No one likes taxes. Entrepreneurs are especially wary of having the government dip into their hard-earned stash. But, because profitable companies can’t avoid them, it’s best to know how to navigate the wacky and wild world of corporate and business taxes.
Sure, you’ve likely had a little experience. But the reality is, f you’re not a tax expert, tax season can be a stressful time. Perhaps the following will help paint a clearer picture of some traps associated with small business taxes.
Without further adieu, here are 10 misconceptions about business taxes you should avoid.
1. You can prepare your small business taxes without help.
Entrepreneurs are stubbornly independent (admit it). Many are wired to “wear many hats” and do things on their own. There are several areas where I have personal biases against going it alone. Tax and legal help top the list.
If you think doing business tax preparation on your own is going to save you time and money, think again. Many small business owners lack the detailed understanding required to prepare an effective business tax return. And if you don’t know what you are doing, it can cost you even more later on down the road, especially if Uncle Sam comes along looking for an audit.
2. Refunds are a good thing.
If you get a refund from the IRS, it means you overpaid.
If you’ve overpaid by a large sum, it means you’ve essentially given the government money interest free. Good deal for them, bad deal for you. While the government charges interest on unpaid taxes, they do not pay interest on overpaid taxes. It’s a bit of double-standard, but it’s just how the system works.
3. Receipts are the equivalent of a tax log.
If you fail to keep accurate records of tax-deductible activities such as miles, entertainment and other expenses, it could come back to bite you if you get audited. In other words, the cost of not doing it will be much greater than the small amount of time it takes to keep a journal of all your tax activities. Properly recorded tax activities also make it much easier for a preparer to get it right without playing guessing games.
4. It’s good to only have independent contractors.
Because independent contractors are less expensive, some small business owners falsely assume it’s okay to hire all employees as independent contractors.
Unfortunately, if they do not meet the qualifications of an independent contractor — many of which are very specific — you may be required to fork over additional unpaid taxes on them if you’re company is ever audited. It’s often best to research and abide by the rules associated with hiring independent contractors, otherwise, it could be a greater cost to you than you think.
5. Everything is deductible.
While considerations for deductibility can often be very loose, not everything is deductible. Small business owners are especially guilty of deducting too many personal expenses that have nothing to do with business. When it come to deductions, you don’t have to be modest or even conservative, but just know the rules so you don’t unintentionally cross the line.