Tax Myths – Small Businesses.
The complexity of the tax code generates a lot of misinformation that could lead to costly mistakes. With this in mind, let's take a look at some common small business tax myths.
1. 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. Examples of these types of costs include advertising, travel, surveys, and training. These start-up and organizational costs are generally called capital expenditures. 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.
2. 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. It is important to properly document your expenses and make sure you are getting good advice from your tax accountant
3. 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 record-keeping). 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 may raise a red flag and lead to an audit.
4. YOU CAN’T DEDUCT BUSINESS EXPENSES IF YOU DON'T TAKE THE HOME OFFICE DEDUCTION. 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.
5. AN EXTENSION TO FILE GIVES YOU AN EXTRA SIX MONTHS TO PAY ANY TAX YOU OWE. It is an extension of time to file not an extension of time to pay. Penalties and interest begin accruing from the date your taxes are due.
If you have any questions about these and other tax myths, don't hesitate to call and speak with us.