Common Small Business Tax Myths
Myths. They are like urban legends. We're so used to hearing them that we actually believe they are true. When it comes to common small business tax myths, this can be potentially dangerous because without knowing the facts about the IRS and their expectations, you can find yourself in a real financial bind.
So, what are some of the more prevalent tax myths that you need to know the truth about? Here are five of them.
Start-up costs can be immediately deducted. Some people believe that since you can deduct a lot of business fees, then there is no need to be super-cautious when it comes to accruing start-up fees (since you can simply write them off). The truth of the matter is that although you can write off those kinds of expenses (up to $10,000 worth), you have to apply them to the prior year. So, for instance, when it comes to taxes filed in 2013, you have to deduct the expenses from 2012. Therefore, deductions do apply but not as quickly as you may have planned.
You can avoid paying employment taxes if you have contracted workers. The answer to this one is "Well, yes...and no." Here's the reason why. If you legitimately have contractors working for your company, yes, you can avoid paying employment taxes. However, if they come into the office every day and clock in and out on a regimented schedule, that sounds more like someone who is an employee. That kind of "gray area" can catch up with you if you're not careful. So yes, be careful.
Filing for an extension will up your chances of being audited. You might be tempted to think that since you were not able to get your tax information in by the official (April 15) date that you will actually draw more attention to the IRS by sending in your taxes six months later; that as a direct result, you could end up being audited. The reality is that people who turn in their taxes later oftentimes actually avoid an audit simply because they are not rushing to fill out all of the necessary information. Oh, and while we're on this one, another myth that needs to be debunked is that if you file late you can pay late. This is so not true. Fees, including interest, start stacking up from April 15 on, so if you're planning on filing for an extension, make sure to definitely keep that in mind.
Being self-employed means that you can deduct all of your expenses. OK, what is true is that if you are self-employed, there are many deductions that you are able to make, but like most things in life, there are definitely limits. By going to IRS.gov and putting "small business deductions" in the "search" field, it will list several articles that will inform you on what you can write off (including how much) and what you can't.
You don't have to pay your taxes if you don't want to. There is a line in the instruction book for the 1040 Form that states that paying taxes is a "voluntary" act. However, there are a lot of people who are currently making an installment agreement or tax settlement because they believed that to mean they didn't have to pay their taxes at all if they opted not to. What the IRS means by "voluntary" is that we have the ability to determine who much we owe (and will deduct) rather than them sending us an annual (or quarterly) bill with what their estimated total is. You can't get around not paying the IRS, so make absolutely certain that you do.