Tax Mistakes I See Too Often
Even smart business owners and high-income individuals make avoidable tax mistakes. And in my practice, I see the same issues come up again and again — costing people real money, creating unnecessary stress, and sometimes triggering IRS scrutiny.
Here are some of the most common missteps I see — and how to avoid them.
1. Misunderstanding How Their Entity Is Taxed
Just because you have an LLC doesn’t mean you’re taxed like a corporation. Too many business owners assume their entity type automatically dictates their tax status — when in reality, tax classification is a separate election.
Whether you’re taxed as a sole proprietor, partnership, S corp, or C corp impacts everything from how you report income to how you're taxed on distributions. Getting this wrong can lead to surprise tax bills, double taxation, or missed deductions.
2. Skipping Estimated Tax Payments
If you earn income outside of W-2 wages — especially from self-employment or investments — you may need to pay quarterly estimated taxes. Ignoring this responsibility can lead to underpayment penalties, even if you pay in full by April.
Too many clients wait until tax season to find out they were supposed to pay all along.
3. Overcomplicating (or Ignoring) Depreciation
Depreciation rules can be powerful — but also complex. Some taxpayers miss out on Section 179 or bonus depreciation. Others overstep by trying to deduct capital expenditures as current expenses.
Knowing what should be capitalized, what can be written off, and when to do a cost segregation study is essential — especially for real estate investors and asset-heavy businesses.
4. Mismanaging Retirement Contributions
Solo 401(k)s, SEP IRAs, and traditional IRAs offer huge tax advantages. But deadlines, limits, and eligibility rules vary — and many taxpayers make avoidable errors:
Contributing too late
Choosing the wrong plan type
Failing to coordinate with other employer plans
A missed opportunity here can mean losing thousands in deductions or compounding tax-deferred growth.
5. Deducting Personal Expenses
The IRS is clear: personal expenses are not deductible. But in small businesses, the line between personal and business often blurs. Meals, travel, and home office deductions need to be handled carefully and documented properly.
The mistake isn’t always intentional — but that doesn’t matter during an audit.
6. Ignoring Carryforwards
Business and investment losses often create carryforward opportunities — net operating losses (NOLs), capital losses, and even charitable contributions.
The problem? Most taxpayers forget them, and many accountants don’t track them closely. This is money left on the table.
7. Forgetting State Taxes
State tax planning is often an afterthought — but it shouldn't be. If you move states, work remotely, or have multistate operations, you may owe tax in places you didn’t expect.
And for high-income Californians, state taxes can be a major driver of overall planning — especially with the SALT deduction cap still in place.
8. Waiting Too Long to Ask for Help
The cost of a missed opportunity is often higher than the fee for good advice.
I see it all the time: clients wait until after the year ends, after the audit letter arrives, or after they've sold a business to ask what they should have done differently.
Proactive planning always beats damage control.
Final Thought
Most tax mistakes aren’t malicious — they’re the result of complexity, bad advice, or trying to go it alone. The good news? Every one of these issues can be fixed or avoided with the right guidance.