One of the primary responsibilities of an entity or a businessperson is to avoid potential mistakes in taxation. For instance, a common potential mistake of many businesses is to overlook or be unaware of tax incentives. This will result in a loss of likely monetary benefit for a company. Therefore, every business enterprise or individual must be aware of the relevant rules and regulations. In this blog, we highlight the common tax pitfalls and tips to avoid them. A proactive business will avoid these not only to be efficient but also to avoid penalties.
Common Tax Pitfalls and Tips to Avoid Them
Tax pitfalls include errors or omissions made during the overall taxation process, including tax preparation and filing. These will result in penalties, audits, or missed chances of deductions or credits. Let’s highlight some common tax pitfalls and how we can avoid them.
Failing to Claim Tax Incentives
One of the common potential risks is failing to claim tax incentives. These include tax reliefs, exemptions, credits, and so on. This in turn will result in paying more taxes than is obligatory. For instance, in the UAE, businesses can claim small business relief if they meet certain conditions. To claim maximum legal tax incentives, you should have updated knowledge about the relevant laws and regulations. However, you can also consult a skilled consultant who ensures maximum tax savings while keeping you compliant with the laws.
Missing Key Deadlines
Besides other common tax pitfalls, meeting the timeline is important. Missing deadlines will mostly result in fines and penalties. Therefore, as an entity, you should be aware of the important dates. For instance, after the tax period, there is a deadline for tax filing and paying due taxes. As a first step, there is a need for awareness. Calculated the due taxes, but when to pay? Secondly, take the necessary action within the time limit. This includes filing the taxes before the due date.
Failing to Claim Tax Deductions
Sometimes expenses in the accounting system are allowable, such as under IFRS, but not allowable under the relevant tax laws. Therefore, a business can only claim expenses or deductions allowed under the tax laws of a certain jurisdiction. Tax deductions reduce the taxable income and thus reduce the tax liability. Hence, failing to claim the tax deductions will increase the tax liability. The goal of a business is to claim expenses that are according to the law, neither understating nor overstating. Therefore, it is important to know and understand the tax laws and regulations.
Failing to Separate Personal and Business Transactions
At a very basic level, it is important to distinguish between business and personal transactions. It includes everything from income to expenses. This is mainly because business is a separate entity, even for taxation purposes. Any personal expenses should not be claimed from the business and vice versa. Any business income should be taken into a personal bank account and so on. Therefore, as an entity, you should separate bank accounts for commercial and personal use. Furthermore, you must ensure that you only claim legitimate expenses with proper documentation.
Failing to Keep Proper Records
There are two aspects of record-keeping. Firstly, maintaining all the relevant records and documentation as per the tax laws. Secondly, maintaining records for a specified length of time. For instance, in the UAE, the tax laws require you to keep some documents for at least seven years. Therefore, knowledge of the relevant laws plus work ethics—every commercial enterprise requires these two ingredients. This will enable them to remain compliant and avoid fines.
Conclusion
The goal of every business, besides commercial success, is to be compliant with the laws, including the tax laws. Failing to do so will result in loss of reputation and massive penalties. Every business makes mistakes; therefore, there is a need to highlight some common tax pitfalls with tips to avoid them. Claiming tax incentives are important; they save you taxes. However, one should keep themselves updated with relevant laws to claim tax benefits. Secondly, keeping up with the deadlines is important in taxation. Therefore, if you miss a date, you might face a penalty. Thirdly, claiming tax deductions results in lower taxable income, hence lower tax liability. Any business failing to claim these deductions will miss the opportunity to save money. Fourthly, every individual or business must separate its business transactions from personal transactions. Lastly, the most important element of tax compliance is record-keeping.
Creative Zone Tax & Accounting (CZTA)
Our firm, CZTA, commits to hard work and a professional approach. We aim to take our clients to the next level. This is possible if you focus on your things and we focus on ours. You heard right, focus on your business and leave the taxation matters to us. Contact us today.
