As it relates to some of the more popular small business tax myths that are lurking around, consider this article to be its own kind of “snopes”. Now, there’s not enough time for you or copy space for us to be able to address every single tax myth there is; however, here are some that, by knowing them, will help you with filing your taxes next year. After all, knowing is half the battle, right?
Indeed it is.
Myth #1: You can immediately deduct your start-up costs. Have you ever needed some major dental work done, but you’re uninsured? So, you decide to get some insurance to pay for the repairs that you need, only to find out that you have to be insured for a year to qualify for its benefits. That’s kind of what this rule is like. Although you can deduct up to $10,000 as it relates to start-up and organizational costs (or what many people call “capital expenditures”) for most businesses, you have to apply them to expenses from the prior year. So for instance, for tax years beginning with 2010, you have to deduct expenses that transpired after 2009. All others have to be amortized (written off gradually).
Myth #2: Buying lots of stuff will give you a big tax break. The truth of the matter is that, yes, you can purchase equipment that you need for your business and write it off. The main point here is to make sure that the dollars and cents that you spend actually do make good business sense. If you owe $50,000, purchasing something that costs $1,500 isn’t really going to make that much of a dent into your bill. So, make sure that you don’t incur unnecessary debt thinking that it will help you to avoid what you will have to pay in taxes.
Myth #3: Contracting out work prevents you from paying employment taxes. The bottom line to this one would be “Yes, that’s true.” However, there has to be some great integrity utilized here because if your employer is legitimately a contracted worker (meaning you are giving them a 1099), but they have to come into work every day at a certain time, that sounds more like a part-time or full-time employee (a W-4 form worker). You definitely don’t want to get “busted” on this one. It will cost you.
Myth #4: That you “tip” the IRS to avoid an audit. If you’re in search of a professional tax resolution, avoid anyone who tells you that if you overpay on your taxes, it will result in your avoiding an audit. Absolutely not. The IRS audits people who pay less money than they owe and/or cannot verify the deductions that they’ve listed. So, thinking that you can give a bit more money to offset these two issues is one of the greatest small business tax myths of all time (consider it just debunked, by the way).
Myth #5: That a filing extension will keep you from having to pay on time. There are a lot of people who think that just because they make a request for a filing extension, then it means that they will get some breathing room to pay what they owe. Nope. A filing extension is literally just that: a bit of more time given to turn in your paperwork as it relates to your taxes. The monies (and interest) that you owe, however, start on April 15. One way to avoid this? Start filing quarterly. It’s usually the best thing for businesses all the way around, anyway.