6 Small Business Tax Myths
It’s tax season again, and for small business owners, that means that in addition to running your business, you’ll need to make sure everything is in order to stay on top of your tax obligations to federal, state, and local agencies. To be compliant with tax laws, many business owners overpay their taxes due to misinformation. It’s easy to understand how it happens; the tax code is complicated, and it’s difficult to keep up with the changes each year. Lack of information, misinformation, and folklore regarding tax planning and strategies can lead to costly mistakes on your return that may affect your bottom line. With that in mind, here some common small business tax myths that once debunked may have you rethinking your business tax planning.
Becoming An LLC Means You Will No Longer Pay Self-Employment Taxes
You have taken a crucial step in protecting your business by becoming a limited liability company, but additional action is required to reduce your self-employment taxes. Why is this? Well, the LLC designation is not a tax filing status with the IRS; it’s a legal entity managed by the state where it is set up. The good news is that there are several tax designations that an LLC can choose from. You can file as an S-corporation, a C-corporation, or a partnership if you have more than one member. The default filing status for a single-member LLC is a sole proprietorship.
If you choose to file your tax return as either a sole proprietorship or a partnership, you will continue to pay self-employment tax on the entire net income you earn from the business. However, if you choose S-corporation status, you have the option to pay yourself a salary. In the S-corporation scenario, you pay yourself a reasonable salary and pay self-employment tax only on the salary. The remaining net income is not subject to self-employment tax.
If your business makes more than $20,000 in profits and is a service business, you are an excellent candidate for an S-corporation. If your company is not service based, you may still be a good candidate for an S-corporation, but you’ll want to discuss it with your tax advisor.
To learn more about advantages of converting your business to an S-corporation click here…
Having An Accountant Prepare Your Tax Returns Means You Will Receive Tax Planning Advice
When your accountant prepares your tax return once a year, you’re often not getting any tax planning advice. Your accountant uses the information you provide and transfers this data to a tax return. In this situation, you likely only receive reactive tax planning advice after you have already filed the prior year’s tax return.
Tax planning goes beyond simply preparing a return once a year. Tax planning utilizes principals found in the Internal Revenue Code. Which provides strategic tax planning services that help small business owners increase their profit by reducing taxes.
Most small business owners understand that having a professional prepare and review their taxes is essential for accuracy. To lower personal taxes and increase profits you’ll want to invest in tax planning as well.
To review Halon’s professional tax preparation and tax planning services click here…
Requesting An Extension To File Your Taxes Is An Extension To Pay Taxes
An extension to file your tax return is not an extension to pay your taxes. Even if you have requested an extension, you are still required to pay your taxes by April 15th. Penalties and interest begin accruing from the date your taxes are due.
If you’re uncertain whether you will owe taxes, a tax professional can assist you in estimating your tax due. They will also help to determine if payment should be made with the application for extension.
Overpaying The IRS Makes You “Audit Proof”
The IRS does not care if you overpay your taxes. Overpaying your taxes has no effect on the outcome of an audit and also has no bearing on whether you will be selected for an audit.
The IRS does care if you underpay your taxes and you’re unable to substantiate the expenses you have claimed. To “audit proof” yourself and your business, you need to properly document your expenses and make sure that you are receiving good tax advice.
You should never intentionally overpay or underpay the IRS. Instead, focus on effective tax planning strategies that can lower your tax bill year after year.
A Home Office Deduction Is A Red Flag For An Audit
There may have been a time when the home office deduction did trigger an audit. These days working from or operating a business from home is much more common. The deduction no longer creates an audit red flag when the IRS rules for the deduction are followed. Following the IRS rules means the office space must be used exclusively for business purposes. It must also be the principal place of business or a place where you regularly meet with customers or clients.
Part-Time Business Owners Cannot Set Up Retirement Plans
If you own a small business and also have a full-time salaried position with a 401K plan, you can still set up a SEP-IRA for your small business and take a deduction for the contributions to the SEP-IRA.
A simplified employee pension individual retirement account (SEP-IRA) is a simple tax-deferred retirement plan for self-employed individuals or small business owners. A SEP-IRA is an IRA that follows the same investment, distribution, and rollover rules as traditional IRAs. Any business owner with one or more employees, or freelance income, can open a SEP IRA. With a SEP-IRA the business makes tax-free contributions to an individual retirement account. A SEP-IRA has higher contribution limits than a traditional IRA allowing a business owner to contribute more than would be possible with a traditional IRA. All while avoiding the cost of administering a more complex retirement plan.
To learn more about small business retirement plans click here…
Now that you know the real story behind these tax myths, it's time to get to work on filing your taxes. If you still have questions about anything small business tax related, our Halon Tax support team is here to help.