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9 Common Tax Mistakes by LLC Owners & How to Avoid Them

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It’s no secret that limited liability companies (LLCs) are popular due to their flexibility and strong protection of personal assets, among other selling points. However, despite their advantages, many LLC owners often make tax mistakes that can result in various financial setbacks.

February 15, 2024
Author: NCH

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Here are some of the common ones you need to keep in mind and avoid at all costs: 

Mistake #1: Neglecting Proper Record-Keeping

Accurate and detailed records are the foundation of a smooth tax filing process. Many LLC owners, especially in the hustle of day-to-day operations, overlook the significance of maintaining meticulous records of income, expenses, and deductions. This oversight can lead to missed deductions, inaccurate financial reporting, and potential audits.

Using accounting software and hiring a professional bookkeeper can streamline this process. Regularly reconcile bank statements, categorize transactions correctly, and retain all relevant documentation. By maintaining organized and up-to-date records, you ensure compliance and gain a clearer financial picture of your business.

Mistake #2: Misclassifying Workers 

The Internal Revenue Service (IRS) has specific criteria to determine a worker’s classification, including the degree of control the business has over the worker’s tasks and the extent of the worker’s independence. Misclassification can result in penalties and additional tax obligations, as employers are responsible for employee payroll taxes.

Understand the criteria used by the IRS to differentiate between employees and independent contractors. Factors such as control over work, financial arrangements, and the type of relationship between the parties are worth considering.

Mistake #3: Failing to Separate Personal and Business Finances

Mixing funds complicates accounting and record-keeping and can jeopardize the limited liability protection that the LLC structure offers.If you own an LLC, it pays to open a dedicated business bank account and use it exclusively for business transactions. 

To prevent this oversight, LLC owners should establish a strict boundary between personal and business finances from the inception of their venture. Also, avoid using personal funds for business expenses and vice versa.

Mistake #4: Ignoring State Tax Obligations

More often than not, LLC owners focus solely on federal tax obligations and overlook their responsibilities at the state level. Each state has its own tax laws and requirements, and failing to comply can lead to penalties and legal issues. 

Engaging with a tax professional specializing in state tax regulations can be instrumental in understanding the complexities of state tax obligations. Regularly reviewing any changes in state tax laws and promptly adjusting business practices also ensures ongoing compliance.

Mistake #5: Neglecting Quarterly Estimated Tax Payments

Unlike traditional employees, self-employed individuals, including LLC owners, are responsible for paying their yearly taxes. Failure to make quarterly estimated tax payments can result in penalties and interest charges, among other consequences.

Timely and accurate estimated tax payments can prevent penalties and ensure you meet your annual tax obligations. Don’t forget to calculate your estimated tax liability and make quarterly payments to the IRS. 

Mistake #6: Disregarding Retirement Contributions

Although focusing on day-to-day operations, entrepreneurs may neglect contributing to retirement accounts, missing out on valuable tax advantages. Allocating funds for retirement not only secures financial stability but also provides tax benefits.

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Prioritize retirement planning and take advantage of available tax-advantaged accounts such as SEP-IRAs or Solo 401(k)s. You can also consult a financial advisor to determine a suitable retirement plan based on the financial health of your business and your long-term goals. 

Mistake #7: Disregarding Depreciation and Amortization

The depreciation and amortization of business assets allow businesses to recover the cost of qualifying assets over time. Overlooking or miscalculating depreciation and amortization can result in missed opportunities to lower taxable income. 

One of the best ways to overcome this is by understanding the depreciation rules provided by the IRS for various business assets. This includes implementing depreciation schedules to deduct the appropriate portion of an asset’s cost over its useful life.

Mistake #8: Procrastinating Tax Planning

This is a pervasive mistake that can have detrimental consequences for LLC owners. Waiting until the last minute to address tax obligations can lead to rushed and haphazard decision-making, along with missed opportunities for tax optimization. Effective tax planning requires time, analysis, and strategic decision-making.

With that said, always embrace a proactive approach to tax planning. It begins with working with a tax professional to implement a year-round tax planning mindset for strategic decision-making, maximizing deductions, and optimizing the overall tax position.

Mistake #9: DIY Tax Preparation without Professional Guidance

Attempting to handle tax preparation without professional guidance is common for anyone who runs an LLC. Tax laws are complex, and DIY approaches may lead to inaccuracies, missed deductions, and increased audit risks.

A tax professional can ensure compliance with tax laws and identify opportunities for tax optimization. The benefits of accurate tax filings often outweigh the cost of hiring a professional, reduced audit risks, and potential savings through proper tax planning.

The Bottomline

LLC owners can mitigate potential tax pitfalls by staying vigilant, implementing robust financial practices, and seeking professional guidance. Avoiding these LLC tax mistakes ensures compliance and fosters a healthier financial future for the business and its owners. 

At NCH, we understand the intricate demands of managing a successful LLC, and we are committed to supporting entrepreneurs with expert guidance on tax matters. Whether you require personalized tax planning, compliance assistance, or ongoing support, our team is dedicated to helping you achieve your financial goals. 

Call us today at 1-800-508-1729 or visit our website for a FREE consultation!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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