Startup owners are often so busy getting their businesses off the ground that they sometimes don’t pay enough attention to their accounting practices, resulting in headaches come tax time. Here’s how to avoid those common tax mistakes.
Every SMB should have sound accounting procedures in place to make tax filing accurate and stress-free. Oftentimes, particularly in the busy first stages of a startup, this is not the case. Here are five frequent tax mistakes SMBs make, and how to avoid making them yourself.
Not Paying Taxes on Time
You might have the best intentions, but when it comes time to pay your taxes, one thing or another could happen and you might find yourself missing the deadline. Whatever the reason may be, paying taxes late can incur heavy fines and financially hurt your business. Avoid this from becoming a habit by creating a separate account for your taxes. This will put the money “out of sight, out of mind” and you can pay your taxes when they are due.
Mixing Business and Personal Expenses
If you’re a sole proprietor or have a home-based business, be sure to always use separate bank accounts for your business transactions. This should be done from the very start, even if you are the only one providing capital for your startup, so you minimize the headache separating personal and business expenses come tax time. Claiming personal expenses as business expenses, for example, can get you into trouble with tax authorities and result in fines.
In India, it is mandatory for all companies under the Companies Act, 2013 to maintain a proper record of business accounts, so ensure you do so from the very beginning. Accounting software like QuickBooks Online is a simple-to-use, cloud-based solution to keeping your books in order and making sure your financial records are well-organized for retrieval later on. You can also send invoices, track outgoing expenses and create customized financial reports to review your business’s financial health at any given time.
Not Taking the Right Deductions
You can make two tax mistakes when taking deductions:
- Taking deductions you’re not entitled to
- Overlooking deductions you are entitled to
If you take deductions you’re not entitled to, it could result in fines you’d rather not have to pay. Unsurprisingly, SMBs often fail to take legitimate deductions and pay more taxes than they need to.
If you don’t have an accountant to oversee the books, make a list of what deductions you are entitled to and what you aren’t, and keep this list handy for reference later on. Also, don’t overlook those small deductions. Remember to keep receipts for every cash purchase – even the small ones. Over the course of a year, small deductions add up and can help reduce your tax burden.
Not Reporting All Sources of Income
Many business owners do not have just one source of income – failure to report all other sources of income could see you paying back what you owe, plus a penalty of at least 100% of the tax and interest for the delay. One type of income that is often overlooked is interest earned on a bank savings account and fixed deposits, which is taxable according to your respective tax grade.
For example, banks would deduct 10% as tax deducted at source (TDS) on the interest amounts earned on fixed deposits, but this percentage changes if you fall within a higher income tax grade. To read more about how to solve your accounting and tax issues, visit QuickBooks Online.