Common tax mistakes to avoid

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Published Date:  23-11-2023   Author:   prarabdh-gupta
common tax mistakes to avoid

Taxes are already one of the biggest liabilities for any business that they can’t really avoid. But, while filing tax returns, businesses generally make a lot of mistakes that significantly increase their tax liabilities. It can directly cost you real money. Though you can not entirely neglect the taxes, you can suppress them to an extent by avoiding various common tax mistakes. 

In this blog, we’ve covered all the common tax mistakes made by small and medium business owners. Plus, we have even covered how you can avoid it with simple practices. All the mentioned tips and tricks below will help you significantly reduce your tax liabilities and save some money.  

Without any delay, let’s begin with some of the common tax mistakes made by small business owners across India !! 

Common Tax Mistakes Made By Small Businesses in India

Taxes are one of the critical elements for businesses, especially the smaller ones. Here are certain very common mistakes made by small business owners in India that can lead them to end up facing heavy tax liabilities. 

1. Choosing the Wrong Legal Entity 

Tax liabilities are completely dependent upon the legal structure of the business. There are various types of legal entities, including Public Limited Companies, Private Limited Companies, LLP, Proprietorship, Partnership, and more. Each one has a different form of liability that sets up a different tax rate for you. For instance, a proprietorship has lower tax rates in comparison to a limited company. Therefore, you should choose your entity carefully based on the size of your business. 

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2. Inaccurate Recordkeeping

One of the common mistakes made in business is inaccurate record-keeping. It leads them to face incorrect reporting, overlooked deductions, and potential IRS audits. Hence, the companies end up paying more taxes and claim less deductions.   

3. Failed in Reconciliation of TDS With Form 26AS 

Businesses often forget to fill out Form 26AS properly. It is one of the important forms that allows you to claim tax deductions and credits. Simply put, if you forget to mention the TDS in the form, you won’t be able to claim your deductions. Businesses generally fail to keep their Form 26AS up to date. In fact, the mismatch between Form 26AS and Form 16 / TDS certificates leads companies to get fewer refunds or higher tax payables. 

4. Combining Personal and Professional Cost 

Combining personal and professional costs is one of the common tax mistakes made by small businesses in India. When you don’t properly track your costs, it eventually leads you to various mistakes in financial reporting and tax filings. 

5. No Tax Planning

Tax planning is one of the essentials for any business to keep its tax liabilities. However, most businesses take it as another expense that generally avoids bearing. They simply don’t understand the importance of effectively planning the tax liabilities and reducing the burden on the company. 

6. Neglecting Account Reconciliation 

Another very common mistake for small business owners is failing to reconcile the accounts. It results in them facing inaccurate financial reports, creating various challenges related to financial statements, and eventually making more significant problems in filing taxes. 

7. Missing Deadlines and Filing Errors  

Small businesses generally have more hand work to complete in a day because of a lower workforce. It makes them often miss tax deadlines and have filing errors. And it directly leads them to face various penalties and interest charges. In this way, companies result in paying more tax liabilities. 

8. Mix Capital Expenses with Revenue Expenses

Small businesses generally get confused between capital expenses and revenue expenses. Capital expenses are basically the company’s assets that last at least more than a year, including computers, servers, chairs, etc. These are not tax deductible in the P&L A/c. You can only get the deduction over the revenue expenses based on items such as printing papers, pens, toner cartridges, and more. In this confusion, businesses often mix the capital expenses with revenue expenses and send them for tax deductions.

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How to Avoid Common Tax Mistakes?

There are certain tax mistakes commonly made by various businesses across India, which leads them to bear higher amounts of tax liabilities. Here, we’ve mentioned some of the finest methods to avoid common tax mistakes for your business. 

1. Avoid Mathematical Errors 

The IRS department has revealed the high presence of mathematical errors in the tax files. These mistakes consist of the basic addition, subtraction, and multiplication errors. Though the department’s software will audit your errors and send you the notice regarding them, it will significantly delay your refund process. To avoid all these issues, it is better to run your files through professional software to check and rectify any of your errors. 

2. Re-check Your Bank Account or Routing Numbers 

Businesses often make the mistake of mentioning the wrong Bank Account or Routing Numbers. When the IRS accepts the returns, you won’t be liable to change your banking information. In this way, the IRS won’t be able to send you the refunds electronically and instead send a paper check to your mailing address (mentioned in your tax returns), which will take around 6-8 weeks. However, you can set up alerts with the Postal Services to know the date of arrival. Moreover, if you somehow enter someone else’s banking details, the refunds will reach their account. And you have to contact your bank to resolve the issue by showcasing your authenticity over the refunds. 

3. Do It At Last Minute 

Most small businesses have this basic mentality to take action for their ITRs when the date is too close. It makes you forget about taking a lot of benefits, such as requesting investment gains. Moreover, it creates pressure on you and relevant team members to report everything into the required files. You might forget to mention the correct details, make possible tax deductions & credits, and more. Therefore, you should plan your tax filing dates significantly before the due tax dates. 

4. Ensure All the Important Paperwork

Early tax filing means receiving tax refunds early, which generally leads small business owners to forget to attach the important paperwork. It requires candidates to amend their tax returns later. Hence, it simply delays your refund process. 

5. Always Check For the Typos

After preparing tax files, there are significant chances of making mistakes in it. It might include mathematical errors, information-related errors, and more. Thus, you should adequately check for typos after finishing creating tax files. It will help you a lot and make your reports easily pass through the audit process. 

6. Report all of Your Income Sources 

Last but not least, small business owners generally make a mistake in reporting their income sources, mainly including saving accounts and FD income. It is also a taxable income, and if you don’t mention these incomes, you might receive a notice from the income tax department. Therefore, make sure to note down all of your income sources and mention them in your tax reports. 

How to Correct Common Tax Mistakes?

Businesses generally pay full attention while filing income tax returns. But they can certainly make some tax mistakes, such as unclaimed deductions, basic typos, bank account details, and more. You have the option to correct these mistakes even after filing the tax returns. Simply, you can revise your returns and rectify the mistakes before they get verified. 

The tax department allows taxpayers to revise their returns to fix any of the recently issued rules and regulations. Otherwise, they might be counted as an inaccurate return filing. However, you can revise your returns only if it has been filed within the due date. As mentioned earlier, make sure not to verify the returns if you still have to revise them; otherwise, the tax department will proceed with it for further processing. 

According to Section 139(5), any individual or business who has filed the tax return before the due date can file a revised return. It can be filed only before the expiry of a year from the end of the relevant assessment year or the completion of the assessment year, depending upon whichever is earlier. 

The best thing is that you can revise your tax returns any number of times. However, you should carefully use this opportunity; otherwise, the tax department will thoroughly check your returns, especially for large refunds. This revision is only possible if your omission is unintentional. But, if you intentionally file a false return, then you might get imprisoned u/s 277. In fact, you will also have to pay the 100-300% tax due as a penalty for your concealing income.  

7 Effective Tax Mistake Prevention Tips for Small Businesses in India

Prevention is always better than cure; the same goes for saving methods. Here, we have mentioned some of the best mistakes preventive tips that will allow you not to make any potential mistakes regarding tax planning. 

Tip 1: Track all business-related expenses 

Even a small business has various transactions on a daily basis. Here, you need to keep a proper record of all your expenses, no matter how big or small it is. Negligence of expenses can lead you to pay a higher amount of taxes. Because small expenses also compound in the end and become a huge sum that would be subtracted from your actual taxable income. 

Tip 2: Limiting Cash Payments 

Cash payments are generally the most accepted form of payment, but small businesses should avoid making too many payments in cash because a cash payment of more than Rs. 20,000 in a day might cancel a lot of your tax deductions. In simple words, if you’re paying more than the amount mentioned, it would be better if you use digital payments. 

Tip 3: Consider Business Loan 

Business loans for MSMEs generally help the businesses to expand and purchase new equipment. You don’t have to pay the taxes over the loan. However, make sure that your company fulfills all the required criteria of the loan, and the interest should also be lower.  

Tip 4: Make Municipal Tax Payments by Cheque 

You should prefer using the cheque to pay the municipal taxes. If you deal in cash, there is a high chance that you might lose the receipt. In such a case, you won’t be able to claim any of your benefits. However, cheque payments will be recorded in the checkbook of your bank account. It will freely help you claim your deductions.  

Tip 5: Hire An Accountant 

Hiring professional tax consultants is one of the best tax mistake prevention tips for small businesses in India because of its complex tax structure. The professional guidance will help your business to reduce your tax burdens by claiming the maximum number of deductions and tax credits. Moreover, they will also enroll your business name in all the required tax-saving schemes.  

Tip 6: Prioritize Balance Sheet

Most business owners solely focus on their everyday operations to maximize their profit margins. But, they forget that it is also important to maintain a good balance sheet. It might impact your tax returns. Therefore, make sure to properly check the mention of all the assets, loans, etc. 

Tip 7: Utilize Tax Saving Software 

To manage a business, you should take the help of tax-saving software as it will help you to manage your reports and save significant taxes effectively. Moreover, machines don’t make human errors, allowing you to have better and more accurate records.  

Red Flags that Could Trigger a Tax Audit

1. Round-off Numbers 

Tax returns are one of the crucial pieces of information for a business, and you can not simply run off the number here. It is a very big red flag for your company. Instead, you have to mention the accurate value of your taxes. Because round numbers showcase that you’re estimating the amount of deductions or refunds, make sure to enter precise and accurate numbers. 

2. Home Office Deduction 

Home office deductions are generally the most exploited ones by the self-employed or businessmen. People generally add up additional costs, including gardening costs, to claim for bigger tax reductions. However, the income tax department properly knows it and even gives more attention to this side. Therefore, you should only mention the deductions in your reports that you can easily argue with the auditor. 

3. Misreporting Income

Misreported income is one of the biggest red flags that could trigger a tax audit against your business. In order to generate more profit, small businesses often hide some of their income made in the cash payment. It can lead you into more significant trouble. Though the IRS systems are not perfect, they can easily catch such cleverness. In fact, an auditor can also find out this misreported income through the inconsistencies in the bank balances. They can even check out the account details of your business partner. It might lead your business to face a full strict audit, and if you are found guilty, you will be penalized based on the required rules and regulations.  

4. Not Reported All Stock Trades 

Income earned through selling stock trade is taxable unless it comes up as an investment under the tax-deferred retirement account. Therefore, it is required to report this income as well in order not to be mentioned under the red flag. The brokerage firm generally delivers a copy of Form 1099-B to your company and IRS. All you need to do is report your capital gains and losses on Schedule D while filing your income tax returns. 

5. Claiming Business Losses Year After Year 

However, businesses often register heavy losses. But, you should not claim the losses year after year on your reports, as it might raise suspicion and warrant an IRS audit. However, if your company genuinely has multiple years of losses, you have to prove it with the help of proper and organized documents representing your accurate revenues and expense figures. 

6. Reported Too Much or Too Less Money 

Generally, the IRS department gives special attention to businesses that mention very little or little income in their reports. It allows the required department to raise certain doubts regarding your business returns. Therefore, you should mention an average income based on your business in your returns file. It will help you to keep safe and not be highlighted in the eyes of tax department people. 

7. Didn’t Answer the Questions Regarding Digital Assets 

The IRS has released the notice to mention the virtual currency transactions on the front page of Form 1040 since the year 2020. On this page, the income tax department has filled up many questions that you have to answer with a simple “Yes” or “No.” For instance, if you have made a certain profit from the cryptocurrency, you have to report it in your tax returns. Otherwise, it could be considered one of the biggest red flags that could trigger a tax audit. 

Conclusion 

Businesses generally end up paying a lot more taxes due to certain common mistakes. It drastically increases the tax liabilities for the business owners and lets them even have to bear the penalties and punishments often. But we hope that you keenly follow all the tips, tricks, and methods mentioned in this guide. They will allow you to save a lot of taxes and not trigger a severe audit of your ITRs. 

Frequently Asked Questions 

Q1. What are some of the biggest tax mistakes for small business owners? 

Here are some of the most significant tax mistakes of small businesses:

  1. Failed to file the proper forms or payments 
  2. Often mixing business and personal expenses 
  3. Not providing the correct estimations and reports 
  4. Not keeping accurate and organized records 
  5. Forget to claim certain deductions 

Q2. What are the common mistakes in ITR?

There are various common mistakes in filing the ITR, including inappropriate personal information, lack of reporting of all income sources, making errors in calculations, avoiding certain small deductions and exemptions, late filing, etc. 

Q3. How do you solve income tax errors?

Here’s a step-by-step guide to solving income tax errors:

  1. First, you have to open the “Services” section and click on the “Rectification” link
  2. Click on the “+ New Request”
  3. Select order under the Income Tax or Wealth Tax and Assessment year. After that, you can proceed 
  4. Next, go through the list “Request Type” and submit your required request 

Q4. Can we correct our income tax return?

Yes, you can revise your income tax returns u/s 139(5) Income Tax Act. This provision allows the business owners to fix their discrepancies in the IT returns. However, you should make sure that all of them are unintentional mistakes because intentional manipulation can lead you to face legal penalties or punishments. 

Q5. What happens if you file an incorrect income tax?

The results of filing an incorrect income tax depend upon the date you have filed it. For instance, if you have filed your ITR within the due date, then you can easily revise it at any time. In fact, you will also get 15 days from the date of receiving the notice to sort your defects if they find some genuine errors according to Defective Return Notice u/s 139(9). 

Q6. Would you have to face any penalty for revising ITR?

Generally, the income tax department doesn’t make any charges or penalties for filing the revised returns. But, you might have to face some interests after revising the income or changing the tax liabilities.

Q7. How to save taxes on a 25 lakh salary?

There are certain schemes you can invest in to save a good amount of taxes. We have mentioned some of them below: 

  1. ELSS (Equity Linked Saving Schemes) funds 
  2. SSY (Sukanya Smriddhi Yojna)
  3. PPF (Public Provident Fund)
  4. FD (Fixed Deposit) for five years or more
  5. NSC (National Savings Certificate)

Q8. How can 7 lakh income be tax-free?

A new tax regime, posted by the finance ministry, has stated that people with an income of Rs. 7 lakh per annum don’t have to pay any taxes from 1st April. However, even Rs.100 additional income can lead you to pay heavy taxes. For instance, if your income is Rs.7,00,100, then you have to pay the taxes of Rs.25,010. 

Q9. What is a green flag in a forensic audit?

Green flags represent the fraud in the submission. It can be considered a white-collar crime or something even more detrimental to an organization’s interest. There are certain more such signals to indicate the possible existence of the fraud. But they do not activate the alarm bells. 

Q10. How can you avoid an audit trigger? 

Firstly, you should make sure to file your returns within due time and in a proper format. Still, there are certain things you can be more careful of not to get the audit trigger. 

  1. Make sure to mention all of your expenses correctly 
  2. Try to claim all the possible tax deductions 
  3. Do not amend the returns 
  4. Avoid rounding off the numbers 
  5. Avoid using excessive deductions
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Prarabdh Gupta

Prarabdh Gupta is a finance content writer with 4+ Years of Industry experience in simplifying complex finance terms. He crafts captivating and engaging content around mutual funds, insurance, banking, real estate, taxation, and financial planning. He has completed his graduation from Jiwaji University, Gwalior.

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