The complexity of the tax code
generates a lot of folklore and misinformation that could lead
to costly mistakes such as penalties for failing to file on
time or, on the flip side, not taking advantage of deductions
you are legally entitled to take and giving the IRS more money
than you need to.
With this in mind, let's take a
look at seven common small business tax myths.
START-UP COSTS ARE DEDUCTIBLE IMMEDIATELY
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.
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. The $5,000 deduction is reduced (but not below zero) by
the amount your total start-up or organizational costs exceed
$50,000. Remaining costs must be amortized.
OVERPAYING THE IRS MAKES YOU "AUDIT PROOF"
It is never a good idea to knowingly or unknowingly overpay
the IRS. You should only pay the amount of tax that you owe.
The IRS doesn't care if you pay the right amount of taxes or
overpay your taxes; however, they do care if you pay less than
you owe and you can't substantiate your deductions with good
recordkeeping. 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.
YOU CAN TAKE MORE DEDUCTIONS IF YOUR BUSINESS IS INCORPORATED.
The good news is that self-employed individuals (sole
proprietors and S Corps) qualify for many of the same
deductions that incorporated businesses do. As such, becoming
incorporated is often an unnecessary expense and burden that
many small business owners don't need. For instance, 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 take the company in a
different direction. Furthermore, 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 the home office deduction used to be a red flag, this is
no longer true. In fact, with so many people operating
home-based businesses the IRS rolled out a new simplified home
office deduction in 2013, which makes it even easier to claim
the home office deduction (as long as it can be substantiated
with excellent recordkeeping).
Furthermore, because of the proliferation of home offices, tax
officials cannot possibly audit all tax returns of small
business owners taking the home office deduction. In other
words, there is no need to fear an audit just because you take
the home office deduction; however, a high deduction-to-income
ratio, however, may raise a red flag and lead to an audit.
YOU CAN'T DEDUCT BUSINESS EXPENSES IF YOU DON'T TAKE THE HOME
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.
AN EXTENSION TO FILE GIVES YOU AN EXTRA SIX MONTHS TO PAY ANY
TAX YOU OWE.
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 PENSION
If you start 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.
If you have any questions about these and other tax myths,
don't hesitate to call and speak to our tax professionals.
If you have any questions about these individual and business
tax myths or changes, please contact the office for assistance
with following these and other 2018 or 2019 tax planning
strategies that might be suitable for your particular
Don't hesitate to call us if you need help or
want to get started on tax filing for the 2018 tax season (or a jump
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Certified Business Exit