Tax Planning, Myths, & Conjecture

Author: Keith Huggett

Year after year changes occur to our tax code, making it more complex and often incomprehensible to most people.  Sadly, an auditor will not accept the excuse of ignorance as a viable defense against penalties, interest, and/or additional taxes.  While your goal, and that of your qualified tax professional, is to save as much as possible, it gets more difficult to do so every year.

Consulting a professional tax preparer can benefit you in several ways.  Not only are you able to get your taxes prepared, you also have the opportunity to invest in tax planning, outsourced back office support systems, and possibly CFO or other business services.  The qualified tax professional has years of experience with tax preparation, attends many different tax seminars each year, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code.

Taking an active roll in your tax planning can often provide new insights into the complexity of our tax code and how it can be used strategically for your benefit.  However, the tax code and its myriad changes from year to year can often generate a lot of folklore and misinformation that also leads to costly mistakes.  Here are 5 common business tax misconceptions:

1. All Start-Up Costs Are Immediately Deductible
   
   Business start-up costs refer to expenses incurred before you actually begin operating your business. Business start-up costs include both start up and organizational costs and vary depending on the type of business.
   
   Starting in tax year 2011, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized.
2. Overpayment of Taxes Will Lower Your Chance of Audit
   The IRS doesn't care if you overpay your taxes. They are only interested in you if underpay your taxes. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to lower your chance of being audited is to properly document your expenses and make sure you are getting good advice from your tax accountant.
3. Your Business Structure Can Allow Additional Deductions
   Self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do. Choosing the right business structure has more applications than just affecting your tax deductions.  Choosing the wrong structure can be a costly expense.
4. Taking the Home Office Deduction will Result in Audit
   As long as you keep excellent records that satisfy IRS requirements, audit is not an automatic result from claiming the home office deduction. Due to the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. There are always other red flags to be concerned about which may lead to an audit.
   
   
5. Filing for an Extension Grants an Extention to Pay
   Extensions enable you to extend your filing date only.  If you do not pay your taxes on time, you will be assessed penalties and interest from the date your taxes are due.

A tax headache is only one mistake away, whether it's a missed payment or filing deadline, an improperly claimed deduction, or incomplete records and gaining understanding how the tax system works is beneficial to any business owner, whether you run a small to medium sized business or are a sole proprietor. Working with a professional tax consultant can catch these errors and many more.  Don't get caught unaware, prepare now. The tax planning professionals at The Tax Office, Inc., can assist you with any tax questions that you may have. Contact us today.