Common Business Tax Filing Mistakes (And How to Avoid Them)

Key Takeaways

• The QBI deduction (Section 199A) is frequently missed or miscalculated. For a business with $200,000 in qualified income, that’s up to $40,000 in deductions missed.
• S-Corp owners: Unreasonable (too low) officer compensation is a top IRS audit trigger. $0 salary with $200,000+ in distributions creates significant risk.
• Partnership mistakes: Not tracking partner basis, allocations that don’t match the operating agreement, and missing K-1 deadlines ($220 per partner per month penalty).
• Universal errors: Deducting personal expenses, incorrect depreciation methods, and missing required information returns (1099s, K-1s).
• Prevention is easier than correction: maintain organized records, work with a preparer who specializes in your entity type, and review your return before signing.

Most business tax returns contain at least one error. Some are minor, resulting in nothing more than an IRS notice requesting clarification. Others cost thousands in missed deductions, unexpected tax bills, or penalties that compound over time.

After 18+ years of analyzing business returns, we see the same mistakes repeatedly. These aren’t about incompetence. Tax law is complex, and even experienced professionals miss things. The goal of this guide is education and awareness so you can prevent these issues before they happen.

Note: This article focuses on errors and how to prevent them. We’re not criticizing anyone. The goal is to help you avoid common pitfalls and make sure your returns are as accurate as possible.

Universal Mistakes (All Business Types)

These errors show up across entity types and affect businesses of all sizes.

Mistake 1: Deducting Personal Expenses as Business Expenses

What it looks like: Personal meals categorized as business entertainment. Personal vehicle use without mileage logs. Home expenses claimed without proper allocation between business and personal use.

The risk: Audit adjustment plus potential accuracy penalties. The IRS pays close attention to expenses that commonly include personal components.

How to prevent:

• Maintain separate business bank accounts and credit cards
• Document business purpose for every expense at the time it occurs
• When in doubt, don’t deduct it

Example: We analyzed a return where 100% of a cell phone was deducted as a business expense. After looking at actual usage, business use was closer to 60%. The adjustment was small, but eliminating it removed a potential audit trigger.

Mistake 2: Missing the QBI Deduction (Section 199A)

What it looks like: Pass-through income reported but no Form 8995 or 8995-A filed. Or the form is filed but the calculation doesn’t maximize the deduction.

The cost: Up to 20% of qualified business income. For a business with $200,000 in qualified income, that’s potentially $40,000 in deductions missed.

How to prevent:

• Verify the QBI deduction is calculated on every pass-through return
• Understand the limitations (specified service trades, income thresholds)
• Track W-2 wages and property for businesses subject to limitations

For complete guidance, see our QBI Deduction Guide.

Example: We analyzed a partnership return where $180,000 in QBI wasn’t properly calculated due to confusion about the specified service trade rules. The missed deduction cost the partners approximately $7,200 in additional tax.

Mistake 3: Incorrect Depreciation Methods or Lives

What it looks like: Assets depreciated over wrong periods, Section 179 not maximized, bonus depreciation missed, or assets categorized incorrectly.

The cost: Timing of deductions and sometimes permanent differences. Depreciating equipment over 7 years when you could have expensed it immediately ties up deductions you could use now.

How to prevent:

• Review asset classifications annually
• Consider Section 179 and bonus depreciation for new asset purchases
• Maintain detailed fixed asset schedules
• Know which assets qualify for accelerated treatment

Mistake 4: Not Filing Required Information Returns

What it looks like: Missing 1099-NECs to contractors who were paid $600 or more. Missing K-1s to partners. Late filings that trigger penalties.

The penalties:

• 1099 penalty: $60-$310 per form depending on how late
• K-1 penalty: $220 per partner per month the return is late

How to prevent:

• Track all payments to contractors throughout the year
• Issue 1099s by January 31
• Issue K-1s by the return due date
• Use accounting software that flags 1099-eligible vendors

For deadline details, see our guide to business tax extension deadlines.

S-Corporation Specific Mistakes

S-Corps have special rules that create unique opportunities for error.

Mistake 5: Unreasonable (Too Low) Officer Compensation

What it looks like: An S-Corp with $300,000 profit where the owner pays themselves only $30,000 salary. Or $0 salary while taking significant distributions.

The risk: IRS reclassification of distributions as wages, plus penalties and back payroll taxes. The IRS specifically looks for this pattern.

How to prevent:

• Research comparable salaries for your role and industry
• Document your compensation decision with a reasonable compensation analysis
• Consider what you’d pay someone else to do your job

For complete guidance, see our S-Corp Reasonable Compensation Guide.

Example: We’ve analyzed returns where S-Corp owners took $0 salary while distributing $200,000+. A reasonable salary analysis showed comparable compensation of $85,000-$110,000 for the work performed. This pattern creates significant audit risk.

Mistake 6: Missing Shareholder Health Insurance on W-2

What it looks like: A 2%+ shareholder’s health insurance is paid by the company but not added to the shareholder’s W-2.

The result: Incorrect W-2 reporting and a missed self-employed health insurance deduction on the shareholder’s personal return.

How to prevent:

• Add health insurance premiums to the shareholder’s W-2 in Box 1 (but not subject to FICA)
• The shareholder then deducts on Form 1040 as self-employed health insurance
• Work with your payroll provider to set this up correctly

For details on how this works, see our S-Corp Health Insurance Rules guide.

Mistake 7: Distributions Exceeding Shareholder Basis

What it looks like: Distributions taken without tracking basis, resulting in distributions that exceed the shareholder’s stock basis.

The result: Unexpected capital gain on what the shareholder thought was a tax-free distribution. This often surfaces years later when the shareholder sells their stock or the company liquidates.

How to prevent:

• Track shareholder basis annually, not just at year-end
• Review basis before taking large distributions
• Understand debt basis rules for S-Corps (only direct loans create basis, unlike partnerships)

Mistake 8: Not Reporting Shareholder Loans Properly

What it looks like: Informal loans between shareholder and corporation without documentation. No interest charged on loans. Loans not reflected on the balance sheet.

The risk: IRS recharacterization as distributions, imputed interest income, and loss of basis benefits.

How to prevent:

• Document all loans with promissory notes
• Charge adequate interest (at least the AFR rate)
• Report interest income and expense appropriately
• Reflect loans properly on the corporate balance sheet

Partnership Specific Mistakes

Partnerships offer tremendous flexibility, which creates opportunities for error.

Mistake 9: Allocations Don’t Match the Operating Agreement

What it looks like: A 50/50 allocation on the return but the operating agreement specifies 60/40. Or allocations changed verbally but the agreement was never amended.

The result: Incorrect K-1s, potential partner disputes, and potential IRS challenge to the allocations.

How to prevent:

• Review the operating agreement annually before preparing returns
• Verify allocations with all partners before filing
• Amend the agreement in writing whenever ownership changes

For more on partnership allocations, see our Partnership Taxation Guide.

Example: A 3-partner LLC updated ownership percentages verbally but never amended the operating agreement. The return was filed with old percentages, resulting in $12,000 of income allocated to the wrong partner. This created both tax problems and partner conflict.

Mistake 10: Not Tracking Partner Capital Accounts Properly

What it looks like: Capital accounts don’t reconcile year over year. Partner basis is unknown. The tax basis and book basis capital accounts don’t agree without explanation.

The result: Incorrect distribution treatment, inability to determine taxable gain or loss, and IRS notices requesting clarification.

How to prevent:

• Maintain capital account records on every Schedule K-1
• Choose tax basis or 704(b) method and apply consistently
• Reconcile capital accounts annually
• Document any differences between book and tax capital

For details on capital account tracking, see our Partner Basis Calculation Guide.

Mistake 11: Missing Special Allocations Documentation

What it looks like: Special allocations claimed (allocating specific items differently than ownership percentages) but no documentation of substantial economic effect.

The risk: IRS reallocation to match ownership percentages, which can result in significant tax adjustments for some partners.

How to prevent:

• Document the business purpose for any special allocations
• Ensure allocations have substantial economic effect under Section 704(b)
• Work with a CPA familiar with partnership taxation

Mistake 12: Incorrect Partner Basis Calculations

What it looks like: A partner claims a loss but doesn’t have sufficient basis to absorb it. Or debt basis is calculated incorrectly.

The result: Suspended losses, amended returns, and potential penalties.

How to prevent:

• Track each partner’s basis annually using a formal schedule
• Include debt basis where applicable (recourse vs. nonrecourse matters)
• Review at-risk and passive loss limitations
• Verify basis before claiming losses

Multi-State Mistakes

Operating across state lines creates additional compliance obligations.

Mistake 13: Missing State Filing Requirements (Nexus)

What it looks like: A business has customers, remote employees, or property in multiple states but only files in one state.

The risk: Back taxes, penalties, and interest from states where you should have been filing. Some states are aggressive about identifying non-filers.

Common nexus triggers:

• Employees working in a state (even remotely)
• Revenue exceeding state thresholds (often $100,000-$500,000)
• Physical presence (inventory, office, equipment)
• Significant sales volume (transaction counts)

How to prevent:

• Understand economic nexus thresholds for each state where you have customers
• Track revenue by state throughout the year
• Review nexus annually as your business changes

For partnerships operating across state lines, see our guide on Multi-State Partnership Filing.

Mistake 14: Incorrect Apportionment

What it looks like: Income apportioned incorrectly between states. Using outdated apportionment methods. Not accounting for throwback rules.

The result: Overpaying in high-tax states, underpaying elsewhere, and potential audits from multiple states.

How to prevent:

• Understand each state’s apportionment formula (many now use single-sales-factor)
• Review apportionment factors annually
• Consider whether your sourcing methodology is defensible

Recordkeeping Mistakes

Poor records create the foundation for many other errors.

Mistake 15: Inadequate Mileage Documentation

What it looks like: Mileage deduction claimed but no contemporaneous log. Year-end estimates based on memory.

The risk: Disallowed deduction on audit. Mileage is one of the most commonly challenged deductions.

How to prevent:

• Keep a mileage log recording date, destination, business purpose, and miles
• Use a mileage tracking app (MileIQ, Everlance, or similar)
• Document at the time of each trip, not at year-end

For current mileage rates, see our IRS Standard Mileage Rate guide.

Mistake 16: No Documentation for Cash Expenses

What it looks like: Cash expenses deducted but no receipts to support them.

The risk: Disallowed deductions. Without documentation, the IRS assumes the expense didn’t happen.

How to prevent:

• Get receipts for everything
• Photograph receipts immediately (thermal paper fades)
• Use expense tracking apps to capture receipts digitally

Mistake 17: Commingled Personal and Business Funds

What it looks like: Business and personal expenses on the same credit card. Business income deposited into personal accounts. No clear separation between business and personal finances.

The risk: Audit complications, missed deductions, and potentially pierced corporate veil for liability purposes.

How to prevent:

• Maintain a separate business bank account
• Use a dedicated business credit card
• Document any legitimate business expenses paid personally
• Reimburse yourself properly for business expenses paid from personal funds

For help getting your records in order, see our bookkeeping services.

How to Check Your Own Returns

Use these checklists to verify your returns before filing.

For S-Corps

• Is officer compensation reasonable and documented?
• Is shareholder health insurance on the W-2?
• Are distributions within basis limits?
• Is the QBI deduction calculated correctly?
• Are all 1099s filed for contractors?

For Partnerships

• Do allocations match the operating agreement?
• Are capital accounts properly maintained?
• Is each partner’s basis tracked?
• Are special allocations documented?
• Are guaranteed payments correctly reported?

For All Business Returns

• Are all deductions properly documented?
• Are all required information returns filed?
• Is depreciation calculated correctly?
• Are multi-state filing requirements addressed?
• Does the return reconcile to financial records?

When to Get a Second Opinion

Consider a professional analysis of your returns if:

• You’ve had the same preparer for years but never received planning advice
• Your business has grown significantly in complexity
• You’ve had a major life or business change (new partner, new state, new entity)
• You’re not sure if your return is maximizing available deductions
• Something about your tax situation doesn’t feel right

Want us to analyze your recent returns? We can identify optimization opportunities and potential issues. Schedule a consultation to discuss your situation.

Prevention Is Easier Than Correction

The best way to avoid tax filing mistakes:

1. Maintain organized records throughout the year – Good bookkeeping prevents most errors.
2. Work with a preparer who specializes in your entity type – See our tax preparation services for what to expect from a quality preparer.
3. Ask questions – If something on your return doesn’t make sense, ask your preparer to explain it.
4. Review before signing – You’re responsible for everything on your return, regardless of who prepared it.
5. Plan ahead – Year-end planning prevents April surprises.

Frequently Asked Questions

How common are errors on business tax returns?

Studies suggest a significant percentage of business returns contain at least one error. Most are minor calculation issues or missing information that result in IRS notices requesting clarification. More serious errors involving missed deductions or incorrect entity treatment can cost thousands in unnecessary taxes or penalties.

What happens if I find an error on a past return?

You can file an amended return (Form 1120-X for C-Corps, Form 1065-X or corrected 1065 for partnerships, Form 1120-S corrected return for S-Corps). If the error results in additional tax owed, file as soon as possible to minimize interest and potential penalties. If the error results in a refund, you generally have three years from the original due date to claim it.

Can my CPA be held responsible for errors on my return?

While preparers have professional liability for negligent errors, you (the taxpayer) remain legally responsible for the accuracy of your return. This is why reviewing your return before signing is critical, regardless of who prepared it. If errors result from information you didn’t provide or questions you didn’t answer accurately, the responsibility is primarily yours.

How long should I keep tax records?

Keep tax returns and supporting documentation for at least seven years. Some records (basis in assets, entity formation documents, depreciation schedules) should be kept permanently because they affect future returns. Digital storage makes this easier than ever.

What’s the best way to avoid these mistakes?

Work with a preparer experienced in your entity type, maintain organized records year-round, and stay involved in the process. The combination of professional expertise and your knowledge of your business produces the best results.