Your small business's cash flow takes a hit anytime you owe the IRS money. Avoiding a tax debt, however, can be as simple as knowing how and when to file your business's tax returns. By knowing what common small business tax mistakes to watch out for, you avoid having to pay the IRS any more money than what you legally and rightfully owe each year. 

Neglecting to Hire a Financial Professional

One of the easiest ways to avoid common small business tax filing mistakes is to hire a financial professional for your business. This individual understands that as an entrepreneur you probably have very little cash left in your budget for anything other than the basics. A financial pro can make sure your finances are in order and also help you identify ways to save money while bulking up your cash flow. 

More importantly, a qualified financial professional can advise you on matters like what tax credits you can rightfully claim on your tax returns. The money this individual saves you could cover the costs of hiring him or her and leave extra cash in your budget at the same time.

Overlooking Legitimate Business Expense Deductions

Another reason to hire a tax professional for your business involves finding and making use of legitimate expense deductions to which you are entitled. In fact, the IRS permits small business owners like you to deduct certain expenses on your returns to help reduce your taxable income. 

Knowing what these expenses are, however, can be tricky. Even more, failing to claim them when filing your returns could result in you paying significant and unnecessary taxes to the IRS each year. 

If you are not sure what expenses you can deduct on your taxes, you can review the IRS guidelines for deductible business expenses. You can also ask an accountant or tax professional to review your business's regular costs and identify which ones can be deducted from your taxable income. 

Some of the most common business expenses you can deduct when filing your returns include:

• Travel expenses like gas, mileage, and car repairs
• Petty cash purchases
• Magazine subscriptions for your office
• Training classes
• Food expenses for entertaining clients

You should keep a record of these costs during the year so you can show proof of them when filing your taxes. 

Erroneously Classifying a Hobby as a Business 

Legitimate home-based business owners can deduct expenses like Internet bills, postage, and purchases for equipment like printers and cameras on their returns. However, when your home-based endeavor consistently loses more money than it makes, the IRS may label it a hobby rather than a business.

As a rule, you cannot deduct hobby expenses on your taxes unless they are lower than the amount of income you make from it. If you are unsure of whether or not your endeavor is a hobby or a legitimate business, you should check the IRS guidelines at IRS.gov. You can then decide whether or not to deduct the related expenses on your tax return.

Inaccurate or Incomplete Records 

When you fail to keep your business's records in order, you only make it more difficult to file and pay your taxes on time each year. Inaccurate or incomplete records often lead to you misplacing important tax documents like income earning statements or receipts for deductions. If you outsource the preparation of your business's taxes to an accountant or tax professional, you likewise only make this person's job more challenging. 

You can avoid the hassle of inaccurate or incomplete records by taking plenty of time before tax season to compile and organize your business's books. If you lack the time or talent for it, you may hire staff specifically for this purpose. You also have the option of outsourcing your bookkeeping to a professional bookkeeping firm. 

As tax season approaches, you will appreciate the importance of having organized and ready books for your business. You also help your company's tax professional file your tax returns in a timely manner.

Inaccurate Income Reporting

It may be tempting to under-report what your business made during the tax year. However, purposeful and inaccurate reporting of your income only puts your business at risk of being audited by the IRS. 

In fact, the IRS will assuredly find out sooner than later that you manipulated the numbers on your tax return. Once you are found out, you will be at risk for having civil and criminal penalties levied against you. 

Specifically, your civil penalty can be up to 20 percent of what you owe to the IRS. Criminal penalties can include being charged with fraud and possibly facing jail time. 

You can avoid these penalties by being truthful about your income when filing your tax returns. If you are not sure of how to report your income, you should hire a tax professional to file your business's returns for you. 

Failure to File and/or Pay on Time 

As with filing your personal tax returns, your business's returns must be filed on time each year. Further, if you owe anything to the IRS, it must be paid in full by the stipulated deadline if you want to avoid expensive fines and penalties. 

When you do not file your business's returns on time each year, the IRS can impose a penalty of 0.5 to one percent for each month you are late filing. The fines are imposed automatically by the IRS' computer system. 

Failing to pay your tax debt on time each year can be more expensive. The IRS can levy fines of five percent for up to five months to a total of 25 percent of your tax bill. When you want to avoid having more money added to what you already owe, you should make it a priority to file and pay your taxes on time each year. 

If you are not able to file on time, you should request a filing extension from the IRS. A tax professional can assist you in making this request if necessary. 

These common small business tax filing mistakes can be costly and challenging. You can avoid them by knowing how and when to file your returns each year. You can also simplify filing your taxes by hiring a tax professional for your business.