How incorporating helps businesses during tax time

April 15, 2014

Tax season can be a stressful time for small business owners. Even if you’ve kept meticulous records all year, it’s not uncommon to experience mistakes and confusion when tax time rolls around. For small business owners, doing annual taxes can be a time consuming endeavor. Even the most detailed records can result in tax discrepancies that can be difficult to resolve.

A recent article in the Washington Post discusses how some small business owners may end up spending an entire week working on preparing their taxes. According to the article, small business owners may spend 40 hours putting their taxes together, on average. However, this process could cost even more time down the line if the IRS audits your business.

This is one reason why small business owners may want to keep separate accounts for business and personal expenses.  They may want to seek professional advice regarding how to file their taxes and manage their finances overall. In an audit, the IRS will determine which of your expenses were personal and which were for business. One New Jersey based tax accountant made the point that business owners should keep their business and personal accounts separate.

“It’s tempting for small-business owners to commingle their business checking account with their personal expenditures. Under an IRS audit, not only will the personal expenditures be disallowed as not valid business expenses,” certified public accountant Stephen Reed told the Star-Ledger/, “but the IRS may take the position that there is no clear demarcation between your business accounts and your personal accounts, so they may audit your personal tax returns as well.”

One thing that small business owners can do to better prepare for tax time is to incorporate. Some of the benefits of incorporating your business include limited tax liability and personal exposure to liability, although the specific benefits vary for different entities. An incorporation services provider can help you determine which type of incorporation is right for your business needs.