miss
R&D Credit and the Payroll Tax Offset
Product development, prototyping, and testing may qualify for the research credit. Eligible startups can apply the credit against payroll tax. Keep time tracking, contractor invoices, and technical notes. Claiming via Form 6765 requires forethought, but the savings can fund your next sprint.
Work Opportunity Tax Credit Timing
WOTC can meaningfully reduce taxes, but certification must be requested within 28 days of hire. Many founders learn this when it is too late. Build the Form 8850 step into onboarding so your year‑end return includes every approved hire credit.
Small Business Health Care Tax Credit
If you buy coverage through a qualifying small group marketplace and meet wage and contribution rules, a credit may apply. Review eligibility before open enrollment and keep proof of payments. At filing, accurate payroll and premium records make claiming straightforward and defensible.
Worker Classification and Information Reporting
Classifying a full‑time, controlled worker as a contractor may seem convenient, but it risks back taxes and penalties. Use behavioral and financial control tests. When in doubt, treat as an employee or seek guidance before your filing binds you to a bad position.
Accounting Methods, Inventory, and Revenue Recognition
Your initial return sets your accounting method. Cash is simpler, but accrual can better match revenue and expenses. Changing later requires a formal request. Evaluate invoices, prepayments, and recurring revenue before filing to avoid surprises locked into future returns.
Accounting Methods, Inventory, and Revenue Recognition
If you hold inventory, special rules may apply. Some small businesses qualify for simplified treatment under thresholds indexed annually. Misapplying these rules skews cost of goods sold and taxes. Document your approach and be consistent, so your filings withstand scrutiny and audits.
State and Local Tax Surprises New Businesses Miss
Hiring a remote employee or shipping from a warehouse can create state filing obligations. Many founders overlook this until notices arrive. Track where people work and goods move, then register and file proactively to avoid penalties that complicate your income tax return.
State and Local Tax Surprises New Businesses Miss
Some states charge minimum or franchise taxes even without profit. Forgetting these leads to suspended status and late fees. Calendar these obligations from day one, and set reminders so your annual income tax filing is not derailed by administrative surprises.