Three Mistakes Small Businesses Make on Their Tax Return

I have been preparing returns for small business owners in the San Antonio area since 2010, and the mistakes that cost people the most money are almost never the ones they worry about. Owners ask me about audit risk and about which deductions they might be missing. Meanwhile the return sitting in front of me has one of three problems, and I see the same three over and over. None of them are complicated once you know what to look for. All three are easy to walk into without realizing it.

Mistake One: Not Paying Yourself a Reasonable Salary

This one shows up most with S-Corp owners. If your business is taxed as an S-Corp and you work in it, the IRS expects you to pay yourself a salary through payroll, with the usual withholding, before you take the rest of your profit as a distribution. The appeal of skipping payroll is obvious: distributions are not subject to self-employment tax the way wages are, so paying yourself little or nothing and taking the rest as a distribution looks like a shortcut to a lower tax bill.

The problem is that it is not actually optional. A reasonable salary has to reflect what someone doing your job, in your industry, in your area, would actually be paid. When it does not, that gap between what you took as salary and what a reasonable salary would look like is exactly the kind of thing that draws attention on examination, because it depends on judgment rather than a simple form. I work through what a defensible number looks like with each client based on the role they actually perform in the business, not a formula pulled off a chart. Getting the salary number right at the start of the year is far less work than trying to fix it after the return is filed.

Mistake Two: Failing to Keep Proper Accounting Records

The second mistake is simpler to describe and just as costly. A shoebox of receipts, a bank statement without categories, or a memory of what a transaction was for six months later, is not a set of books. When I sit down with a client whose records are thin, we usually spend more time reconstructing the year than we would have spent keeping it current in the first place.

Weak records cost you in two separate ways. First, deductions you actually earned get missed, because nobody can substantiate them months later, and the safe move is to leave them off the return. Second, if the return is ever questioned, the burden is on you to show the numbers are right, and a bank statement alone rarely does that. Keeping a simple, current set of books, even a basic one, protects both the deductions you are entitled to and your ability to defend them later. I would rather help a client set up something workable in January than try to reconstruct a year from memory in April.

Mistake Three: Mixing Business and Personal Expenses

The third mistake is running personal spending through the business account, or business spending through a personal card, and treating the two as interchangeable because it is convenient in the moment. I understand the temptation, especially for a sole proprietor or a single-member LLC where there is only one person making every purchase. But once the lines blur, so does everything downstream of them.

• It makes bookkeeping slower and more error-prone, because every transaction needs to be sorted after the fact instead of already being clean.
• It weakens the liability protection an LLC or corporation is supposed to give you, since courts look at whether you actually treated the business as separate from yourself.
• It makes a deduction harder to defend, because a mixed account does not show a clear business purpose the way a dedicated one does.

A separate business checking account and a separate business card, used consistently, solve most of this on their own. It sounds almost too simple to matter, but I see the returns that skip this step, and I see how much extra work it creates every single year.

None of these three mistakes require a complicated fix, but all three are easier to prevent than to unwind after the fact. If you recognize your own return in any of this, I offer a free consultation and I would rather talk it through with you before your next filing than after. You can reach me at (210) 842-8197 or set up time to sit down together, in person or by video, whichever works better for your schedule.