Business owners wear a lot of hats, and taxes aren’t always at the top of the priority list. But small mistakes can add up, leading to missed deductions, cash flow issues, and even IRS penalties.
Some mistakes are simple bookkeeping errors, while others come from misunderstanding tax laws or trying to take shortcuts that don’t hold up under audit.
If you’re running a business, understanding what not to do is just as important as knowing the right steps to take. Here are 10 of the most common tax mistakes business owners make and why they can be a problem.
1. Not Separating Personal and Business Finances
One of the biggest tax mistakes business owners make is not keeping personal and business finances separate.
A lot of times, we see business owners using one bank account for everything, mixing personal and business expenses. The problem? It makes it difficult to track actual business performance and often leads to missed deductions or even tax compliance issues.
When financials aren’t kept separate, it’s hard to know where the business stands. Are you profitable? Losing money? Spending too much? Without clean records, you’re making decisions without the full picture.
2. Not Tracking All Business Expenses
Many business owners don’t realize how much they’re leaving on the table simply because they aren’t tracking everything.
We often find expenses paid in cash, purchases made from personal accounts, or transactions that aren’t properly categorized in their accounting system. When that happens, deductions get missed, taxes get overpaid, and records become incomplete.
Some business owners are great at tracking big expenses but overlook the small ones. Things like subscriptions, office supplies, mileage, or client meals—they all add up and should be recorded properly.
3. Not Keeping Track of All Accounts
It’s easy to focus only on your main checking account, but what about credit cards, lines of credit, and personal accounts you’ve used for business purchases?
We often find that business owners forget to track certain accounts and miss transactions that should have been deducted. If money is moving between different accounts and you’re not keeping up with it, expenses start slipping through the cracks.
4. Spending Just to Save on Taxes
Many business owners think, “If I spend more money, I’ll owe less in taxes.” While that’s technically true, it’s not always smart business.
We see this a lot at the end of the year when business owners buy expensive equipment or vehicles just to lower their taxable income. The problem? You’re still spending the money.
For example, let’s say you buy a $100,000 truck to get a $30,000 tax deduction. Sure, you saved on taxes—but you still spent $100,000. If you didn’t actually need the truck, that’s not a great financial move.
The goal isn’t to pay the least amount in taxes possible—it’s to manage cash wisely while still minimizing taxes.
5. Misclassifying Employees as Independent Contractors
Some business owners think hiring independent contractors instead of employees is a great way to save on payroll taxes and avoid extra paperwork.
The issue? If the IRS disagrees with how you classified a worker, it can cause major problems.
If an independent contractor is later deemed an employee, the business is responsible for:
- Back payroll taxes
- Penalties for misclassification
- Interest on unpaid taxes
If you’re not withholding Social Security and Medicare taxes, and the IRS finds out the worker should have been an employee, that deduction disappears, and you’re left owing more than you planned.
6. Not Taking Advantage of Tax Deferral Options
A lot of business owners miss out on opportunities to reduce their taxable income because they aren’t thinking about tax deferral strategies.
Some of the biggest missed opportunities include:
- Retirement accounts like 401(k)s, SIMPLE IRAs, and SEP IRAs—putting cash aside for the future while reducing taxable income.
- Health Savings Accounts (HSAs)—offering tax benefits for covering medical expenses.
- Roth accounts, which allow for tax-free growth in retirement.
Many business owners put off setting these up, but they’re some of the best tools available for lowering tax liability.
7. Poor Record-Keeping for Receipts and Documentation
It’s one thing to claim an expense—it’s another thing to prove it.
Many business owners don’t keep proper records or receipts, which becomes an issue if they ever get audited. The IRS doesn’t just take your word for it. If you can’t produce receipts or documentation, those deductions can be disallowed.
This is especially important for expenses like:
- Business travel
- Meals and entertainment
- Office supplies and equipment
Without records, you could end up paying more in taxes than necessary.
8. Incorrectly Calculating Depreciation
Depreciation can be tricky, and many business owners either:
- Take too much depreciation too soon, thinking they can write off an entire vehicle or piece of equipment when they shouldn’t.
- Forget to record assets altogether, missing out on depreciation deductions.
For example, we often see business owners buy a vehicle for both business and personal use but try to depreciate the full amount when only part of it qualifies.
Depreciation should be handled correctly, or you risk losing deductions or facing IRS pushback.
9. Not Allocating Business vs. Personal Expenses Properly
We see business owners struggle with mixed-use expenses all the time.
If you take a business trip but add a few personal days, how much of it is deductible? If you use your personal vehicle for work, are you tracking mileage properly? If you own the real estate where your business operates, are you charging yourself a fair amount for rent?
Some business owners write off too much, while others don’t take advantage of deductions they’re entitled to. The key is proper allocation so you’re following tax rules without leaving money on the table.
10. Paying Yourself the Wrong Way
A lot of business owners don’t pay themselves correctly, which can lead to tax inefficiencies or compliance issues.
A few common mistakes:
- Not paying themselves a reasonable salary in an S-Corp, which raises red flags for the IRS.
- Taking only salary instead of a mix of salary and distributions, missing out on tax-saving opportunities.
- Defaulting to an entity structure that isn’t the best fit, simply because someone told them it was the right choice.
The way you take money out of your business affects taxes, and it’s important to get it right.
Work with a Professional and Stay Proactive
One of the biggest tax mistakes business owners make? Not working with a proactive tax professional.
Taxes shouldn’t be something you only think about in April. By working with a CPA who actively helps you plan throughout the year, you can avoid costly mistakes, take advantage of tax-saving strategies, and keep more of your money.
At Patrick Accounting, we work with small business owners who want clear financials, better tax strategies, and a team that truly understands their business. But we also know that not every business is the right fit for our services.
If you're wondering whether Patrick Accounting is the right partner for you,
check Who Is a Good Fit for Patrick Accounting?
The right accountant can make all the difference. Let’s see if we’re the right fit for you.
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