Small business owners face many different hurdles when running a company, but one hurdle that has the potential to cost businesses dearly, is the tax code.
In a seemingly continual state of flux, while a good understanding of the tax code can help businesses save hundreds of thousands of dollars, a lack of awareness or misunderstanding, can just as easily cost them as much.
However, working with a tax preparation service in Fort Lauderdale who can correctly interpret the tax code – no matter how many times it changes – can help you avoid costly mistakes resulting from misconceptions and folklore, that can cripple your business financially.
Here are 7 top small business tax misconceptions that professional guidance can help you avoid:
- Every start-up cost can be deducted immediately
Referring to expenses that were incurred before a business started operating, business start-up costs may be different according to the type of business, and can include costs associated with starting the business and organizing it, like surveys, travel and training. These are typically known as capital expenditures.
Certain assets can be recovered through depreciation or Section 179, and when starting a business, you can choose to amortize or deduct certain costs for starting up the business.
For the majority of new businesses, a deduction of up to $5,000 in startup costs is allowed by the IRS in the first operational year, providing valuable relief to cashflow for new ventures.
- You’ll avoid an audit if you overpay the IRS
Underpaying and not being able to substantiate your deductions is all that the IRS care about. Overpaying in one area doesn’t make you audit-proof if you underpay in another, so the best way to please the IRS is to document all expenses properly and get sound advice from a tax accountant.
- Being incorporated means you can take more deductions
S Corps and sole proprietors actually qualify for a lot of the same deductions as businesses that are incorporated, and for many, being incorporated is a burden and expense that’s wholly unnecessary.
Unfortunately, it’s not unheard of for start-ups to spend a lot of money setting themselves up as a corporation, only to find out afterwards that they need to move in a different direction, or change their name. also, many such small businesses who incorporate, fail to make any money in the first few years, and then find themselves having no income, but being forced to make minimum corporate tax payments.
- Home office deductions raise a red flag for the IRS
Provided you keep good records of your use of a home office, there should be no reason for the IRS to flag you up for an audit. What may raise a red flag though, is a high deduction-to-income ratio.
- Without the home office deduction, business deductions aren’t deductible
Even if you don’t take the home office deduction, you’re still eligible for such deductions as travel expenses, phone-bills, printing and other home-based business expenses.
- Extensions allow you to extend your tax due-date
If you request an extension on your filing date, you’ll still accrue interest and penalties from your tax due-date.
- A self-employed pension plan can’t be set up by part-time business owners
Consulting with accountants in Fort Lauderdale will help you understand that if you’ve got a salaried position with a 401k plan while starting a company, you’re still able to set up a SEP-IRA for your business and take the deduction.
Ultimately, the accuracy of your tax return is your responsibility in the eyes of the IRS, so whatever size business you run, having a good understanding of the tax system is always beneficial, even if you work with a tax expert.