Don’t Make These Eight Mistakes When You File Your Business Return


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Your business return is a report to the IRS and to you State department of revenue. It says a lot about your business and about you. But it also says one really important thing that you might not even be aware of.

Your business return says whether you should be audited or not.

Here’s a brief outline of eight mistakes that you want to avoid on your business return. For more information on these mistakes, and how to avoid them, please see Smart Business Stupid Business.

Mistake #1: Selecting the wrong business type for your business.
Mistake #2: Selecting the wrong NAICS code for your busness.
Mistake #3: Failing to elect to amortize your start-up costs.
Mistake #4: Not selecting the correct accounting methods.
Mistake #5: Not taking the full amount of loss in the start-up year (or for that matter any growth year).
Mistake #6: Not reporting inventory for a retail business.
Mistake #7: Making a mistake with your salary.

There are two things you can do wrong:

  1. Pay yourself a salary when you’re in a structure like an LLC or LP or
  2. Not pay yourself a salary when you’re in a structure like an S Corporation.

Mistake #8: Not setting up an audit defense.

Got more questions? Check out Chapter 17 in Smart Business Stupid Business, now part of a Smart Business Smart Investment 2 for 1 package!



7 Comments

  1. Diane Kennedy says:

    Steve,

    Just to be clear, if your LLC is using partnership taxation, partners (members) can’t take salary. They instead take guaranteed payments.

    Since a business operating under partnership law has self-employment tax, there really isn’t any pro/con to considering it guaranteed payments or distributions. It’ll be taxed the same. If the two partners have a different formula for payment (ie, one guy does all the management and so makes an extra $5K/mo), you may want to make it part guaranteed payment that is not equal and part distribution that is equal.

  2. Steve Remington says:

    If your LLC is a partnership and you withdraw the same amount of money each month (equally for each partner) is that considered a salary?

  3. Clint says:

    Diane, this is for a few clients we’ve done not ourselves. I just wanted a second opinion 😉

    By the way I love your site and have been a fan of yours since I first read your Success Story on the Fastlane 🙂

  4. Diane Kennedy says:

    Clint, if your business has no/very low income, you most likely don’t need to do a salary. The IRS has allowed business owners to ‘postpone’ salary for owners because they understand that owners often are the last to get paid.

  5. Clint says:

    @Diane Kennedy- As far as #7 goes, if the LLC Sole Prop taxed as an S operates at a low net gain(less than $5k) or even a loss do you still advise the business owner to take a salary?

    I know this also depends on the proportion of write-offs to income, however if this does trigger an audit then a business that keeps thorough records of income/expenses shouldn’t have much to worry about in that scenario as it’s just the IRS doing their due diligence.

  6. Diane Kennedy says:

    Thanks for the comments Andres.

    On #3: Yes, you do have to capitalize and amortize the costs for 180 months. However, you can now immediately expense up to $10,000 of the costs. There is a phase-out if your costs exceed $60K.

    On #7: If you have an LLC with default tax treatment (Sole Prop if single member or partnership if multiple), then you can’t take a salary. People get that one wrong. If you’ve elected to be taxed as an S Corp, then you MUST take a salary in most cases.

  7. Andres says:

    I like this post…

    About #3: amortize them? I thought they were expenses and you would simply have them as such for the the first year….

    About #7: So what is the mistake and the correct thing to do when it is an LLC filing as S corp?

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