Due to mismanagement of their tax affairs, some persons and businesses find themselves on the wrong side of the tax equation. From non-filing of returns generating interest and penalties to poor tax planning leading to high tax liabilities.
Here are 3 mistakes that business owners make regarding their taxes
1) Not registering the business with Board of Inland Revenue (BIR)
All businesses whether sole trader or LLC needs to have an identity with BIR. If your business is a sole trader business then your identity is your personal BIR number. So if at the time of registering your sole trader business with Company Registry (Legal Affairs) you do not have a personal BIR number, you will need to get one.
If your business is a Limited Liability Company (LLC), the company needs its own BIR number which will be completely different and separate from your own personal number. This is because, in the eyes of the law, the LLC is a separate legal entity.
2) Not filing tax returns
The filing of tax returns for all businesses is MANDATORY. For sole traders, this is done via the personal income tax return and for LLCs this is done via the corporate tax return.
The tax return is the tool by which you communicate to the BIR the results of the business and there is no circumstance under which you are not required to do so. Non-filing of tax returns leads to penalties which over time can be costly, particularly for the LLCs.
A common misconception is that you only file taxes when you “make money”. Wrong! Even if you didn’t make a profit you are required to file the tax return. In fact, it would benefit you more to file the return showing the losses since later on when you turn profitable the losses are used to minimise your tax liability. This leads to the 3rd mistake…
3) No tax planning
The tax system is filled with lots of rules, yes, but it’s also filled with tax breaks, incentives, allowance and credits that businesses can utilise to legitimately minimise their tax liabilities.
Tax planning involves understanding how the tax rules and allowances affect your business. Once you know the effect, you will know how to position the activities of your business to maximise what you are legitimately allowed.
So how can this be corrected?
1) Hire a tax professional or accountant
First and foremost, hire an accountant to handle your tax planning and tax filings. A trained professional in this field can help ensure that nothing is missed and that calculations are accurate.
2) Ensure proper bookkeeping and record keeping systems are in place for the business.
One of the tenets of proper tax return preparation is ensuring that the return is reflective of genuine and legitimate transactions. Proper bookkeeping ensures that business transactions are accurately recorded and that the underlying documentation justifying the expense is retained.
3) Ensure that all business transactions are actually passed through the business.
A lot of times, more frequently with sole traders and solopreneurs, expenses are incurred and are passed through the business owner and not through the business. Failure to pass all the expenses through the business will give an incomplete reflection of the business results and therefore an inaccurate tax position.
One thing for sure is that tax compliance impacts all businesses no matter what type. Make sure that you are not on the wrong side of the tax equation.
Andrea Ragoo is a professional accountant in Trinidad & Tobago. Follow on LinkedIn