Back Taxes and Big Small Business Mistakes to Avoid

California back taxes Los Angeles

Once your small business starts making money, you’ll need to figure out the best way to avoid owing back taxes. Research tells us that the IRS suspects sole proprietors and some small businesses underreport their income by up to 57%.

That means if you’re a smaller enterprise you could already be on the government radar. Here’s a few mistakes to avoid so you don’t make things worse.

  • Don’t Hide Income. As tempting as it might be to leave a few invoices off the books, this is one sure-fire way to get yourself in big trouble with the government. Keep in mind the IRS is always looking for contractors who get paid less than $500 per job. There are even reports that consultants have been earmarked by the IRS for underreporting their income.
  • Over Deducting. Of course, when you own a small business you can avoid back taxes in California by deducting expenses. However, you want to be prudent. Deducting a trip to Los Angeles when you live in Chicago to meet one client for 45 minutes will get you scrutinized by the government. It’s good to remember that meal expenses and the ones you submit for entertainment are the ones that are most likely going to raise the red flags.
  • Not Knowing When Your Business Is A Hobby. Say you’re an event planner who does a wonderful job and gets great comments on all the weddings you put together. It’s not a good idea to claim a whole bunch of expenses when you only work on the weekends and make a few thousand dollars a year. The IRS wants to be sure that you’re serious about making a profit and a goal of your business. You’ll need to be prepared to prove it to them by showing a good profit on a yearly basis.

Finally, you need to be reasonable about using a home office deduction. The IRS will let you deduct a portion of your house if you use one room for your business on a regular basis. However, that area needs to be used exclusively for your enterprise. In other words, it can’t be a children’s playroom on the weekends and your office through the week.

Staying on top of your taxes can help you avoid any trouble when your small business. No one wants to owe back taxes in Los Angeles and we can help you to avoid that situation.