Myths about your small business tax return can leave you feeling stressed out about your accounting program and tax responsibilities. Sure, filing taxes can be scary, especially if you’re filing small business taxes for the first time. But don’t be too quick to panic over tax return horror stories. You might find out that your concerns stem from an IRS urban legend, and learning how to file federal income taxes for small businesses isn’t the beast you thought it would be.
We are here to squash the tax return rumors, so you can stop worrying about your return and get back to running your business. Here are five small business tax return myths to stop stressing over:
Myth 1: Home office deductions are red flags for an IRS audit
The idea that the home office tax deduction triggers an IRS audit has been around for quite a while. Some home-based business owners shy away from this deduction because before computers were a large part of managing a company, fewer people worked from home. The deduction stood out to the IRS.
Now, in the digital age, home offices are more popular. The commonality of businesses run from a home has reduced IRS suspicions about the home office deduction.
Usually, you won’t be audited for claiming a home deduction office. Red flags begin to raise when you claim a huge amount of space, or your entire home, as your office. In recent years, the IRS created a simple option to claim the home office deduction.
Myth 2: You can deduct all startup costs immediately
Startup costs incur while you are creating your business. Common expenses might include rent, equipment, and licenses, but there can be hidden costs of running a business as well. There is a common misconception that you can deduct every expense you incur when you start a business right away. Unfortunately, that’s not the case.
The IRS limits the startup costs you can claim on your tax return. You can deduct up to $5,000 of startup costs and organizational costs. If the total cost is more than $50,000, your deduction is reduced. Any remaining costs must be amortized.
Myth 3: A tax extension means you can push back tax payments
The IRS permits tax extensions on the day you file taxes, not the day you pay them. You are subject to penalties and interest if you don’t pay your taxes on time.
If you need extra time for filing your taxes, take advantage of extensions so you don’t miss any credits for your refund. Individuals (e.g., sole proprietors) file for extensions with Form 4868 and corporations file with Form 7004.
Myth 4: Only large businesses can get health care tax credits
Large businesses must offer health coverage under the Affordable Care Act (ACA). Sometimes, large businesses opt for employer-sponsored health care, which is tax exempt.
Employer-sponsored health care is often not an option for small business owners because of the cost. The ACA also does not require you to offer health coverage if you have fewer than 50 employees.
But if you do offer healthcare to your employees, you may qualify for the Small Business Health Care Tax Credit. You must offer coverage through the SHOP Marketplace and:
- have fewer than 25 full-time equivalent employees
- pay average salaries under $50,000 per year
- pay at least 50% of employee premium costs
The credit is worth up to 50% of your payments on employee premiums (and up to 35% if you are tax exempt).
Myth 5: A big tax refund is always a sigh of relief
When you receive a giant refund check in the mail, all that money might feel like a reward for your hard work.
But, an unusually large tax refund could be a sign that you are not estimating your taxes correctly. When you overpay taxes, it’s like lending interest-free money to the government all year. You could have invested that money into your business. Your accounting for income tax refund money may need refined.
Your small business tax return
Like the figures of most urban legends, you probably will not experience these tax return myths first-hand.
For your tax return, the real concern is simply to get your taxes filed correctly. Focus on organizing your financial statements, accurately filling out tax forms, and making on-time payments.
Talk to a tax professional to help you with your small business taxes. You can help your accountant maximize your tax refund by keeping accurate, detailed financial records.
Do you need a simple way to keep your income and expenses in order for tax filing? Use our small business accounting software to record all your transactions. Get a free trial today!