Each year in anticipation of tax season, we talk about what businesses should or shouldn’t do, but usually tax advice is too little, too late. Bad habits cause more problems than single-entry and calculation errors. If you own a small or midsized business (SMB), you may have to change your tax habits.
- The business can’t pay off its taxes: There are companies that fall six months (or more) behind on taxes and take yet another six months (or years) to catch up and pay off all the fines and penalties they’ve accrued. While this mistake sounds easy to avoid, often it’s not.
Think about a small restaurant in a big city. One month could be slow, but the restaurant still needs to pay salaries and rent and stock pantries. So, the restaurant meets these commitments with its operating cash flow, but doesn’t have enough funds left over to cover sales and payroll taxes. The following months are slow too; more back taxes and penalties accumulate. Catching up becomes harder and harder, even during a good month. A similar situation can occur when a small business owner designates the sales revenue from a certain delivery to cover taxes that month. If snow delays that delivery and the payment can’t come through, taxes go unpaid.
Solution: Create a separate bank account for taxes. As you generate revenue, automatically set aside what you will have to pay in taxes. Remove the money from sight so you’re not tempted to use it for other operating expenses. Funds will then be available when tax day arrives.
- You get audited – and have nothing to show: Audits are always painful, but getting caught in an audit without meticulous records is a nightmare. SMBs are more liable to end up in this situation because they have less time and money to spend on accounting.
Solution: You need to assume the worst and meticulously document an “audit trail.” Expect that one day an auditor will want to look at each sale and see how you calculated sales tax. Today, advanced tools let auditors easily sift through all of your data looking for oddities. That is what they do during the audit. For every sales tax filing, you need to collect proof that you filed the return and paid the right amount of money, and you need proof of when the return was filed and when the payment cleared.
Without all this documentation, you will be on the hook for back taxes, fines, and penalties. Whatever you do, help the auditors do their job. The nicer you are, the nicer they will be.
Too Many Hats?
SMB owners often try to handle accounting without professional help. Unfortunately, when one person is the CEO, COO, CFO, bookkeeper, and tax preparer of the same company, tax mistakes are more likely to happen. Even if you try to minimize accounting costs, working with a professional accountant and tax preparer will save you money in the long run.