Keeping up with all of the different tax regulations – federal, state, and local – is one of the biggest challenges of running a business.
What makes things more frustrating is that the tax code fluctuates constantly – most people can barely understand it, much less keep up on it.
We’ve all heard that ignorance of the law is no excuse – this seems especially true when it comes to taxes. No tax auditor is going to waive tax law infringements because you stare at them blankly and shrug your shoulders.
One of the best ways of abiding the law in this regard while also keeping as much of your money as possible is to hire a CPA. He or she knows the tax code inside and out – they’ll ensure you are paying the taxes you owe while also getting the most out of your income.
However, this isn’t to say you shouldn’t be armed with some important knowledge for yourself.
The following are common misconceptions about tax returns that too many business owners hold.
You Can Immediately Deduct All Start-Up Costs
You have to spend money to make money, but can you deduct those expenses? Not always.
A start-up cost (or “capital expenditure”) refers to any expense incurred prior to you actually operating your business.
The IRS breaks these down into 2 categories:
- Business start-up costs – Travel, advertising, training, surveys, market research, etc.
- Organizational costs – Any cost involved in the actual formationion of your business – partnership filing fees, organizational meetings costs, legal fees, etc.
The following rule applies to both.
You can immediately deduct $5,000 of your business start-up costs if what you spent on them was less than $50,000. If you go higher than that, your first year deduction will decrease by $1 for each dollar you spent over $50,000.
Remaining costs can be amortized (gradually written off later on).
You Can Take More Deductions If You’re Incorporated
Sole proprietors and incorporated businesses don’t differ much regarding the amount of deductions they can take. In fact, for small businesses, being incorporated can lead to a lot of expenses and unnecessary burdens.
Small business owners who incorporate run the risk of getting bogged down with minimum corporate taxes and little to no income for many years.
You’re Automatically Safe From Tax Audits If You Overpay The IRS
The IRS is perfectly happy to take as much money as you want to give them, but overpaying them in one area doesn’t mean you’re safe if you underpay them in another.
No matter what, the IRS wants you to substantiate your deductions and make sure you’re paying what you owe in all areas.
The only way to stay safe from (or during) an audit is to document all of your expenses and follow the advice of your tax accountant.
You Can’t Set Up A Self-Employed Pension If You Are A Part-Time Business Owner
You can legally set up a SEP-IRA for your business even if you started the company while having a salaried position.
Just keep in mind: A simple mistake can lead to big problems, even if you’ve delegated tax prep to someone else.
An Extension On Your Taxes = An Extension To Pay Taxes
Filing for an extension simply means you don’t have to file on tax day – it doesn’t mean you won’t see any penalties or interest after tax day if you haven’t paid the IRS.
The IRS Sees Home Offices As A Red Flag
This used to be more or less true, but with the increased number of people working from home, you can have a home office without sweating.
The sheer number of people working from home makes it impossible for the IRS to audit everyone who claims a home office.
Just make sure you’re keeping satisfactory records and being honest about your space.
You Can’t Deduct Business Expenses If You Don’t Take The Home Office Deduction
Running a business from home is no different than running a business at any other location. You are fully entitled to take deductions on your:
- Internet bills,
- Phone bills,
- Travel costs,
- Depreciation of equipment that is used for your business,
- Wages paid to employees, and
- Anything else that costs money to run your home business.