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. In fact, so many people now
have home-based businesses that in 2013, the IRS rolled out the new simplified
home office deduction, which makes it even easier to claim the home office
deduction (as long as it can be substantiated).
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.
Barry Eisenberg, SCORE Counselor
