Are you throwing away money due to tax deduction mistakes? Doing your small business taxes is never a pleasant experience (well, it may be if you’re an accountant). This year’s taxes could be even more nerve-racking than normal since the Tax Cuts and Jobs Acts (TCJA), which took effect in January 2018, made some substantial changes to the tax deductions small business owners normally rely on.
Changes to the tax law make it more important than ever to keep detailed records of your business expenses to avoid making tax deduction mistakes. However, most small business owners are failing miserably at tracking their expenses, a recent study found.
More than 50% (55.4%) of respondents don’t deduct all of the expenses they’re entitled to on their taxes every year, according to a study by QuickBooks. In the poll of over 500 self-employed individuals and small business owners, just 15.2% of respondents say they are able to deduct 100% of what they’re entitled to every year.
Why are these entrepreneurs leaving money on the table? Poor organization and bad record keeping are the biggest culprits, the study found. Here are small business owners’ most common tax deduction mistakes.
Tax deduction mistake #1: Not keeping track of every expense
Some 21.8% of respondents say they don’t take all their deductions because they can’t remember all their expenses. Of course, there’s no way you can remember all of your expenses for a year without documenting them somehow. But even among those who do track expenses, there’s a lot of room for improvement (as Mistake No. 2 shows).
Tax deduction mistake #2: Not keeping receipts and records organized
Almost 80% of respondents say they could do better at organizing their receipts; just 20% feel there’s no room for improvement. Some 70% of respondents say they lose an expense receipt at least once a month.
It’s no wonder receipts get lost: Just 16.8% of respondents track their receipts digitally. In fact, almost 15% literally use shoeboxes to store their receipts! About 40% keep receipts in a physical folder, but it’s easy for small receipts to get lost in that type of filing system.
Sloppy expense tracking causes stress—something no entrepreneur needs more of. About 30% of survey respondents report that expense tracking regularly stresses them out, while 53.8% say organizing their expense records is stressful.
Digitizing your receipts is the easiest way to make sure you keep detailed records of expenses and avoid tax deduction mistakes. Digital receipts can easily be shared with your accountant or tax preparer, too. There are also lots of apps you can use to scan and store receipts. To make your life easier, look for one that has a mobile app, integrates with your accounting software, lets you search receipts, and can link receipts with client invoices.
Once your receipts are digitized, you don’t have to worry about losing those tiny scraps of paper between now and tax time. You can either scan your receipts as the expenses occur (if you’re a very organized person) or collect all your paper receipts and set aside time at the end of each week or month to scan them.
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