The most common tax mistakes small business owners make include poor receipt tracking, mixing personal and business finances, handling taxes without professional help, and only reviewing finances once a year. Avoiding these mistakes can help reduce errors, maximize deductions, and improve financial health.
Poor receipt tracking
Relying on paper receipts or manual tracking increases errors, wastes time, and makes it harder to accurately claim deductions.
The “shoebox method” creates problems because:
- Receipts get lost or damaged
- Manual entry wastes time
- Errors increase during tax season
“The level of detail within an individual line item in your bank account can vary quite a bit whereas a receipt can tell you specifically what you spent the money on,” says Matthew Baker, vice president of strategic planning for accounting software company FreshBooks.
Yet the age-old process of gathering dog-eared receipts and entering them manually into an Excel spreadsheet wastes valuable time and company resources. Luckily, bookkeeping apps, like ReceiptBank and Expensify let entrepreneurs scan copies of receipts into a software program for easy recording.
You believe that one bank account is better than two
Like business and pleasure, some things are better kept separate. Yet many small business owners make the mistake of relying on a single bank account for both personal and business expenses. “Running everything through one account and not being able to parse it out [come tax season] is the worst-case scenario,” warns Baker.
For one, a bank statement won’t tell you whether that purchase from your neighbourhood electronics store was for your son’s X-box or an office printer. Secondly, by relying on a single set of bank statements to track expenses, you’re more likely to miss important business write-offs.
However, Baker advises, “If you have a business credit card, you’re not going to get confused around whether something is a personal expense or not.” A dedicated business credit card, debit card, credit line, chequing account – they’re all financial instruments that can help you maximize deductions.
You tackle tax season – solo
Generating revenue – not general ledgers – should be the primary focus of a small business owner. Yet many entrepreneurs err in thinking that they can cut costs by filing their own tax returns. “A tax professional should be your lifeline,” advises Baker. “To do it 100 percent on your own during tax season would be awfully daunting.”
To be sure, hiring a seasoned tax professional to oversee your finances can be costly. But the right expert can also introduce you to rebates and tax incentives that can easily offset this upfront expense.
However, the trick is “hiring the right accountant for your business,” says Baker. “Not all accountants are created equal. You want to make sure they work with other small businesses in your area and in your profession. At the end of the day, you want somebody who’s done it before and who knows how to make tax season less stressful and challenging.”
You treat tax season as an annual review of your business
Tax season is an excellent time to take stock of the year’s progress – and pitfalls. But growing a company requires year-round diligence. That’s why using software, like FreshBooks and TurboTax, to generate monthly reports on everything from customer profitability to product pricing can identify problem areas and eliminate last-minute, tax-season surprises.
“Regularly reviewing finances is something all small business owners should do,” says Baker.
Learn how you can pay your taxes accurately and on time right from your online business account.
Frequently Asked Questions
What are the most common tax mistakes small business owners make?
The most common mistakes include poor receipt tracking, mixing personal and business finances, filing taxes without professional help, and only reviewing finances during tax season.
Why is tracking receipts important for small businesses?
Tracking receipts ensures accurate expense reporting and helps small businesses claim all eligible tax deductions under Canada Revenue Agency (CRA) guidelines. Without proper records, you may miss deductions or face issues during an audit.
Should small business owners separate personal and business finances?
Yes. Keeping personal and business finances separate makes it easier to track expenses, stay organized, and identify deductible business costs.
Is hiring an accountant worth it for a small business?
In many cases, yes. A qualified accountant can help reduce errors, identify tax-saving opportunities, and ensure your business stays compliant with tax regulations.
How can small business owners prepare for tax season?
Small business owners can prepare by organizing receipts, using bookkeeping software, reviewing finances regularly, and working with a tax professional ahead of key deadlines.
How often should small businesses review their finances?
Ideally, small businesses should review their finances monthly. Regular check-ins help catch issues early and prevent stress during tax season.
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