EA - Don't Be Fooled By These Common Myths About Small Business Taxes

Don’t Be Fooled by These Common Myths About Small Business Taxes

Owning a business can be advantageous when tax time rolls around because you have many options for tax write-offs and deductions. The problem is that the tax code can be quite confusing, making it hard to know how to maximize these write-offs while still staying within the guidelines established by the IRS. Too often, business owners find themselves in challenging tax situations due to an attempted DIY tax filing, often including improper deductions or other issues that could result in auditing and fines in the future.

The costs can add up if you cross the regulations set by the IRS. Not only are there penalties for mistakes on tax filings, but the late fees and other charges can really take a toll on your bank account. The best thing that you can do is make sure that you always pay your taxes on time, and be careful to avoid writing off deductions that aren’t qualified for your business.

On the flip side, don’t make the mistake of overlooking deductions that you are entitled to, which could result in an overpayment of your taxes. There is no reason to pay the IRS more money than what is needed each year! Hiring an accountant is the most effective solution to find the sweet spot with your tax filing and payments. Your small business accountant can offer advice to maximize deductions while staying within the guidelines set by the IRS.

When it comes to business taxes, there are a variety of myths floating around. Here are some of the most common myths

Myth #1: Over-Pay Your Taxes Will Help You Avoid Auditing

Some people think that fattening out their tax payments can make their business “audit-proof” in the eyes of the IRS. The truth is that red flags will fly for underpayment, but the IRS doesn’t care if you pay the right amount or if you overpay. The best way to avoid the scrutiny of the IRS is to pay the exact amount due, based on your business calculations for the year.

What happens if you overpay? If you are making quarterly payments and you send the IRS more than the amount needed for the year, then it means that you will likely get a tax return when tax time rolls around.

You can minimize the risk and impact of an audit with good recordkeeping, documentation to back up your deductions, and accurate calculations on your tax filing each year. An experienced tax accountant can provide the guidance and information you need to ensure accuracy on your tax calculations.

Myth #2: It’s Awesome to Get a Big Tax Refund

It can feel like Christmas in April to see a big check show up from the IRS. Many people plan their vacations or big purchases around their tax refund money. But, before you spend that cash on electronics or something frivolous… remember that the refund is coming because you overpaid on your taxes.

Receiving a tax refund could be a sign that you aren’t using the right calculations to estimate your tax payments. Overpaying on your taxes means that you are sending the IRS money that isn’t needed. Essentially, you are giving the government a free loan!

The best solution is to pay the right amount on your tax payments, so you have the money on hand to pay for the business expenses that need to be covered throughout the year. Your tax accountant can help you find the “sweet spot” for your payments, making it easy to dial in the right numbers without underpaying or overpaying.

Myth #3: Home Office Deductions Increase the Risk of an Audit

Are you scared to take a home office deduction because of the potential increased risk of being audited? Just because you are taking home office deductions, doesn’t mean that you will trigger something in the IRS system that causes you to be audited.

Home-based businesses are quite common in the digital world that we live in. Whether you are working at home as a freelancer or you have a new startup running in the basement or garage, don’t be scared to leverage the home office deduction to manage your expenses. Follow the recommendations of your accountant and make sure that you only write off the portion of the home that is being used for business purposes only. For example, your office should be a room used only for the business… you can’t use the room as both an office and guest bedroom.

Myth #4: All Start-Up Expenses Should Be Deducted Immediately

It costs money to start a business. Not only do you need to put cash into business development and inventory purchases, but other expenses add up when it comes to website design, marketing, and more. Many of these costs need to be paid before the business opens, and might include both organizational and structural costs.

If you put money into office equipment or machinery, then that asset can be written off in full in the current year of taxes. Sometimes, it is a better strategy to amortize costs for equipment and other expensive purchases. Talk to your accountant about the equipment that was purchased, the overall costs of the start-up purchases, and your tax strategy to decide if the expenses should be deducted immediately or spread out over time.

Myth #5: File an Extension if You Can’t Make the Tax Payment

As April 15th draws near each year, do you ever find yourself in a cash crunch? Even though tax time is still a few months away, you should start thinking about cash flow right now, so you have enough money in the account to cover the required costs for both state and federal taxes.

If your tax filing isn’t ready by April 15th, then you might consider filing for an extension to buy a little more time for the final calculations. Sometimes, an extension makes sense – but you should always make this decision based on the recommendations of your small business accountant.

Remember this important aspect of tax extensions: buying a little more time to file your taxes doesn’t mean that you get more time to come up with the cash that is needed. When the IRS grants permission for a tax extension, you are still required to pay the anticipated amount of taxes on the day they are due.

Myth #6: Incorporate for Better Tax Breaks

You can choose from various structures for your business entity, including Sole Proprietor or a Corporation. Don’t mistakenly think that incorporating your business is essential in the early stages. In fact, this cost is unnecessary in the beginning. It can cost thousands of dollars for accounting and legal fees to set up the corporation… and you won’t likely make enough money in the first few years to make it worth the expense.

Setting up a corporation prematurely might increase the amount of taxes you pay overall since you need to pay for corporate taxes. These expenses can be avoided in the beginning by sticking with a self-employment structure, especially if your business isn’t profitable yet.

Self-employment allows you to enjoy the same deductions, without going through the hassle of setting up an official corporation. Once your profits hit a certain annual threshold, then the real tax benefits of incorporating will kick in. Talk to your accountant about the entity strategy to determine the right timing for setting up your business corporation.

Myth #7: Paying an Accountant for Tax Filing is the Best Tax Planning Advice

No doubt, your business will benefit from the tax preparation and filing services offered by an experienced small business accountant. But, talking to your accountant once a year isn’t enough to put together a strong tax strategy for your business.

Tax preparation services are limited to taking the annual information that you provide and compiling it into the tax return paperwork that needs to be filed. Once that filing is complete, then you won’t likely hear from your tax preparer until the next tax season rolls around the following year.

If you want to be proactive about your tax strategy, then you need to be working with an accountant on an ongoing basis. The best solution is to maintain open communication with a tax professional throughout the year. You can use their advice and recommendations as you are making decisions about your business. Remember that tax planning should be an ongoing process. Your business financial information needs to be evaluated in real-time, so you can make changes and adjustments to your spending and profit strategy when it is most effective.

Talk to the Small Business Accounting Experts

Are you considering the benefits of hiring an outsourced accounting team? If you are ready to make the changes that are needed for your tax strategy, then our team is here to assist. We provide ongoing accounting and bookkeeping services, helping to keep your business up-to-date throughout the year. These services are always customized, based on the unique needs of every company.

For more information about these outsourced accounting services, call us at Easier Accounting: (888) 620-0770.

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