5 Epic Tax Myths That Confuse Small Business Owners
What are the “5 Epic Tax Myths that Confuse Small Business Owners”? My goal is to debunk a few of the tax myths making their rounds in the small business community, in an effort to save business owners both time and money.
Epic Tax Myth #1
There are magic deductions that small business owners do not know about
Sadly, there are no magic deductions that accountants and tax preparers know about. Everything that you spend on, or in, your business is a business expense, however, good recordkeeping is the key. We wrote about the importance of keeping your business finances separate from your personal finances before, and can’t stress that simple piece of advice enough. Paying for all of your business expenses from business accounts makes it much easier to track your business expenses.
Epic Tax Myth #2
I can write off all my car expenses because I use my car for business
If you use a vehicle exclusively for business, you may deduct the entire cost of operating that vehicle. Most small business owners use their your car for both business and personal purposes, so you may only deduct the costs associated with the business use.
Be warned! There are two methods for determining the auto deduction: the standard mileage rate method or the actual expense method. There are rules for each method, so do your research!
Epic Tax Myth #3
Putting advertising on my car automatically turns it into a company vehicle
There are many business owners who believe that if they turn their car into a mobile advertisement, every trip made in that car is a business expense, but that is not the case. The IRS says that even if your company logo is all over your car, the trips that you take in the car for personal purposes are still personal and cannot be deducted as a business write-off.
Epic Tax Myth #4
I can write off all of my business meals
Epic Tax Myth #4 is another one making its rounds. The current meals and entertainment deduction is limited to 50%. For bookkeeping, you record the expense in full on your books, and the adjustment is made on your tax return. It is also important that you keep track who you met with and the business purpose, this recordkeeping is easy to do with an accounting system like QuickBooks Online.
Epic Tax Myth #5
I can avoid paying payroll taxes by hiring people as contractors
We cannot stress this enough, please do not fall for this one of the ‘5 Epic Tax Myths’! The IRS penalties for misclassifying employees as independent contractors can be steep, so learn the rules regarding employees and independent contractors.
When trying to determine if someone is an independent contractor or an employee, the IRS looks at three things:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer?
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)?
Know the rules and follow them!
How to avoid falling for Epic Tax Myths
If you are unsure about a tax situation, do your research. Please talk to your tax preparer, but I always suggest that you go to the IRS site for yourself. Remember, filing your taxes is a once per year event, but how are you keeping track of your business expenses and your business health throughout the year?
Does “tax time” stress you out? If it does, make a promise to get your books in order now, so that next year is much easier and less stressful for you. If you are ready to see how you can simplify the backend of your business, schedule an appointment with C2 Accounting to talk. Let’s make sure that you are not falling for any other other ‘Epic Tax Myths’.