by Penny Fox –
Tax time can be taxing for everyone, but small business owners have it particularly hard. Without an army of accountants and tax experts, they put on the “tax” hat, and most often are working blind.
One major misconception is that taxes are a once-a-year worry. If you just throw everything in a shoebox at the end of the year and send it to your CPA, you’re doing your business a disservice. You should be collecting that data monthly at least, and using it to run your business more efficiently.
Here are a few tax myths that are common among small business owners.
Tax myth #1: You can avoid taxes by investing in equipment.
You can’t just spend your way out of a tax bill. If you spend $300,000 on equipment to eliminate $100,000 in tax liability, you’re still spending money, especially if you have to borrow to buy that equipment. If you need the equipment, that’s fine. But don’t burden yourself with debt unnecessarily. Successful entrepreneurs only spend a dollar when they absolutely have to.
Tax myth #2: Some write-offs are just for big business.
Don’t think that write-offs for R&D are just for large corporations. They can save a small business owner real tax dollars.
Tax myth #3: You can avoid paying taxes by having employees work as contractors or freelancers rather than full-time employees.
While this strategy can offer legitimate tax savings, working on a 1099 basis involves certain tests. There are questions about control, such as whether the person is required to show up for work at a specific time and location every day.
Tax myth #4: The IRS is targeting small businesses.
There may be deductions for auto and home office use that you’re afraid to claim because you think it will set you up for an audit. But if they’re legitimate and you have the proper documentation, use them. Don’t be afraid to look for hidden tax deductions. If you’re storing supplies in your garage, for example, that can be a legitimate business deduction, and is not necessarily going to raise red flags.
Tax myth #5: Startup costs are not tax deductible.
Up to $5,000 in startup expenditures can be written off during your first year of business, unless they exceed $50,000. The balance can be amortized over fifteen years. In addition to the $5,000 start-up deduction, you can take up to $5,000 in additional deductions for small business organizational expenses, such as the expense of forming a corporation, partnership, or limited liability company (not a sole proprietorship). The deduction would be applied to legal fees and other expenses for forming your business structure.
Penny M. Fox, CPA specializes in tax and accounting services, including tax planning and tax return preparation, bookkeeping, retirement planning, business consulting, estate planning, trust consulting, divorce planning and bankruptcy planning.