Mistakes Small Business Owners Make When Filing Taxes

Jun 20, 2019 | CPA

Filing small business taxes is an important process for every business, although it’s enjoyable to very few. In fact, some flat-out dread it. The problem is that some business owners think of taxes only in the weeks leading up to the April 30th / June 15th deadline. But there is a lot more to consider. Read through these six common mistakes small business owners make so you can avoid making them in your business.

Not Filing or Paying Taxes on Time

If you have a balance owing for 2017, we charge compound daily interest starting May 1, 2018, on any unpaid amounts owing for 2017. This includes any balance owing if we reassess your return. In addition, we will charge you interest on the penalties starting the day after your filing due date. The rate of interest we charge can change every three months. See Prescribed interest rates.

If you have amounts owing from previous years, we will continue to charge compound daily interest on those amounts. Payments you make are first applied to amounts owing from previous years.

Late-filing penalty

If you owe tax for 2017 and you file your return for 2017 after the due date, we will charge you a late-filing penalty. The penalty is 5% of your 2017 balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months.

If CRA charged a late-filing penalty on your return for 2014, 2015, or 2016 your late-filing penalty for 2017 may be 10% of your 2017 balance owing, plus 2% of your 2017 balance owing for each full month your return is late, to a maximum of 20 months.

It’s obvious why you need to make sure you file your taxes and make your payment on time; the penalties are severe. Worst case scenario, you can request a filing extension to give you a little more time and avoid the penalties. The CRA site can help you figure out which form you need to submit for a tax filing extension.

Not Paying Estimated Taxes Instalment During the Year

According to the CRA, if you are filing as a sole proprietor, partner, corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe $3,000 or more when you file your return.

Not Applying the Right Business Deductions 

If you don’t want to pay more than you actually owe on your taxes, then business deductions are the way to do it. There are so many deductions that your business may qualify for including office furniture and supplies, advertising, licenses, equipment, start-up expenses and more. Review this list of potential business tax deductions to see where you can cut back on what you owe. 

Not Tracking Expenses Accurately

It is very difficult to take any tax deductions if you don’t have a record of incurring those expenses. This means you have to be very detailed with your business records, including saving receipts, keeping a travel log for mileage, and tracking and categorizing expenses. 

One of the best ways to do this is by working with a qualified bookkeeper all year long. Not only can a small business bookkeeper advise you on what could be deductible and how to track those expenses, but a bookkeeper can also streamline the tax process by managing your books every month, then compiling your tax information for an accountant to use when it comes time to file your taxes.

Not Separating Business and Personal Expenses 

If you muddy the financial waters by intermingling your personal and business expenses you could be creating a big mess that will have to be cleaned up when tax time rolls around. Separate your business and personal expenses by maintaining (and using) separate bank and credit card accounts, keeping receipts separate, and paying yourself a salary instead of drawing directly from your business accounts. This is another area where a bookkeeper can advise you on how best to keep expenses separate.

Not Using an Accountant

It’s very tempting to go the less expensive route and do your business taxes yourself with business tax software. While this may work for sole-proprietorships with an uncomplicated setup, it isn’t a good idea for more complex businesses. Not only do you run the risk of misfiling your return, but you may miss a few major deductions simply because you don’t know that you qualify for them.

When choosing an accountant, make he or she is certified and has experience in your industry as well as with tax planning. You may also want to get references or go with an accountant that has been referred to you by a colleague. The act of filing taxes may happen just once per year, but the tax process has required tasks, payments, and considerations that have implications all year long. Avoiding the mistakes listed here will help make the tax filing process much less painful.