Misinformation associated with the subject of taxes can lead to costly mistakes for small business owners. Missed deduction, overly complicated business structures, and other problems that arise from misinformation, can be avoided by checking with a tax expert and by reading some of the tax reference books on the market.
Here are the most common small business tax myths:
Start up costs are immediately deductible~ Costs incurred before you opened your doors for business are deductible, but must be spread out over at least the first 60 months you are in business. There are two ways to avoid the delayed deductions. One, conduct some business during the start up phase, or two, delay paying costs until you open for business. Talk to a tax expert before choosing either of these options because if you lose money in the first few years of operation, you may be better off having the deduction spread out.
Accrual accounting is the best method of accounting for small businesses~ Accrual method accounting used to be the standard for small businesses, but now cash basis accounting is acceptable for the vast majority of companies. Choosing accrual-based accounting, traditional double-entry bookkeeping, can cost a small business owner an unnecessary amount in taxes. Entrepreneurs who have chosen accrual-based accounting incorrectly often don't find out until tax time that they owe tax on money they haven't yet received.
Being Incorporated enables you to take more deductions~ Aside from health insurance, deductions for the self-employed (sole proprietors and S corporations) are pretty much equivalent to corporate deductions. For many small businesses, being incorporated is an unnecessary expense and burden. Start ups can spend $1000 in legal and accounting fees to set up a corporation, only to determine shortly after that they want to change their name or company direction. 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~ This is no longer as true as it once was. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. A high deduction-to-income ratio tends to lead to an audit.
If you don't take the home office deduction, business expenses are not deductible~ 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.
All equipment expenses are deductible in the year you incur them~ You are entitled to deduct up to $18,000 annually in equipment, other than autos, used in business. If your income is low, you may only be able to deduct part of the cost of your purchases in one year, even if they are below the annual deduction limit.
Taking an extension on your taxes is an extension to pay taxes~ Extensions enable you to extend your filing date only. If you do not pay taxes on time, penalties and interest begin accruing from the due date.
Part time business owners cannot set up self-employed pensions~ If you start up a company while you have a salaried position complete with a 401K plan, you can still set up an SEP-IRA for your business and take the deduction.
