Top 5 Tax Preparation Mistakes Small Businesses Make (and How to Avoid Them)

We all have that one friend who never picks up the tab. While there’s nothing wrong with covering your friends every once and a while, when it comes to business, you don’t want to be that friend in the group. This is especially true during tax season and instead of just being the ‘annoying one’ at the table, not having your finances in order can lead to some serious compliance issues and costly fines. But we get it, with so many rules and regulations thrown your way, it can be easy to make mistakes when it comes to your business tax prep. A great way to be one step ahead of the game is to be aware of common pitfalls. Keep scrolling to see our list of the top 5 tax preparation mistakes that small businesses make and solutions on how to avoid them.  

1) Underreporting income  

One of the most common mistakes is underreporting income, especially when managing multiple streams of income. If your business requires quarterly estimated tax payments, you need to calculate them as accurately as possible. The CRA doesn’t expect you to predict your income perfectly, but getting close is crucial to avoid underreporting penalties. 

Solution: Meticulous record-keeping is the key to preventing underreporting income. A great way to do this is to use bookkeeping software that allows you to regularly reconcile your books to ensure accuracy.  

2) Poor record keeping  

Another common pitfall is poor record keeping throughout the year. This can result in missed deduction opportunities and inaccurate expense tracking. This lack of organization can also lead to chaos during tax season and leave you scrambling to meet your tax filing deadline.  

Solution: Prioritize organization throughout the year by setting up a system for tracking your income and expenses. Whether you use accounting software or just a simple spreadsheet, the important thing is to ensure that your records are up-to-date and accurate.  

3) Missing deadlines 

Missing tax deadlines can lead to costly penalties and interest charges. It can be easy for small business owners to miss deadlines due to their busy schedules. That said, staying informed about tax deadlines is crucial to avoiding compliance issues and keeping your business on track. 

Solution: Create a tax calendar that outlines all of the important dates such as filing deadlines and payment due dates. It is also a good idea to set reminders on your phone or use a project management tool to keep track of these dates.  

4) Mixing personal and business expenses  

Mixing personal and business expenses is a common mistake among small business owners which can lead to complicated tax filings. When these expenses are intertwined, it can be difficult to identify deductible expenses which can lead to inaccuracies on your tax returns.  

Solution: Create clear boundaries between your business and personal finances by opening a separate bank account and credit card for your business transactions. This simple step is essential for maintaining accurate records and ensuring tax compliance.  

5) Missing out on deductions  

Many small business owners miss opportunities for valuable deductions. It is important that you understand the common deductions available for your business and keep track of all eligible expenses throughout the year.  

Solution: Research which expenses can be deducted for your business each year. It is also crucial that you keep detailed records of all business-related costs to ensure that you have the necessary documentation when you file your taxes.  

While tax season can be overwhelming for small business owners, by using these tips you can avoid some of the common tax preparation pitfalls. With that in mind, tax regulations are complicated, and compliance issues can sometimes result in costly fines. A great way to ensure that your financial documents are handled correctly is to seek the help of a professional. Here at STEPS, we offer small business bookkeeping services and can help you get your financial documents in tip-top shape for the upcoming tax season. To learn more, visit our bookkeeping tab or reach out to us on our contact page.