Small businesses need to cope with a number of challenges in order to survive and grow in a competitive environment. Excessive regulatory procedures make the situation even more difficult. Tax is a tricky area with several complexities that may be beyond the understanding of a small business owner with little to no financial expertise. Here we explain some of the hurdles that small businesses experience when it comes to accounting, recording and paying taxes.
Maintaining accurate records
Maintaining accurate accounting records is key to calculating the correct amount of tax liability and filling out the tax returns correctly. For small businesses, this can be a very time-consuming process. Small businesses rarely have the luxury of having an employee dedicated to accounting and bookkeeping. Usually, it is the owner who maintains the books and files the tax return. If the owner is not experienced, it can become very difficult especially as the business grows. This can lead to errors in bookkeeping and calculating the tax liability.
Complex tax structures
By their very structure, small businesses need to abide by a more complex set of accounting and tax regulations than large businesses, including filing a tax id application to completing complex return forms. Due to the result of a flawed tax structure that does not distinguish between the special needs of small businesses, the same tax compliance requirements are imposed on small businesses as on large businesses. As a result, the overall proportion of tax and other compliance costs in relation to the revenue earned is much bigger for small businesses.
Recording cash transactions
A common practice among small businesses is the preference for cash transactions over credit transactions. Making and receiving payments in cash rather than through banking channels is more convenient for small businesses given the small scale of their transactions and the desire to have funds within easy reach. However, recording and accounting for cash transactions can be problematic even due to a minor error in bookkeeping. This can result in the tax liability being understated. If this becomes evident during a tax audit, it can result in additional compliance costs for small businesses.
Small businesses find it hard to keep up with changes in the accounting and reporting methods for taxation. These rules change almost every year, which means that each year small business owners have to become familiar with a new system of declaring their income and filing their tax returns. A very complex issue arises when certain tax provisions are applied retroactively once they have expired. This makes it difficult for small businesses to plan their investments and financing for the year because of the ambiguity about various tax provisions.
The challenges of partnership
Many small businesses operate as partnerships. This makes it easier for the business to benefit from the expertise of partners who bring in varied skills and experiences to the business. However, this can create hurdles for calculating taxes, especially if a proper, binding partnership agreement has not been made. This agreement is essential for tax purposes because it specifies important information such as the salaries paid to each partner as well as the profit-sharing ratio. All of this information affects the accounting and calculation of tax as well as the procedure for filing for a business operated as a partnership.
Confusing deductible expenses
As mentioned in some of the points above, small business owners are rarely familiar with the complex terms and concepts involved in tax accounting. One such difficulty arises in the accounting for deductible expenses. Generally, a small business is entitled to deduct certain expenses from their tax liability, such as expenses that are paid out of the owner’s own funds rather than the funds of the business. Tax laws allow for these expenses to be deducted from the tax liability of the business. Unfortunately, many small business owners do not keep track of such expenses, which results in their having to pay a higher amount of tax than they should be paying.
Less access to professional services
Hiring a professional tax consultant seems daunting to many small businesses. It is natural to feel uncomfortable sharing your business finance details with an outsider. Moreover, many owners are concerned about any errors they might have unwittingly committed from coming to light. However, for some people, hiring a professional tax accountant is simply an expense that they cannot afford.
Tax procedures may seem like an unnecessary burden but it is necessary to ensure the survival of your business. A professional tax accountant can be hired easily to help a small business determine its tax liability and pay the correct amount in tax. Remember that the costs of not complying with tax regulations is quite severe, and the fines and penalties can become an additional burden on the balance sheet. Therefore, addressing the challenges faced by small businesses is important in order to facilitate them in contributing to the economy.