7 Common Small Business Tax Misperceptions
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.
codes seem to be in a constant state of flux and increasingly
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
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, regularly 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.
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
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.
You can also elect to deduct up to $5,000 of business start-up
and $5,000 of organizational costs paid or incurred. 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. The $5,000 deduction is reduced by the amount your
total start-up or organizational costs exceed $50,000. Any
remaining costs must be amortized.
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 a tax
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.
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.
DID YOU KNOW
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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.
REQUESTING AN EXTENSION ON YOUR TAXES IS AN EXTENSION TO PAY
Wrong. Extensions enable you to extend your filing date only.
Penalties and interest begin accruing from the date your taxes
PART-TIME BUSINESS OWNERS CANNOT SET UP SELF-EMPLOYED
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.
Whether it's a missed estimated tax payment or filing
deadline, an improperly claimed deduction, or incomplete
records, understanding how the tax system works is beneficial
to any business owner. 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 call the office for assistance.
If you have any questions about small business taxes, don't hesitate to call the office if you would like more information
about tax planning strategies this year. Help is just a phone call away at
Financial Services at Sullivan & Co. CPAs
Sullivan leads our Financial Services
Division and is here to help you navigate your
financial future. As an Investment Advisor Representative,
he is able to provide an independent opinion on the
investments you already own or are considering buying.
We can structure a portfolio
based on your risk tolerance or we can help you decide how
to invest in your company 401(k) plan. We work with each
client to identify their concerns and to provide solutions
according to their situation.
is also experienced in company retirement plans. If you own
a business that does not have a plan; we can discuss your
options and set up a plan that fits your company.
If your business already has a
plan; we offer a free evaluation of the plan to ensure that
it is up to date and working well for you and your
Our goal is to provide personal, unbiased and independent
advice to help you make well-informed decisions about your
financial life and investments.
Contact Paul Sullivan or Jane Huserova to set up a free
initial consultation (301) 657-8080.
And as always if you have any questions about accounting or
investments and how they effect you or your business, please
give us a call. We can help guide you in the right
you can call our offices if you have any questions about these
or any other accounting, tax, financial planning or insurance
related issues, at 301-657-8080.
Regards, Paul Sullivan, CPA
President, Sullivan & Company