Top 9 Tax Compliance Issues for Businesses
Running a business means handling multiple fronts all at the same time. Business owners need to oversee everything—from marketing their products and services, landing sales, and taking care of their employees to establishing relationships with their customers. Then, of course, there’s filing taxes.
Filing taxes is a necessary part of business and being tax-efficient will essentially benefit you in the long run. It is best to comply with legal formalities as early as possible to avoid complications such as penalties and fees, or even have taxing authorities like the Internal Revenue Service (IRS) check up on you.
It will also boost your business’s credibility and help you keep track of all your resources, especially once it’s time to expand.
Filing taxes can be tedious and quite error-prone, but it is something you must claim responsibility for as a business owner. If you are experiencing trouble keeping up with the tax filing system and avoiding tax compliance issues, this article should help you from feeling overwhelmed.
Read on as we go through some common tax issues businesses face, including how to avoid or resolve them.
1. Late filing of taxes
While it is common for individual taxpayers to file their taxes late, it can also happen for businesses regardless of size. Companies need to take extra caution as delayed filing of taxes can incur sizable penalties and fees.
Unpaid tax interest, unfortunately, accrues at a high rate. To ensure timely filing of taxes for your business, determine the necessary due dates for the tax year well ahead of time.
2. Underpayment of taxes
Some businesses might also end up underpaying their taxes due to the nature of business transactions, the underestimation of tax payments, or the complexity of the tax code itself. Underpayment refers to the collected sales taxes that are not passed along to the state. This may be unintended, but it can also be deliberate.
Often, transactions are done through cash, while not all transactions are reported to the IRS. These errors can hurt your business in the long run. For instance, they can inflate end-of-year taxes.
3. Disorganized records
Poor record-keeping can also lead to an onslaught of problems and penalties. Ensure a reliable record-keeping practice by keeping all transaction receipts and other documents and storing them in an organized manner.
4. Changes to Section 179
The Section 179 deduction allows businesses to write off or deduct the full price of equipment or software in the same tax year it was bought or leased from their gross income. This has proven to be very beneficial, especially for businesses that are smaller in terms of investment, assets, and income.
Bonus depreciation is also offered on some years, allowing even more flexibility for small businesses. Companies, however, need to be attuned to changes to Section 179 every year.
5. Changes in the existing provisions
Apart from Section 179, some existing provisions can also change. For instance, at the end of 2019, the work opportunity credit, new markets tax credit, and employer credit for paid family and medical leave expired. There are also cases wherein provisions are retroactively revived.
These instances illustrate the tax code’s complexity—it is a must to stay updated with significant changes.
6. Accounting method
When choosing between cash or accrual methods, it is vital to determine which suits your business to avoid complications down the road. If you file a tax return with one method, you should maintain the same method going forward unless permitted by the IRS.
For cash-basis, income and expenses are recorded as and when the money is received. With the accrual scheme, income is reported as they are incurred, regardless of whether payment is actually made, and expenses are reported as they become due.
The disadvantage to the accrual method is that it might be a bit more complicated to shift items of income and expense between different years as they are due.
7. Employment taxes
Businesses employing workers traditionally must comply with employment tax requirements, and with that comes many possible issues. They need to make sure taxes are properly withheld from their employees’ pay and make tax payments on behalf of employees. This includes Social Security, federal income, and healthcare.
If the business fails to comply, it might have to undergo an audit and land in grave legal and financial trouble.
8. Foreign entities
United States taxpayers with foreign financial interest must disclose these assets to the IRS as per the Foreign Account Tax Compliance Act. U.S. persons with foreign financial accounts of at least US$ 10,000 must file a Report of Foreign Bank and Financial Accounts. Penalties may be imposed if failure to file is deemed willful.
9. GILTI and repatriation taxes
GILTI, or global intangible low-taxed income, requires U.S. shareholders who own more than 10% of any controlled foreign corporation to pay U.S. taxes on their proportional share of the profit, regardless of whether the profit is distributed to shareholders.
A way around this provision for small businesses and individuals is to treat their foreign corporation as a partnership or disregarded entity, though this also comes with disadvantages. With a pass-through or disregarded entity status, foreign income taxes may be treated as a foreign tax credit.
There is also a transition tax U.S. shareholders of foreign corporations must bear, which is applied to foreign earnings in cash and cash equivalents (15%) and other earnings (8%). This includes U.S. owners of small businesses overseas. To get a better grasp of such issues, it is best to seek a partner offering tax services for expats.
Pay It Right
According to the IRS, businesses with less than a million in revenue assume nearly two-thirds of business compliance costs. With smaller firms bearing the brunt of tax compliance, it is essential to get a handle on common tax issues to avoid incurring additional fees or penalties.
From beneficial tax provisions to tax services for expats, every business can get ahead with the right partner for solving tax issues. For assistance, Tax Samaritan offers the best services. Visit our website for more information.
All About Randall Brody
Randall is the Founder of Tax Samaritan, a boutique firm specializing in the preparation of taxes and the resolution of tax problems for Americans living abroad, as well as the other unique tax issues that apply to taxpayers. Here, they help taxpayers save money on their tax returns.