The old legal saying that "ignorance of the law
is no excuse" is perhaps most often applied in tax settings and it is safe
to assume that a tax auditor presenting an assessment of additional taxes,
penalties and interest will not look kindly on an "I didn’t know I was
required to do that" claim.
On the flip side, it is surprising how many
small businesses actually overpay their taxes, neglecting to take deductions
they’re legally entitled to that can help them lower their tax bill.
One of the biggest hurdles you’ll face in running your
own business is staying on top of your numerous obligations to federal, state
and local tax agencies. Tax codes seem to be in a constant state of flux,
making the Internal Revenue Code barely understandable to most people.
Preparing your taxes and strategizing as to how to
keep more of your hard-earned dollars in your pocket becomes increasingly
difficult with each passing year. Your best course of action to save time,
frustration, money and an auditor knocking on your door is to have a
professional accountant handle your taxes.
Tax professionals have years of experience with tax
preparation, religiously attend tax seminars, read scores of journals,
magazines and monthly tax tips, among other things, to correctly interpret the
changing tax code.
When it comes to tax planning for small businesses,
the complexity of tax law generates a lot of folklore and misinformation that
also leads to costly mistakes. With that in mind, here is a look at some of the
more common small business tax misperceptions.
1. All Start-Up Costs Are Immediately Deductible
Business start-up costs refer to expenses incurred
before you actually begin operating your business. Business start-up costs
include both start-up and organizational costs and vary depending on the type
of business. Examples of these types of costs include advertising, travel, surveys
and training. These start-up and organizational costs are generally called
Costs for a particular asset (such as machinery or
office equipment) are recovered through depreciation or Section 179 expensing.
When you start a business, you can elect to deduct or amortize certain business
For tax years beginning in 2010, you can elect to
deduct up to $10,000 of business start-up costs paid or incurred after 2009.
The $10,000 deduction is reduced (but not below zero) by the amount such
start-up costs exceed $60,000. Any remaining costs must be amortized.
2. Overpaying The IRS Makes You
The IRS doesn’t care if you pay the right amount of
taxes or overpay your taxes. They do care if you pay less than you owe and you
can’t substantiate your deductions. Even if you overpay in one area, the IRS
will still hit you with interest and penalties if you underpay in another. It
is never a good idea to knowingly or unknowingly overpay the IRS. The best way
to "Audit Proof" yourself is to properly document your expenses and
make sure you are getting good advice from your tax accountant.
3. Being incorporated enables you to take more
Self-employed individuals (sole proprietors and S
Corps) qualify for many of the same deductions that incorporated businesses do,
and for many small businesses, being incorporated is an unnecessary expense and
burden. Start-ups can spend thousands of dollars in legal and accounting fees
to set up a corporation, only to discover soon thereafter that they need to
change their name or move the company in a different direction. In addition,
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
4. The home office deduction is a red flag for an
While it used to be a red flag, this is no longer true
as long as you keep excellent records that satisfy IRS requirements. Because
of the proliferation of home offices, tax officials cannot possibly audit all
tax returns containing the home office deduction. In other words, there is no
need to fear an audit just because you take the home office deduction. A high
deduction-to-income ratio, however, may raise a red flag and lead to an audit.
5. 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.
6. Requesting an extension on your taxes is an
extension to pay taxes.
Extensions enable you to extend your filing date only.
Penalties and interest begin accruing from the date your taxes are due.
7. Part-time business owners cannot set up
If you start up a company while you have a salaried
position complete with a 401K plan, you can still set up a SEP-IRA for your
business and take the deduction.
A tax headache is only one mistake away, be it a
missed payment or filing deadline, an improperly claimed deduction, or
incomplete records. Understanding how the tax system works is beneficial to any
business owner, whether you run a small- to medium-sized business or are a sole
proprietor. And, even if you delegate the tax preparation to someone else, you
are still liable for the accuracy of your tax returns.
Richard L. Lipton CPA & Associates LLC, located in
Florham Park, N.J., draws on its founder’s 10 years as a stockholder and
manager of a family-owned automotive business in Paterson, N.J. To contact Richard L. Lipton CPA & Associates LLC: ?Call:
973-520-8123, or ?E-mail: [email protected]?.