Tax and tax law can be extremely complex. In fact, there are nearly 10.1 million words in the US tax code. Moreover, tax law is constantly evolving. There were nearly 5,000 changes alone between 2001 and 2012, and there have been even more changes in the past 6 years since 2012. Being able to make tax payments on time can be difficult enough, but determining how much tax is owed and navigating complex tax laws is a tough feat for any business owner to tackle alone.
At Paladini Law, we’ve seen the darker side of taxes and the crippling impact tax liabilities and penalties can have on a business. That is precisely why we decided to survey 150 New Jersey business owners. We wanted to know how much owners knew about state and federal taxes and how much of an impact tax has on their business. The results of the survey can be found below.
Is tax season anxiety inducing?
If you stress out over tax season, you’re not alone. Nearly half (41%) of all business owners say that tax season causes overwhelming stress. What’s causing the stress?
When asked what aspect of taxes business owners feared most, 37% answered missing out on deductions. Another 21% cited not being able to correctly separate business expenses from personal expenses. Another 16% reported being afraid of failing to file on time. Tax stress can be somewhat reduced with better organization and more accurate record keeping. For many of these issues, hiring or consulting a tax expert would also significantly reduce stress. A tax accountant can review your business financials to find additional deduction opportunities and ensure expenses are categorized appropriately.
How much of a financial burden is tax preparation?
It would appear that tax preparation isn’t a huge financial burden for most business owners. Approximately 53% of business owners estimate they spend $1000 or less a year on federal and state tax administration. Still, taxes can be quite burdensome for some businesses, with 16% reporting administration spends of $20,000 or more each year.
What is the biggest administrative tax burden for New Jersey businesses?
According to 39% of NJ business owners, the largest administrative burden revolves around accounting and paying for business income taxes. Sales taxes and payroll taxes were runners up with 15% of the vote each. Another 14% of business owners reported state and local tax compliance to be particularly burdensome. Corporate taxes, property taxes, capital gains taxes, and the alternative minimum tax were not found to be as burdensome.
Who is filing tax returns?
Nearly half of all respondents (49%) file business taxes themselves. Another 33% hire an external tax practitioner to handle taxes. Approximately 10% of the businesses surveyed have internal staff members to handle taxes. Only 8% utilized both internal and external resources. Investing more into tax prep could not only reduce stress, but also help local businesses avoid errors on returns.
What percent of New Jersey business owners have received a notice or letter from the IRS?
Approximately 18% of all New Jersey business owners have received an IRS notice or letter at some point during the lifespan of their business. Another 31% of owners admitted to having made a mistake on a past business tax return. Despite past history, most business owners remain optimistic about this upcoming tax season.
Approximately 77% of business owners surveyed were confident their 2018 business tax returns would be completely free of error. The remaining 23% were not as confident and there may be justification for that lack of confidence.
There may be some confusion surrounding tax classifications and the IRS
A common mistake many business owners make is accidentally deducting expenses for a home office that can’t be deducted. Our survey reflected that some New Jersey business owners may still be uncertain about what can and can’t be deducted. Approximately 10% of business owners incorrectly assumed they could deduct the cost of adding a new master bedroom and another 7% thought they could deduct the expense of adding a new backyard pool. Of course, owners may also be missing out on additional deductions. Only 38% of business owners knew that they could deduct the cost of repairs and maintenance to the home office. Another 32% were unaware they could deduct the portion of rent or mortgage interest and real estate taxes that reflect business use.
Additionally, there seems to be some confusion regarding IRS processes. When asked how many years back the IRS can audit a business, 21% thought it was 10 years, 37% thought it was 5 years, and another 7% thought it might have been 13 years. In most cases, the statute of limitations grants the IRS a period of up to 3 years. However, there are exceptions that could allow the IRS to go up to 6 years back. In some situations, the IRS may not have a time limit at all. No time limit is certainly a worst-case scenario and aggressive legal representation is imperative in those situations.
What percent of New Jersey business owners have been audited by the IRS?
Approximately 12% of New Jersey business owners say their business has been audited by the IRS. Of the business owners that have been audited, 91.67% have failed to file file their taxes on time at some point and 91.67% have admitted to making a mistake on a return. These owners may have learned from their mistakes, as 75% were confident this year’s return would be free of errors.
State and federal taxes may not be particularly burdensome for New Jersey business owners, but there does seem to be some confusion surrounding tax laws and the IRS. The number of respondents filing taxes by themselves is particularly worrisome. Having an expert (either on staff or externally) review and prepare taxes can significantly decrease the likelihood of an IRS audit. In certain situations, it may also be worth consulting a tax attorney to ensure the business is in compliance with federal, state, or local tax laws.
Tax Resolution For New Jersey Business Owners
If you’ve received an IRS notice or letter or are facing a stressful tax issue (audit, collections, tax compliance, etc.) Paladini Law is here to help. Attorney Brad Paladini has helped clients save millions of dollars in taxes and avoid or reduce harsh penalties. Attorney Paladini has made it his goal provide high quality legal representation in the most cost-effective manner possible. Contact Paladini Law today by calling (201) 381-4472 or filling out a contact form to schedule a consultation.