Small business owners have a lot on their plates, so it can be easy to believe tax myths. However, doing so can lead to lost opportunities and costly mistakes. Let us help set the record straight. Here are some common small business tax myths – debunked.
Start-Up Costs are Immediately Deductible
Many small business owners think that all their start-up costs are immediately deductible, but in reality, the amount will be limited.
Generally, you can deduct up to $5,000 of costs in your first year of operation. If your business start-up costs exceed $50,000, the $5,000 deduction is reduced by the exceeded amount. So, for example, if you used $52,000 in start-up costs before launching your business, you’ll only be able to deduct $3,000 in the first year. After your first year, you can amortize the remaining costs.
Confused? Navigating deductions isn’t always easy. Consider reaching out for small business tax help from a tax professional to help you.
You Don’t Owe Taxes for Side Hustles
Having multiple streams of revenue is great, but don’t forget you may need to pay taxes on your side hustle. Just because it’s something small doesn’t mean taxes don’t touch it. If you made a net profit of $400, you are required to file a tax return. Also, keep in mind if you make more than $400 from your side hustle, you’ll have to pay self-employment tax as well.
Overpaying the IRS Makes You “Audit Proof”
This is certainly a small business tax myth people need to stop circulating. You should only pay the amount of tax you owe. The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes. However, they do care if you pay less than you owe and can’t substantiate your deductions with good record keeping.
If you really want to “audit proof” your small business, make sure to properly document your expenses, you pay taxes on time, and you are getting good advice from a tax professional.
Small Businesses Don’t Get Audited
Another small business tax myth related to audits – small businesses don’t get audited. In reality, yes, they do. Business size doesn’t matter to the IRS. The good news is that only about 1-2% of businesses get audited every year. If you’re worried about an audit, maintaining good records and having a tax expert help you adhere to tax regulations can help set your mind at ease.
The Home Office Deduction is an IRS Audit Red Flag
Good news – the home office deduction isn’t an automatic IRS red flag. It doesn’t magically put you on their radar. And why would it? It’s a deduction for a reason. Many people operate home-based businesses, so tax officials cannot possibly audit all tax returns of small business owners taking the home office deduction. Just make sure if you claim the home office deduction, it can be substantiated with excellent recordkeeping.
So, in short, there is no need to fear an audit because you take the home office deduction. However, what may be an IRS audit red flag is a high deduction-to-income ratio.
Filing an Extension Gives You an Extra 6 Months to Pay Taxes
Sorry, but this is a myth. If a small business owner can’t file by their return due date, a business tax extension will only give them additional time to file. The extension does not give them additional time to pay. In fact, if the owner doesn’t pay the taxes owed by their return date, they will be subject to penalties and interest on the balance due.
If you know you need extra time, file for an extension early, and don’t dilly dally on filing your return and paying taxes owed.
There’s No Need to Worry About Taxes Until Tax Season
This is a common myth, as taxes aren’t just relevant from January to April. Taxes are relevant year-round, and waiting until tax season to start thinking about them sells your business short. With a tax professional, you can develop a small business tax strategy that helps you avoid missed deductions, rushed decisions, and financial penalties. Tax planning will help you reduce your tax liabilities, and is something certainly worth starting as soon as possible.
When in doubt, meet with a trusted tax expert to ensure you’re getting the best advice for the unique needs of your business.
Gaylor Tax Services is Here to Help
Business taxes aren’t always easy to navigate, but the worst thing you can do is believe tax myths that can get you turned around. When in doubt, meet with a trusted tax expert to ensure you’re getting the best advice for the unique needs of your business.
If you’re looking for a tax expert to help you with your small business taxes, Gaylor Tax Services is here to help. We can help with entity selection and restructuring, tax planning, and tax preparation. We’re also here to represent you in the event of an IRS audit. Our experts are here to answer your questions year-round, so do not hesitate to contact us. We are located in Phoenix, Arizona, but can assist you anywhere in the state.
