One of the biggest hurdles you’ll face in running your own business is how to stay on top of your obligations to federal, state, and local tax agencies. A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records.
Here is a list of some common small business tax misconceptions:
1. All Start-Up Costs Are Immediately Deductible
Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses.
You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation. You can elect to deduct up to $10,000 of business start-up costs and $10,000 of organizational costs paid or incurred in the year that you start a business. The $10,000 deduction is reduced by the amount your total start-up or organizational costs exceed $60,000. Any remaining cost must be amortized and you must spread out the remainder of your start-up costs over 15 years (180 months).
2. Being incorporated enables you to take more deductions.
Aside from health insurance, deductions for the self-employed (sole-proprietors and S Corps) are very similar to corporate deductions. For many small businesses, being incorporated is an unnecessary expense and burden..
3. The home office deduction is a red flag for an audit.
This is no longer as true as it once was. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. A high deduction-to-income ratio tends to lead to an audit.
4. 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.
5. Taking an extension on your taxes is an extension to pay taxes.
Extensions enable you to extend your filing date only. If you do not pay taxes on time, penalties and interest begin accruing from the due date.