We have talked about setting up the right entity for your business to save you money in tax each year. There are several myths about tax for your businesses that are out there. I talked with a couple of friends of mine that are tax professionals and discussed the most common tax myths that exist for small business owners.
Myth 1. I can write off all of my expenses for my business from equipment to entertainment.
Reality: When it comes to equipment that you buy, you may not realize the full write off for several years depending upon if the asset is depreciable or not. As for entertainment, only 50% of your entertainment expense if able to be deducted and then still there needs to be a clear agenda for your business lunch. A lunch where you happen to mention your business for a minute in passing doe not make that a “business lunch”. My advice on this is to be careful.
Myth 2: If my office is at my home, I can write off my housing expenses as a result.
Reality: A great rule of thumb here was told to me in breaking this down. The question to ask is, would the expense still exist even if the business did not. For example your mortgage, you would still have the mortgage even if you didn’t start the business.
Myth 3: I can prepare my own taxes or my friend/family member say they can handle it.
Reality: One of my tenants is to live Soul Purpose. In living Soul Purpose, you do the things that you are good at then find like minded people to fill in the gaps. While this doesn’t mean that you are will never do things you don’t like or that you are not strong in, I feel that tax is one such topic that you should employ a professional who lives and breathes the stuff to do your tax preparation. Don’t cut corners. I know it’s cheaper to do it yourself or have a friend/family member do it. I like to choose hard/easy over easy/hard in these situations. Let’s say you are audited. How much confidence are you going to have in yourself and the knowledge of tax law? A tax professional knows these things and can aid you in the audit process. Paying someone to do your taxes initially is harder on your bank account but much easier if problems arise later.
Myth 4:Â If I get audited, I should prepare for hell.
Reality: This was actually a new one to me. Apparently the audit process isn’t what it once was and the IRS has made changes in the way these are handled. The tax professionals that I talked to say that this has become a much simpler and less invasive process. They do caution that just because an auditor says something is wrong with your tax return doesn’t mean that it is true. Auditors for the IRS aren’t necessarily tax professionals in their own right so don’t take everything that is said at face value without consulting your own professional during this process.
So here are a few myths to overcome during this tax season. This is a great time to evaluate who you have on your team to help you with these things. I am curious as to what other myths regarding tax that you have run across or if you have any additional points to add to the 4 myths of business tax discussed above?
PS I am adding a bonus podcast this week. I had a chance to sit down with Chris Anderson who is a tax professional. His firm is called Soulence (www.soulence.com). We discuss entity structures in a little more depth. I know this is bonus coverage and everyone is excited. Please try to contain your excitement as much as possible.