Don’t Fall for Myths About New Tax Code
The complexity of the tax code generates a lot of folklore and misinformation that could lead to costly mistakes, such as penalties for failing to file on time or, on the flip side, not taking advantage of deductions you are legally entitled to take and giving the IRS more money than you need to.
With this in mind, let’s take a look at common small business misconceptions.
Myth: Startup costs are deductible immediately
Business startup costs refer to expenses incurred before you actually begin operating your business. These include both startup and organizational costs and vary depending on the type of business. Examples of these types of costs include advertising, travel, surveys and training. These startup and organizational costs are generally called capital expenditures.
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 startup costs.
Business startup and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business startup and $5,000 of organizational costs. The $5,000 deduction is reduced (but not below zero) by the amount your total startup or organizational costs exceed $50,000. Remaining costs must be amortized.
Myth: Overpaying the IRS makes you ‘audit-proof’
It is never a good idea to knowingly or unknowingly overpay the IRS. You should only pay the amount of tax that you owe. The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes; however, it does care if you pay less than you owe and you can’t substantiate your deductions with good record keeping.
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.
Myth: The home office deduction is a red flag for an audit.
While the home office deduction used to be a red flag, this is no longer true. In fact, with so many people operating home-based businesses, the IRS rolled out a new simplified home office deduction in 2013, which makes it even easier to claim the home office deduction (as long as it can be substantiated with excellent record keeping).
Furthermore, because of the proliferation of home offices, tax officials cannot possibly audit all tax returns of small business owners who are taking the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction; however, a high deduction-to-income ratio, however, may raise a red flag and lead to an audit.
Myth: You can’t deduct business expenses if you don’t take the home office deduction.
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. These deductions will be reported on Schedule C if you are unincorporated.
Myth: An extension to file gives you an extra six months to pay any tax you owe.
This is probably the most common misconception there is. The truth is that extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due, which is most cases is April 15 for individual taxpayers.
Income tax preparation is complex and becomes more so with every passing year. If you currently do not have a tax preparer, it might be time to think about hiring one. Misconceptions that folks here on the street have are widespread, and ignorance is no excuse as far as the government is concerned.