Some mistakes can attract fines or even trigger an IRS audit. Others deny you the opportunity of fully enjoying the benefits of these deductions and realizing savings. With this in mind, here are the top mistakes to note and avoid when calculating tax deductions.

Deducting All Start-Up Expenses at Once

Business owners spend a lot of money to set up an enterprise. Typical expenses include costs for planning, research, borrowing, technology and equipment, marketing, and employees. In a bid to lower the taxable income in the first year, some business owners claim all these expenses against their taxable income.

The IRS considers start-up costs as capital expenses. Since business capital is usable within a long time, you cannot deduct it all during the first year. Start-up expenses are amortized over 15 years. Additionally, business assets such as vehicles, machinery, and equipment have to be depreciated over the projected lifespan. 

If you file the wrong deductions, you will be required to refile the amended taxes.

Failing to Deduct Eligible Expenses

Are you aware of all the deductible expenses your business is entitled to? If not, you may end up paying more than what the IRS demands. There are many deductions that small businesses can take advantage of, and these include the following:

• Depreciation of business assets such as vehicles, appliances, and equipment
• Employee salaries and benefits
• Professional services offered to the business accountants, bookkeepers, IT experts, and staffing agencies 
• Business insurance, including professional indemnity and workers' compensation
• Real estate taxes and loans used to fund business investments 

Other deductible expenses include meals and travel costs, business-related education expenses, technology expenses, bank fees, and donations. However, you need to provide receipts and all pertinent evidence to the IRS. Lack of proper documentation will cause the IRS to disallow the deductions.

Breaking Tax Deduction Rules

Filing taxes can be confusing for a first-time business owner. With so many deductions to consider, it is easy to break the rules. If the IRS considers such mistakes criminal or negligent, it can impose huge fines on your business. Therefore, beware of the following mistakes that can prove disastrous to your new enterprise:

• Merging business and personal expenses. For example, if you occasionally work from home, you cannot deduct your total internet and phone bill as a business expense.
• Calculating deductions incorrectly. For example, when claiming deductions for your vehicle, you can use the IRS standard mileage rate or calculate the actual vehicle expenses. However, you cannot deduct both from your taxes.
• Exaggerating meals and travel. Higher-than-normal deductions on business meals and travel costs may attract the attention of the IRS. If you have no proof that these count as business expenses, the IRS may disallow the expenses.
• Guessing and estimating deductions. You can round off numbers when deducting expenses. However, round off to the nearest dollar and not a hundred or thousand figure as the latter can bring trouble your way.

Tax deductions are a complex subject for businesses, and the only sure way to avoid these mistakes and dodge the fines and tax audits is to file your taxes correctly.

At Bliss & Skeen CPAs, we understand the importance of getting your deductions and tax returns right the first time. Our tax experts can take away the stress of tax preparation and allow you to focus on core management duties. Contact us today for a consultation.