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Small Business Owners – Don’t Believe These Business Tax Myths

Tax code can be complicated, so it’s easy to see how business tax myths spread among small business owners. You are carrying the responsibility of running your company, managing employees and working on product development. Tax regulations are not on your mind and often fall to the bottom of the priority list.

While it is important to focus on all aspects of your business, failing to keep up with the tax code can be disastrous for your company. If you run into issues with the IRS, then you will be facing fines, interest costs, and late fees. Additionally, poor bookkeeping and accounting practices can cost you a lot of money in potential business deductions.

Preparing for the Upcoming Tax Season

While April 15th is still two months away, right now is the time to get started on your tax preparation. Good bookkeeping should be happening year-round, to ensure that your reports are ready when it is time to file your paperwork.

The assistance of an experienced accountant can be invaluable in helping with accurate filing. Not only do you have a pro to guide your decisions, but an experienced accountant can minimize the risk of you getting caught in some of the most common business tax myths.

Business Tax Myths to Avoid

There is a lot of misinformation about tax loopholes, deductions, and write-offs that may or may not apply to small businesses. Just because you read someone’s advice online doesn’t mean that the information lines up with the guidelines set by the IRS. If you want to stay away from trouble with the IRS, then you need to be sure that you are thorough and accurate in your tax filing. Avoiding these common misconceptions will protect yourself and your business. Here are some of the most common business tax myths:

  • Myth #1 – Tax Filing is Optional: This myth might seem blatantly obvious to many people, but it’s surprising to see how many people mistakenly think that tax filing is an optional activity each year. There is a phrase in the instruction book for Form 1040 that uses the word “voluntary” in reference to the tax system, and some people have interpreted it to mean that individuals have no legal obligation to file taxes. The truth is that the voluntary portion is the individual’s responsibility for calculating the amount of taxes that are owed. Tax filing is legally required, and it’s up to you to ensure that your filing information is correct.
  • Myth #2 – All Start-Up Costs Should Be Immediately Deducted: The timing of your business deductions varies depending on the nature of your business and the types of purchases you are making. Certain costs should be deducted upfront, which means that you take the value of the write-off in the year the purchase was completed. But there are instances where is it more effective to take the tax benefits through depreciation, which means the write-off is calculated over a period of time. For example, costs for specific office equipment or machinery might fall into the category of Section 179 expensing. Also, you can deduct up to $5,000 of your organizational costs and $5,000 of the business start-up costs, and remaining costs might need to be amortized. The best solution is to talk to your accountant for personal recommendations to ensure optimal tax savings each year.
  • Myth #3 – I Don’t Have to Pay Taxes on Money Made Online: The internet has opened a whole new world for businesses, with a large portion of retail sales happening online. These numbers continue to grow each year. If you are doing business online, then it means that you haven’t filed a W4 with an employer – so no structure is in place to withhold taxes from your pay. But don’t assume that means you don’t have to pay taxes on the income! If you make $600 or more working as a contractor, then you must report that income to the IRS. You will be required to pay self-employment taxes, so make sure to set aside money every month to be prepared for the upcoming tax bill.
  • Myth #4 – Incorporating is the Best Way to Minimize Tax Burden: Remember that there isn’t a one-size-fits-all solution that works for all types of businesses. While there are undeniable benefits to incorporating, sometimes it makes sense for self-employed individuals to stick with a sole proprietor business setup. The truth is that incorporating too early could have a negative impact on your tax burden. For example, if you don’t make money for the first few years, then you bear the burden of minimum corporate tax payments and not enough income to pay the bill. Work with your accountant and business attorney to determine the right timing of incorporation for your small business.
  • Myth #5 – Home Office Deductions Increase the Risk of an Audit: Are you a small business owner who works from home? You might be nervous about maximizing the deductions for your home office because you are worried about the increasing risk of an audit. Years ago, a home office wasn’t as common as it is in our digital business world. At that point, it might have been true that a home-based business could potentially raise red flags for the IRS. But self-employment at home and remote employment are becoming so popular that home business write-offs are quite common. As long as your deductions are legitimate, there is no reason why you should be worried about increasing the risk of an audit. The most important thing you need to do is ensure that your workspace at home meets the regulations established by the IRS.
  • Myth #6 – Only Large Corporations are Audited: On the other hand, some small businesses assume that they don’t bring in enough profit to be audited by the IRS. The truth is that the amount of income you receive doesn’t have as much to do with the auditing process as other factors. Certain activities can send up red flags. Regardless of the amount of income you receive, it is essential to ensure that you have thorough, detailed business records to track all deductions and income. This paperwork should be kept on file for a few years so you can defend your tax filing if the IRS comes calling.
  • Myth #7 – “Audit Proof” Your Business by Overpaying on Your Taxes: There is no reason why you should send the IRS more many than what is owed. Some people assume that overpaying on their taxes means that they are protected against an audit. The truth is that the IRS doesn’t care if you pay what you owe or overpay, the excess will just be sent back to you in the form of a tax return. Their main concern is to ensure that you aren’t paying less than you owe. Your goal should be to pay what you owe as closely as possible, then all deductions need to be backed-up with solid recordkeeping.
  • Myth #8 – File an Extension if You Don’t Have Cash for the Tax Bill: Filing an extension is an option if you need more time to prepare your tax paperwork. But just because an extension is filed doesn’t mean that you are buying more time to pay your bill. This process extends the date for your filing only. It is still your responsibility to pay the money that is owed by the original due date. Failing to make a timely, accurate payment could result in additional costs for interest and penalties. If you need more time to pay taxes, then you might consider payment plans that can be arranged through the IRS. You will pay more money overall though because of the interest that is accrued on the overdue payment.
  • Myth #9 – My Accountant Holds the Responsibility if Tax Mistakes are Made: Hiring an accountant is an invaluable step for businesses of all sizes. It is important that you have someone to guide you through the tax rules and regulations. While your accountant can help you avoid common missteps in your tax filing, the ultimate responsibility still lies on you. It’s up to you to ensure that you are providing accurate numbers and information, then the accountant uses this information to prepare the tax paperwork. The quality of your tax filing is only as good as the financial details that are provided to your tax accountant.
  • Myth #10 – It’s Good to Get a Big Tax Refund: Whether you are a small business owner or an employee, it might feel like a relief to receive a big tax refund in April. Even though this check might feel like “free money,” it is important to remember that the money was yours in the first place. A big tax refund means that you overpaid on your taxes – you essentially gave the IRS a free loan. If you get a tax refund, then it means that you should talk to your accountant to adjust your withholdings or estimated payments going forward.

The simplest way to avoid common business tax myths is by partnering with an experienced accountant who can guide your financial decisions throughout the year. Easier Accounting is here to help! Call us at (888) 620-0770

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.