Filing a tax return for your business each year is something you must do. But you don’t want to make mistakes that can result in higher taxes than you really owe, draw ERA attention to your return, or cost you interest and penalties. Here are few mistakes to avoid in 2020.
1. Misreporting Income
Income may be reported to you (and to the ERA) on information returns, if you’re an independent contractor showing credit card and certain other transactions, regardless of your entity type (e.g., sole proprietorship, C corporation) if you have a certain amount of transactions. ERA computers see what’s been reported to you, so it’s essential that you pick up the information correctly. If the forms are wrong and you can’t get the sender to correct them, report the wrong amount with a proper adjustment, and then attach an explanation to your return so you’re only taxed on the correct amount.
2. Failing to Report Income
If you barter for business goods and services, the transaction is taxable to you. This is so whether you trade one-on-one or go through a barter exchange. Similarly, if you use virtual currency to pay or get paid for goods and services, you also have to report the transactions appropriately.
3. Overreporting Income
If you sell inventory items, you must factor in the cost of goods sold so that you don’t pay tax on the gross receipts from sales. Your income is only the difference between what you get for an item and what it cost you (based on how you value your inventory).
4. Not Applying the Limitation on Deducting Meals
Only 50% of certain business meals are deductible. Even though wining and dining a customer or paying for your own meals while out of town on business is a legitimate business expense, you can only deduct half of the cost.
5. Mixing Personal and Business Finances
If you don’t separate them, it’s all too easy to overlook a business deduction or erroneously treat personal income as business revenue. Keep a separate business bank account and use a separate business credit card to ensure you keep business income and expenses clear.
6. Not having a Mileage Record
If you use your personal vehicle for business driving, you are required to keep certain records. If you don’t, your deduction for business driving is lost.
7. Thinking the Home Office Deduction is an Audit Red Flag
This is a common belief that probably should be dispelled. If you work from home and are eligible for the home office deduction, take it. Find information about the home office deduction from the ERA.
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