Small Business Tax Misconceptions

So you got out from under working for somebody else, and now you own the business. You are probably very good at what you do, and enjoy doing what you are good at. Then you begin to think about “the necessary evil” that raises its ugly head-bookkeeping, payroll, taxes and the numerous obligations, deadlines, paperwork and regulations that are in a constant state of flux. You might be good at making widgets, but you find you are not so good at knowing what to record financially, what paperwork is due when to which taxing authority, or even how much tax you may or may not owe. Of course, the best thing to do is give Seacoast Accountability a call, but if you are not quite to that step, this article is geared to dispel some of the myths about small business taxes that you may have heard.

A CPA is your best source for tax preparation

This is not always true, and it’s expensive. Select a tax professional that asks you a ton of questions, better yet, one that has experience in your industry. CPAs tend to be conservative and may not include deductions that you are legally entitled to get, resulting in the more tax you pay.

The home office deduction will get me audited

Once upon a time, this might have been the case. With the economy the way it is now, there are an increasing number of home offices, and the IRS simply doesn’t have the resources to audit every one of them. The key here is to be sure that the majority of your administrative tasks are done from the home office and to have legitimate and realistic deductions. (See my previous blog about the home office deduction) IRS asks you for a code that identifies your type of business. They have a database that tells them what the norm is for various expenses in your industry.   It is the ratio of income to expense, or coding a high amount of expense in a particular area that is most likely to trigger the audit.

If I file an extension, I can wait to pay the tax I owe

Oh, this is a big fat lie! The only thing that an extension does for you, is give you the extra time to file the return without being hit with a late filing penalty. Any amount that is due after the due date is assessed with an underpayment penalty and interest begins to accrue from the original date the return was due, typically April 15^th.

If I pay what I owe, I won’t get a penalty

Again, this is false. Your taxes are calculated quarterly, so if you pay everything you owe when the return is due, you could possibly be hit with an underpayment penalty for not paying taxes in quarterly installments.

I haven’t started operating the business, so I can’t deduct anything

The IRS now allows an immediate deduction of start up costs, or the business expenses you paid out before opening day. These costs consist of market surveys, wages paid to train employees, travel, and advertising the opening of the business. You can deduct up to $5,000 in the first year, or the actual start-up costs, whichever is less. The deduction is reduced by the amount of total start up costs that exceed $50,000. Any start up costs not deducted in the first year can be deducted over 180 months, starting the month after the business begins.

The only mileage I need to keep track of is my business miles

I run into this every year, especially with new clients. My returning clients have been trained to know better! IRS requires that you keep a mileage log of ALL miles. At least get your beginning odometer reading each year.   (See my vehicle deduction blog) Not only is this an IRS requirement, but the ratio of total miles to business miles is used to capture other vehicle expenses such as the personal property tax and finance charges paid on the business vehicle, which can be deducted in addition to the standard mileage rate.

I live in New Hampshire, so I don’t have to pay income tax

If you have $50,000 of income, before expenses, you have to file a Business Profits tax return with the state. You may also be subject to a Business Enterprise Tax.

As a side note, and something to think about, the small business owner is saddled with not only the income tax that every taxpayer is subject to, but the self employment tax, as well. This is a double-edged sword, because the self employment tax is what you pay into the Social Security system. The less you pay in, the less you get in your golden years. I strongly recommend seeking a tax professional to help you get estimated payments set up, review your record keeping and deductions, and advise you about a tax planning strategy. Now is a great time of year to review what has happened with your company for the first half of the year, and to make any adjustments to avoid surprises at year end. Give us a call at (603) 834-1271.

Legal Warning: The information in this blog is as accurate as I can make it. Consult me or your tax professional before using anything posted here on your tax return. Your circumstances may be different than those assumed in the postings. Please see my disclaimer.

Disclaimer: I desire to present only accurate information on this blog. However, I do not guarantee the accuracy or timeliness of the information. The information on this blog is subject to change without notice. I do not make any warranty, expressed or implied, or assume any liability or responsibility for the accuracy, completeness, or usefulness of the documents or information available on this blog. Any reference to a product, service, publication or web site does not imply an endorsement of that product, service, publication, or web site. If you have any questions or comments about any information provided on this blog, please email me at [email protected].