When it comes to the ever-changing tax code, it can be hard for a small business owner to keep up. You’ve got to wear a number of hats, and tax accountant is just one of many that can soak up a huge amount of time and energy. Unfortunately, there are a number of myths out there about small businesses, taxes, and tax planning that can leave you spinning your wheels, or worse: making bad decisions for your business based on tax misinformation.
Here are some of the most common myths about taxes and tax planning for small businesses:
Myth #1: Purchasing equipment is the best way to decrease tax liability.
You need to understand from the beginning that spending isn’t the best way to go about reducing your tax liability. If you spend $250,000 on equipment that saves you $75,000 in tax liability, you’ve still spent $175,000. If you borrow money to buy that equipment, you’re going to be spending even more in interest on the debt.
Purchase the equipment you need, but don’t over-purchase thinking that it will save you money at tax time.
Myth #2: It’s always better to have an independent contractor than an employee.
If you’re hiring someone on a legitimately contractual basis, that’s one thing. You can escape some tax burden by treating them as a contractor and issuing a 1099. However, if that contractor is filling the role of employee, you need to treat them as such. If you tell them when and where to work every day and you are their only client, there’s a good chance the IRS is going to see that person as an employee rather than a contractor.
Correctly classify your employees or you’ll wind up facing stiff penalties.
Myth #3: Startup costs aren’t tax deductible.
The costs that you incur before your business actually opens its doors are considered startup costs. These costs can include things like advertising, training, and other capital expenses. Some of those costs can be immediately deductible; other startup costs can be depreciated over time.
There is a limit to how much of your startup costs can be deducted immediately, so consult with your tax advisor about how best to approach this area.
Myth #4: Having a home office deduction will get you audited.
There was a time when home offices were a rarity, and that claiming a home office deduction would create a red flag that would get you audited. Today, however, that’s not necessarily the case. The proliferation of home offices has made this less of a concern than it once was. You’re more likely to get audited if you have a significant deduction-to-income ratio, rather than simply having a home office.
Myth #5: Incorporating your business always provides tax benefits.
For some small businesses, incorporation makes sense. It can protect your personal and private assets from liability in the event that there are troubles with your business. On the other hand, incorporating can also be a costly proposition. For example, you might spend $1,000 in fees and legal help getting your corporation set up, and find that you haven’t reduced your tax burden. In fact, given the fact that most small businesses don’t show a profit in the first couple of years of business, you could wind up facing a minimum corporate tax without any income.
Myth #6: An extension to file your taxes is an extension to pay taxes owed.
If you request an extension on your tax filing date, you’re only allowed to file later than the normal deadline. If you owe taxes, you’ll face penalties and interest charges from the original due date, regardless of whether you filed for an extension.
Myth #7: If your accountant makes a mistake on your taxes, you’re not liable for penalties.
No matter what kind of help you get during the tax process (and chances are you’re going to want and need some help) the accuracy of your return is your responsibility. You’re the one who’s going to be paying fees and penalties if your return has inaccuracies, not your accountant. Make sure you choose an experienced and reliable accountant, and educate yourself on the basics of the tax system so you can be sure you understand what deductions you’re taking and why.
The business tax landscape can be difficult to navigate. It doesn’t help that tax laws are constantly in flux; what’s true today may not necessarily be true tomorrow. Learn how to recognize tax myths, and plan your tax strategy accordingly.
Article courtesy of Score.org and Dominique Molina, President of the American Institute of Certified Tax Coaches, an organization of tax professionals who are trained to help their clients rescue thousands of dollars in wasted tax.