One of the biggest issues facing small businesses today are the numerous obligations to federal, state, and local tax agencies. They lose track of the different rules and develop misconceptions about the very complicated tax code that seems to be in a constant state of flux. Creating exceptions for certain groups has resulted in a steady stream of new and revised tax laws.
Preparing your taxes and strategizing how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Unfortunately, the ever changing nature of the tax code generates a lot of misinformation that also leads to costly mistakes. Here is a list of some common small business tax misperceptions that we have seen with our clients:
1. You can immediately deduct start-up costs.
Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for marketing, travel, equipment, research, or training. These costs are generally capital expenses and must be capitalized.
You recover costs for a particular asset through depreciation. You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized.
However, there is a catch. In order to take advantage of the immediate deduction you must spread out the remainder of your start-up costs over 15 years.
So the immediate deduction is a good option for businesses with lower start-up expenses. If you’re startup expenses are greater than $14,000, then you’ll do better by not taking an immediate deduction but spreading your start-up costs over 5 years.
2. I won’t get audited if I overpay.
The IRS doesn’t care if you overpay and they won’t pay attention to such behavior. They only care if you pay less than you owe and you can’t support your deductions. 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. If I incorporate I will pay less Federal Taxes.
Aside from health insurance, deductions for the self-employed, whether sole-proprietors or S Corps, are pretty much equivalent to corporate deductions. For many small businesses just getting started, being incorporated is an unnecessary expense and administrative burden. Start-ups can spend a thousand bucks in legal and accounting fees to set up a corporation, only to determine shortly after that they want to make some changes that will affect their personal taxes. 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. There is a time and place and stage in your business when incorporating makes sense.
4. Must take the home office deduction for a home based business in order to claim other related expenses.
You are still eligible to take deductions for business related expenses including 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.
5. Filing an extension on your taxes is an extension to pay taxes.
Filing extensions enable you to extend your tax filing date only. If you do not pay taxes on time, penalties and interest begin accruing from the due date of the actual return.
6. If you are a part-time business owner you cannot set up a self-employed pension.
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.
Besides avoiding these pitfalls, possessing basic knowledge of how the tax system works is also beneficial.
Lawrence & Associates, Huntington Beach CPA & Accountant
Huntington Beach Bookkeeping/Huntington Beach Tax Preparation