One of the
biggest hurdles you'll face in running your own business is staying on top of
your numerous obligations to federal, state, and local tax agencies. Tax codes
seem to be in a constant state of flux making the Internal Revenue Code barely
understandable to most people.
The old legal
saying that "ignorance of the law is no excuse" is perhaps most often
applied in tax settings and it is safe to assume that a tax auditor presenting
an assessment of additional taxes, penalties, and interest will not look kindly
on an "I didn't know I was required to do that" claim. On the flip
side, it is surprising how many small businesses actually overpay their taxes,
neglecting to take deductions they're legally entitled to that can help them
lower their tax bill.
Preparing your
taxes and strategizing as to how to keep more of your hard-earned dollars in
your pocket becomes increasingly difficult with each passing year. Your best
course of action to save time, frustration, money, and an auditor knocking on
your door, is to have a professional accountant handle your taxes.
Tax
professionals have years of experience with tax preparation, religiously attend
tax seminars, read scores of journals, magazines, and monthly tax tips, among
other things, to correctly interpret the changing tax code.
When it comes to
tax planning for small businesses, the complexity of tax law generates a lot of
folklore and misinformation that also leads to costly mistakes. With that in
mind, here is a look at some of the more common small business tax
misperceptions.
1. All
Start-Up Costs Are Immediately Deductible
Business
start-up costs refer to expenses incurred before you actually begin operating
your business. Business start-up costs include both start up and organizational
costs and vary depending on the type of business. Examples of these types of
costs include advertising, travel, surveys, and training. These start up and
organizational costs are generally called capital expenditures.
Costs for a
particular asset (such as machinery or office equipment) are recovered through
depreciation or Section 179 expensing. When you start a business, you can elect
to deduct or amortize certain business start-up costs.
Business
start-up and organizational costs are generally capital expenditures. However,
you can elect to deduct up to $5,000 of business start-up and $5,000 of
organizational costs paid or incurred after October 22, 2004. The $5,000 deduction
is reduced (but not below zero) by the amount your total start-up or
organizational costs exceed $50,000. Any remaining costs must be amortized.
2. Overpaying
The IRS Makes You "Audit Proof"
The IRS doesn't
care if you pay the right amount of taxes or overpay your taxes. They do care
if you pay less than you owe and you can't substantiate your deductions. Even
if you overpay in one area, the IRS will still hit you with interest and
penalties if you underpay in another. It is never a good idea to knowingly or
unknowingly overpay the IRS. The best way to "Audit Proof" yourself
is to properly document your expenses and make sure you are getting good advice
from your tax accountant.
3. Being
incorporated enables you to take more deductions.
Self-employed
individuals (sole proprietors and S Corps) qualify for many of the same
deductions that incorporated businesses do, and for many small businesses,
being incorporated is an unnecessary expense and burden. Start-ups can spend
thousands of dollars in legal and accounting fees to set up a corporation, only
to discover soon thereafter that they need to change their name or move the
company in a different direction. In addition, plenty of small business owners
who incorporate don't make money for the first few years and find themselves
saddled with minimum corporate tax payments and no income.
4. The home
office deduction is a red flag for an audit.
While it used to
be a red flag, this is no longer true--as long as you keep excellent records
that satisfy IRS requirements. Because of the proliferation of home offices,
tax officials cannot possibly audit all tax returns containing the home office
deduction. In other words, there is no need to fear an audit just because you
take the home office deduction. A high deduction-to-income ratio however, may
raise a red flag and lead to an audit.
5. If you
don't take the home office deduction, business expenses are not deductible.
You are still
eligible to take deductions for business supplies, business-related phone
bills, travel expenses, printing, wages paid to employees or contract workers,
depreciation of equipment used for your business, and other expenses related to
running a home-based business, whether or not you take the home office
deduction.
6. Requesting
an extension on your taxes is an extension to pay taxes.
Extensions
enable you to extend your filing date only. Penalties and interest begin
accruing from the date your taxes are due.
7. Part-time
business owners cannot set up self-employed pensions.
If you start up
a company while you have a salaried position complete with a 401K plan, you can
still set up a SEP-IRA for your business and take the deduction.
A tax headache
is only one mistake away, be it a missed payment or filing deadline, an
improperly claimed deduction, or incomplete records and understanding how the
tax system works is beneficial to any business owner, whether you run a small
to medium sized business or are a sole proprietor.
And, even if you
delegate the tax preparation to someone else, you are still liable for the
accuracy of your tax returns. If you have any questions, don't hesitate to give
us a call today. We're here to assist you.
