Debunking common small business tax myths
6 min read
June 13, 2023 • Block Advisors
As an aspiring entrepreneur or small business owner, understanding the complexities of taxes is crucial for your financial success. However, navigating the world of small business taxes can be daunting, especially with the abundance of tax myths and misinformation floating around.
Taxes are an inevitable part of running a business and failing to comprehend the intricacies can result in financial penalties, legal issues, and unnecessary stress. By gaining a clear understanding of small business taxes, you can ensure compliance with tax laws, make informed financial decisions, and optimize your tax planning strategies. Another way to put your mind at ease is to get small business tax help from a trustworthy expert, such as a Block Advisors Small Business-certified tax pro.
Today, we’ll shed light on a few common misconceptions and debunk several tax myths that can potentially lead to costly mistakes. By dispelling these myths, we aim to empower you better understand the tax landscape. It is essential to separate fact from fiction and equip yourself with the tools needed to make informed decisions that will protect your business’s financial health and ensure compliance with tax laws.
Whether you are a seasoned entrepreneur looking for a quick refresh of your knowledge or a novice starting your first venture, this article will serve as a valuable resource. Now, let’s delve into the world of small business tax myths and get to debunking!
Don’t let tax myths trip you up
We can help you sort fact from fiction
1) Tax Myth: Home office deductions are an IRS audit red flag.
Myth busted! Claiming a home office deduction isn’t an automatic IRS audit red flag. It doesn’t magically put you on their radar. What may be an IRS audit red flag and get their attention is taking a deduction that is abnormal for the type of business you are conducting. Claiming 90% of your 900-square-foot studio apartment as a home office deduction may look a little fishy, for example. One way to avoid problems is to use the simplified method when determining your deduction for the year.
2) Tax Myth: Taking courses to grow my skills as a business owner doesn’t count toward a tax credit.
Myth busted! Expenses incurred to educate yourself and improve your current business can generally be deducted as a business expense. This includes books, online courses, conferences, and coaches. As long as your efforts aim to improve your skills in your current business, you’re probably in the clear!
3) Tax Myth: Structuring my business as an LLC (limited liability company) will make my taxes more expensive.
Myth busted! Forming an LLC does not affect the cost of your taxes because the IRS does not recognize LLC as a tax classification. Rather, your business will continue to be taxed in the same way as it was before forming the LLC unless you elect otherwise. What forming an LLC will do is potentially reduce or even eliminate your personal responsibility for business liabilities and debts.
4) Tax Myth: Business start-up costs are fully deductible.
Myth busted! Many small business owners think that all their start-up costs are immediately deductible, but, in reality, the amount will be limited. Generally, a small business can deduct up to $5,000 of start-up costs in its first year of operation. Any remaining costs are deducted over a 180-month period. If you’re still unsure, consider reaching out for small business tax help from a Block Advisors tax professional. They can confirm the amount of start-up costs you can deduct now and in the future, and assist you with other tax questions.
5) Tax Myth: Filing an extension gives you an extra 6 months to pay your taxes on your business.
Myth busted! This is wrong. If a small business owner can’t file their return by the due date, a business tax extension will only give them additional time to file. The extension does not give them additional time to pay. In fact, if the owner doesn’t pay the tax owed by their return due date, they will be subject to penalties and interest on the balance due. Yikes! Learn what to do if you can’t pay your business taxes.
6) Tax Myth: I can’t deduct business travel expenses.
Myth busted! This is a very common tax question. Many people are aware that business mileage and auto expenses are popular small business tax deductions. But you can also deduct many of the costs you incur while on the road for work as business travel expenses. This includes taxi fares, airline tickets, hotel costs, and luggage fees. Read about deducting business travel and other related expenses.
7) Tax Myth: I can’t claim the money I spend on advertising, marketing, or my website.
Myth busted! There are a number of expenses you can claim when marketing yourself. Some of these include social media ads, traditional print ads, sponsorships, domain costs, or monthly subscriptions to sites like Squarespace, WordPress, or Shopify. Just remember to document any expenses you claim in case you need to reference them later to avoid making a bookkeeping mistake.
8) Tax Myth: I only need to file my taxes when I file my annual income tax return.
Myth busted! If you made a net profit of $400 or more from your side hustle, you have to pay self-employment taxes. Many small business owners will need to make quarterly estimated tax payments to avoid penalties and interest. In fact, there are many tax deadlines on the calendar you may want to keep in mind.
Together, we’ve debunked eight common small business tax myths. Congratulations on empowering yourself with information to navigate the complex world of small business taxes. By understanding the truth behind the misconceptions above, you can avoid costly mistakes, ensure compliance with tax regulations, and optimize your small business financial planning.
Need small business tax help for your unique situation?
If you still have small business tax questions, don’t worry! The expertise and personalized guidance of a Block Advisors Small Business-certified tax pro can provide you with peace of mind and help you make informed decisions regarding your small business taxes. Reach out to schedule an appointment to chat.
The world of taxes is constantly evolving. It’s wise to stay informed, keep accurate records, and seek professional guidance when necessary. With your newfound knowledge, you’re on your way to achieving financial success and ensuring the long-term growth of your small business. So go out there, tackle your taxes with confidence, and watch your business thrive!