Some small businesses have shown questionable judgment in claiming SpaghettiOs, dog clothes, plastic surgery and undergarments as tax deductions, according to a new survey of accountants.

According to the 400 U.S. accountants polled by accounting software developer Xero, the biggest mistake that small business owners make is not keeping their financial records up to date, followed by a lack of understanding about their tax obligations. To prepare for the changes ahead while staying on top of the traditional challenges, small business owners must know their financials and financial partners better.

They also need to know what they can deduct on their taxes. Other questionable tax deductions uncovered by the survey included a family vacation claimed as a business trip, expenses for pets and pet food, money lent to a deadbeat relative, traffic tickets, a daughter’s wedding, alcohol and gambling losses.

“We’ve seen all these types of things that are no-nos when it comes to applying deductions to your income as a small business,” said Jamie Sutherland, president of U.S. operations at New Zealand-based Xero.

Shortly before tax season, his company introduced the ability to export information from Xero’s cloud-based accounting software to the trial balance systems in both CCH’s ProSystem fx and Intuit’s Lacerte.

One of the most common mistakes for small businesses uncovered by Xero’s survey was not keeping all the receipts associated with out-of-pocket expenses. “Those can add up over time,” said Sutherland. “Throughout the year, you’re doing things at clients, so you’ve got expenses associated with your business that you may or may not know are potential deductions. Hanging onto those and then making sure they’re not plotted against income at tax time can be a problem. Something Xero does to alleviate that situation is we built an iPhone and Android application for our software. You can take a photo of the receipt on the fly and that automatically uploads to Xero. As a mobile business on the go, you can be tracking your expenses and getting them into your accounting software so those receipts don’t go missing anymore. The photos and receipt will be associated with that expense and it will be coded to the right account. You can do that right in the app.”

The survey found that nearly one in four accountants said government regulations and tax policy had the biggest impact on small businesses this year. More than one in 10 attribute this to uncertainty surrounding the “fiscal cliff.”

“The most common question I’m asked is, ‘How can I save more money? I’m scared of all the new tax increases,’” said New Vision CPA Group CEO and principal Jody Padar, a Xero partner. “I wish I could provide a universal answer, but the fact is no two businesses are alike and there are many factors involved in financial planning. What I can say in all confidence is to keep a close eye on your finances, find an accountant you like and trust, and see them at least once a month.”

Small businesses that employ this approach will not only save time, but most importantly, money, according to Xero. A full 72 percent of accountants feel they could provide better advice if given a real-time view into their client’s finances, and nearly one third would be willing to offer discounted fees to sit down to a reconciled ledger.  Cloud accounting makes this possible, and it’s on the rise. In 2013, 43 percent of accountants are planning on offering cloud services, an 11 percent increase from last year.

“I think the one thing that stood out to me was the cloud adoption among accounting professionals,” said Sutherland. “The number of accounting professionals who said they were going to move their clients to cloud software this year is up 11 basis points from last year, from 32 to 43 percent. That’s a big change, but that’s exactly what we predicted was going to happen in this market where more and more accounting firms are moving to the cloud. That’s a fairly big step change, and a good one to point out.”

Xero is also noticing some signs of a recovery in the economy for small businesses, despite the continued challenges of accessing financing.

“It’s not across the board increased optimism, but there are certain pockets that are feeling a little bit better about things,” said Sutherland. “But I think with all the uncertainty around some of the tax regulations over the last six months, whenever you have uncertainty it reduces optimism, so that’s been an issue for small businesses. And then there’s the whole notion of financing and getting credit from banks. We still hear that things are not that easy, but we are seeing a proliferation of tools in the market, whether it’s alternative lending platforms that will do small loans, or even equity financing like crowdfunding. But we still do hear that a lot of small businesses are still using their credit cards or getting financing with a personal loan or against their mortgage. On the whole it’s probably neutral, but there is still some uncertainty in the market.”

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