Misconceptions Business Owners Have About Their Returns
Regardless of how life changes, one of the biggest hurdles you’ll face in running your own business is to stay on top of your numerous 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.
You can safely assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an “I didn’t know I was required to do that” claim. The old legal saying that “ignorance of the law is no excuse” is perhaps most often applied in tax settings. On the other hand, it is surprising how many small businesses actually overpay their taxes. They often neglect to take deductions they’re legally entitled to, or just don’t know about certain breaks that can help them lower their tax bill.
Adding to the mayhem, we have tax codes that seem to be in a constant state of flux. Creating exceptions for special groups has resulted in a steady stream of new and revised tax laws, which have lengthened the Internal Revenue Code to over 4,500 pages and rendered it barely understandable to even the most experienced tax professionals. Often one section can run up to several hundred pages. A special tax service used by tax professionals explains the meaning and application of each part of the code. It is contained in another 12 volumes! The harder Congress tries to simplify the code, the more complex it becomes.
Preparing your taxes and strategizing how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, MONEY, and (God forbid) an auditor knocking on your door, is to have a professional accountant handle your taxes. Tax professionals have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code and gain the advantage over the IRS.
Nevertheless, many accountants don’t understand the mammoth tax code and end up being too conservative with your tax deductions. The more conservative they are, the more taxes you end up paying.
Unfortunately, the cryptic and mystifying nature of the tax code generates a lot of folklore and misinformation that also leads to costly mistakes. Here is a list of some common small business tax misconceptions:
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 $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred in the year that you start a business. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized.
The only catch is that in order to take advantage of the immediate deduction you must spread out the remainder of your start-up costs over 15 years (180 months).
Overpaying The IRS Makes You “Audit Proof”
The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can’t substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. 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.
Being incorporated enables you to take more deductions.
Aside from health insurance, deductions for the self-employed (sole-proprietors and S Corps) are pretty much equivalent to corporate deductions. For many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend $1,000 in legal and accounting fees to set up a corporation, only to determine shortly after that they want to change their name or company direction. Plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.
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.
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.
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.
Part-time business owners cannot set up self-employed pensions.
If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.
Besides avoiding these pitfalls, possessing basic knowledge of how the tax system works is also beneficial. After all, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If your accountant messes up, you pay the penalty, not him.
Avoid Three Common Errors in Budgeting
When it comes to budgeting, it’s absolutely essential to estimate your spending as realistically as possible. Here are three budget-related errors commonly made by small businesses, and some tips for avoiding them. These errors tend to throw budget estimates out of line with reality, thereby taking away from a budget’s usefulness.
- Not Setting Goals. It’s almost impossible to set spending priorities without clear goals for the coming year. It’s important to know, in detail, what you want or need to achieve in your business.
- Cost Underestimation. Every business has ancillary or incidental costs that often don’t get budgeted. For example, each time you buy a new piece of equipment or software, you must budget for staff training and for maintenance of the equipment, as well as the actual cost of the equipment.
- Lack of Flexibility. Don’t be afraid to update your forecasted expenditures either several times per year or whenever new circumstances affect your business. Compare estimates to what you actually pay out, and then adjust your budget figures.
We can help you set up and maintain a budget. Call our office to discuss.
Small Business Jobs Act – A Look at the Benefits
On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 into law – a $42 billion bill in tax cuts, increased loans, and other measures. The bill is designed to prop up small businesses so they can create more jobs.
Many of the Act’s provisions have already kicked in – which means it’s time to learn how they benefit you.
More Loan Money Available
The main focus of the Small Business Jobs Act is to help small businesses get loans. Here are the three major ways the Act makes loan money available to small business owners.
SBA Recovery Loans. The American Recovery and Reinvestment Act of 2009 (the Recovery Act) was last year’s attempt by Congress to aid struggling small businesses. The Jobs Act of 2010 extends some of the Recovery money. With the passage of the Jobs Act, the Small Business Administration began funding new Recovery loans within a few days of the president’s signature.
7(a) and 504 Loans. These are the two largest SBA loan programs, and under the Jobs Act, they got a huge boost.
The bill increased the maximum 7(a) and 504 loans from $2 million to $5 million, and the maximum 504 manufacturing-related loan from $4 million to $5.5 million.
Increased Capital to Community Banks. The Jobs Act established a $30 billion fund, run by the Treasury Department, that extends ultra-cheap capital to community banks with incentives to lend to small businesses. This means higher loans – with better guarantees – are now available at your local bank.
Tip: Now is an excellent time to explore your borrowing options – whether it’s through a national organization like the Small Business Administration or your hometown lending institution.
Don’t miss out on the chance to use some of this capital for your business. Give us a call to talk over your needs.
Tax Cuts, Credits, and Breaks
The Small Business Jobs Act includes $12 billion in tax incentives. Take a look at the top six:
- The elimination of capital gains tax on certain small business investments if they’re held for five years.
- Higher limits on the amount of investments small business owners can write off for 2010 and 2011.
- The extension of a Recovery Act provision that allows for a 50% bonus depreciation. This means small businesses can deduct capital expenditures on certain investments.
- The ability to deduct all of your health insurance payments for you and your family when figuring your self-employment tax.
- An increase in the amount entrepreneurs can deduct for start-up expenses for this year.
- The ability to offset tax liabilities for five years by carrying back general business credits.
Less Red Tape
Some of the Act’s benefits reside in reduced paperwork and clearer regulations, which allow you to take advantage of tax breaks much more easily.
Deduct Your Cell Phone Simply. Previous policies required lots of documentation to deduct charges from an employer-provided cell phone. With onerous and confusing paperwork, you had to prove you used the mobile device for business purposes more than 50% of the time.
The Small Business Jobs Act addresses this headache. The legislation removes cell phones from the Internal Revenue Code’s definition of “listed property.”
What does this mean for the small business owner? It’s now much less complicated to deduct the use of your mobile phone on your taxes.
Tip: Other telecommunications devices have also been removed from “listed property,” including Blackberries and PDAs.
Limited Penalties. The bill limits the penalty for failing to report a transaction that the IRS has formally identified as an abusive tax shelter. The penalty is set at 75% of the tax benefit and capped at $200,000 for corporations and $100,000 for individuals.
Questions?
Do you have questions about how to take advantage of the Jobs Act’s provisions? Make an appointment to meet with us. We’re eager to help you claim the capital you need for your business.
Small Business Jobs Act – A Look at the Benefits
On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 into law – a $42 billion bill in tax cuts, increased loans, and other measures. The bill is designed to prop up small businesses so they can create more jobs.
Many of the Act’s provisions have already kicked in – which means it’s time to learn how they benefit you.
More Loan Money Available
The main focus of the Small Business Jobs Act is to help small businesses get loans. Here are the three major ways the Act makes loan money available to small business owners.
SBA Recovery Loans. The American Recovery and Reinvestment Act of 2009 (the Recovery Act) was last year’s attempt by Congress to aid struggling small businesses. The Jobs Act of 2010 extends some of the Recovery money. With the passage of the Jobs Act, the Small Business Administration began funding new Recovery loans within a few days of the president’s signature.
7(a) and 504 Loans. These are the two largest SBA loan programs, and under the Jobs Act, they got a huge boost.
The bill increased the maximum 7(a) and 504 loans from $2 million to $5 million, and the maximum 504 manufacturing-related loan from $4 million to $5.5 million.
Increased Capital to Community Banks. The Jobs Act established a $30 billion fund, run by the Treasury Department, that extends ultra-cheap capital to community banks with incentives to lend to small businesses. This means higher loans – with better guarantees – are now available at your local bank.
Tip: Now is an excellent time to explore your borrowing options – whether it’s through a national organization like the Small Business Administration or your hometown lending institution.
Don’t miss out on the chance to use some of this capital for your business. Give us a call to talk over your needs.
Tax Cuts, Credits, and Breaks
The Small Business Jobs Act includes $12 billion in tax incentives. Take a look at the top six:
- The elimination of capital gains tax on certain small business investments if they’re held for five years.
- Higher limits on the amount of investments small business owners can write off for 2010 and 2011.
- The extension of a Recovery Act provision that allows for a 50% bonus depreciation. This means small businesses can deduct capital expenditures on certain investments.
- The ability to deduct all of your health insurance payments for you and your family when figuring your self-employment tax.
- An increase in the amount entrepreneurs can deduct for start-up expenses for this year.
- The ability to offset tax liabilities for five years by carrying back general business credits.
Less Red Tape
Some of the Act’s benefits reside in reduced paperwork and clearer regulations, which allow you to take advantage of tax breaks much more easily.
Deduct Your Cell Phone Simply. Previous policies required lots of documentation to deduct charges from an employer-provided cell phone. With onerous and confusing paperwork, you had to prove you used the mobile device for business purposes more than 50% of the time.
The Small Business Jobs Act addresses this headache. The legislation removes cell phones from the Internal Revenue Code’s definition of “listed property.”
What does this mean for the small business owner? It’s now much less complicated to deduct the use of your mobile phone on your taxes.
Tip: Other telecommunications devices have also been removed from “listed property,” including Blackberries and PDAs.
Limited Penalties. The bill limits the penalty for failing to report a transaction that the IRS has formally identified as an abusive tax shelter. The penalty is set at 75% of the tax benefit and capped at $200,000 for corporations and $100,000 for individuals.
Questions?
Do you have questions about how to take advantage of the Jobs Act’s provisions? Contact me. I’ll help you claim the capital you need for your business.
Why have I been writing about Non tax stuff?
Okay, that is becoming a big question almost to the point of being annoying. I am no longer avoiding the question. Please stop filling my inbox and comments with this question, here is the answer:
In the Quote box below is a copy of a notice I received from NATP, National Association of Tax Professionals.
IRS Agents Requesting Electronic Copy of QuickBooks Records
NATP has learned that IRS agents are being instructed to obtain a copy of the taxpayer’s database for examinations for any taxpayer who uses QuickBooks. This will not be done in all examinations, only for those that the IRS agent deems necessary based on the judgment of the agent. If the taxpayer refuses to provide the database and the revenue agent (RA) or manager determines it is necessary, a Summons to obtain the information would be issued. The agents would look at only the information for the year under audit unless they decided to expand the examination to prior years, then information for those years would be reviewed.
The IRS has purchased 1,500 to 2,000 licenses from Intuit and will have one agent trained and licensed per group to assist others in the examination of taxpayers who use QuickBooks. You may not have heard of this yet, but as the software finds its way into RA groups and more agents are trained in its use, we could definitely be seeing a trend in the way exams are conducted since so many small businesses use QuickBooks.
So, in my Small Business client base, I have a lot of clients who use QuickBooks. The information is becoming more relevant to their tax situation seeing how the IRS is now getting these records.
If you have been cheating in QuickBooks, I suggest you make the corrections, now. As I said in my post Mistakes made in QuickBooks, QuickBooks is easy, thus making it user friendly, but being so easy makes it dangerous if you have no formal accounting education. And no I am not saying you need an accounting degree, but if you don’t understand basic bookkeeping, then you could really mess up your books in QuickBooks. And if you are “fudging” your numbers in QuickBooks, well now the IRS will be able to see this and then what? You could owe more in taxes to the IRS. There’s more I think on that, but my peers already think I am a bit out there, so I’ll just leave it at that.
Please if you are using QuickBooks, get your records straight, get your “books” looked at regularly by a professional.
Even better yet, when you find a Tax Professional ask them if they are able to review your QuickBooks files.
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