Small business owners have a lot on their plates, making it easy for them to fall prey to tax myths and misconceptions. But this can lead to costly mistakes and lost opportunities, so today, we’ll debunk some of the biggest tax myths small business owners face. And, of course, you’ll get the inside track on how to deal with these myths. Let’s go!
There’s no need to worry about taxes until tax season
Taxes are relevant year-round, and waiting until tax season to start thinking about them sells your business short. So, get with your CPA to develop a sound business tax strategy that helps avoid missed deductions, rushed decisions, and financial penalties.
Part of any good strategy requires regular financial record reviews. That way, you can be ready to consult with your tax professional to make informed decisions and potentially reduce your tax liability.
It’s okay to write off personal expenses as business expenses
This myth often raises its ugly head among new entrepreneurs with a home office or vehicle they use for personal and business use. There are deep dives that can help with this problem, but the bottom line is that mixing personal and business will create headaches for you.
The IRS watches these types of deductions. Done incorrectly, they can lead to audits, penalties, and even legal consequences. The best way to avoid this fate is to keep clear records of your business expenses and maintain a separate bank account and credit card for your business transactions. And when in doubt, consult a tax professional.
Small businesses don’t get audited
Yes, they do. Business size doesn’t matter to the IRS.
The good news is only about 1-2% of all businesses get audited every year.
The bad news is that doing things that trigger an IRS audit increases your chances significantly. Some things are hard to avoid, like if you deal in a cash-based business.
Still, a good business tax strategy, maintaining good financial records, and getting a CPA to adhere to tax regulations can help. Even if you do get audited, you’ll be more prepared.
Professional tax help isn’t necessary for a small business
Okay, so this one isn’t really a myth. The truth is business owners can do their own taxes, but they must keep up to date with complex and dynamic tax laws to avoid running afoul of the IRS and still take full advantage of deductions and credits. The reality is that the opportunity costs for most small business owners are too high. They’d be better off running their business and using a tax professional as a strategic partner.
Paying taxes can be delayed indefinitely by reinvesting profits
This myth revolves around the belief that reinvesting all profits back into the business can indefinitely postpone tax payments. But Ben Franklin was right: taxes are a certainty in life.
While reinvesting in your business can help you grow and offset some of your tax liability, you should still set aside a portion of your earnings for future tax obligations. Doing so will ensure you are not strapped for cash when the tax bill finally does arrive.
The bottom line
Business taxes are hard to keep up with. The worst thing you can do is operate on hearsay or preconceived notions of how they work. Stay up to date on financial records and meeting regularly with a tax professional or trusted mentor to ensure you are getting the best advice possible for the unique needs of your business.