Misrepresentations to Small Home-Based Businesses That Are Causing Millions to Overpay Their Taxes!
Misconception #1: My professional tax preparer knows everything about taxes so I don't have to.
Truth: It is impossible for anyone to know ALL the tax rules. Updates to CPA's/Accountants and Tax Preparers usually only include laws that pertain to PERSONAL income taxes.
Thousands of excellent tax professionals are doing a good job and maybe yours is looking for ways to reduce your taxes. But the greatest majority only prepare your tax return. They know how to fill out the forms with their eyes closed.
A good tax preparer is not trained in tax reduction strategies. The only way you are assured to get the tax deductions you are entitled to, as a Home-Based Business Owner, is to become informed yourself.
Untruth #2: Home based business expenses can only be used if you "itemize" your return.
Truth: All taxpayers have the opportunity to itemize if it is to their advantage. Whether you "itemize" or not has NO bearing on your Business. When you "itemize" your income tax you file Form A&B and take such things as medical, home mortgage interest etc. You will only "itemize" if the total of Form A is over the standard deduction (for 2008 taxes$5,450 single, $10,900 married).
Misconception #3: There is no advantage to filing business tax forms if you are not making a profit.
Truth: You should file a business tax especially if you are not making a profit. Home business expenses can be offset by income from your job. This reduces your taxable income which in turn reduces your tax liability.
Untruth #4: I work a full time job so my home based business is just a hobby.
Truth: The rules clearly state you have a business if you meet 8 rules. Four of the most important rules to meet are:
1. The knowledge of the taxpayer or his/her advisers. If you are developing a home-based business and actively learning and applying business principals to your business...you qualify.
2. The time and effort you put into 'running your business'. The United States Federal Tax Court has ruled that 45 minutes a day, 4 to 5 days a week qualifies.
3. The manner in which the taxpayer carries on his business activity is scrutinized by the IRS. If you treat your business like a business by conducting your business mostly on the telephone, over the Internet and in-home presentations you qualify as a business.
4. Is the Primary Purpose of your activity to Produce a Profit, or to Produce Tax Write-offs You are not required to actually produce a profit in order to qualify for home-business tax deductions -- just to show that you have the intent to produce a profit.
If you are doing this then there is no reason for your business to be considered a "hobby".
Untruth #5: If you don't make a profit within 5 years you won't be considered a business and can't file home business taxes.
Truth: That's a generalization. Yes, the government would like to see you make a profit within 5 years but you are not penalized for not doing so. If you are following the above 4 rules and conducting yourself as a business you have nothing to worry about. You are a business and some businesses are not profitable for a number of years.
Untruth #6: Learning tax reduction strategies is complicated and hard to understand.
Truth: Learning tax reduction strategies is not hard for the average person. There are good books written for the average business owner to learn what is available to them
Misconception #7: Tax documentation and accounting are not for a home business is not for the average person.
Truth: All Small Business Owners can easily keep their own books using any one of a number of software programs. It is not necessary to have an accountant. You will need to be able to "categorize" and record expenses and sales. - 20765
Misconception #1: My professional tax preparer knows everything about taxes so I don't have to.
Truth: It is impossible for anyone to know ALL the tax rules. Updates to CPA's/Accountants and Tax Preparers usually only include laws that pertain to PERSONAL income taxes.
Thousands of excellent tax professionals are doing a good job and maybe yours is looking for ways to reduce your taxes. But the greatest majority only prepare your tax return. They know how to fill out the forms with their eyes closed.
A good tax preparer is not trained in tax reduction strategies. The only way you are assured to get the tax deductions you are entitled to, as a Home-Based Business Owner, is to become informed yourself.
Untruth #2: Home based business expenses can only be used if you "itemize" your return.
Truth: All taxpayers have the opportunity to itemize if it is to their advantage. Whether you "itemize" or not has NO bearing on your Business. When you "itemize" your income tax you file Form A&B and take such things as medical, home mortgage interest etc. You will only "itemize" if the total of Form A is over the standard deduction (for 2008 taxes$5,450 single, $10,900 married).
Misconception #3: There is no advantage to filing business tax forms if you are not making a profit.
Truth: You should file a business tax especially if you are not making a profit. Home business expenses can be offset by income from your job. This reduces your taxable income which in turn reduces your tax liability.
Untruth #4: I work a full time job so my home based business is just a hobby.
Truth: The rules clearly state you have a business if you meet 8 rules. Four of the most important rules to meet are:
1. The knowledge of the taxpayer or his/her advisers. If you are developing a home-based business and actively learning and applying business principals to your business...you qualify.
2. The time and effort you put into 'running your business'. The United States Federal Tax Court has ruled that 45 minutes a day, 4 to 5 days a week qualifies.
3. The manner in which the taxpayer carries on his business activity is scrutinized by the IRS. If you treat your business like a business by conducting your business mostly on the telephone, over the Internet and in-home presentations you qualify as a business.
4. Is the Primary Purpose of your activity to Produce a Profit, or to Produce Tax Write-offs You are not required to actually produce a profit in order to qualify for home-business tax deductions -- just to show that you have the intent to produce a profit.
If you are doing this then there is no reason for your business to be considered a "hobby".
Untruth #5: If you don't make a profit within 5 years you won't be considered a business and can't file home business taxes.
Truth: That's a generalization. Yes, the government would like to see you make a profit within 5 years but you are not penalized for not doing so. If you are following the above 4 rules and conducting yourself as a business you have nothing to worry about. You are a business and some businesses are not profitable for a number of years.
Untruth #6: Learning tax reduction strategies is complicated and hard to understand.
Truth: Learning tax reduction strategies is not hard for the average person. There are good books written for the average business owner to learn what is available to them
Misconception #7: Tax documentation and accounting are not for a home business is not for the average person.
Truth: All Small Business Owners can easily keep their own books using any one of a number of software programs. It is not necessary to have an accountant. You will need to be able to "categorize" and record expenses and sales. - 20765
About the Author:
Karin Russell has owned a small business specializing in tax preparation for home based businesses for 36 years. Her blog:Home Business Owners-Reap the Rewardsgives more tax saving hints for home business owners. She highly recommends the book 'It's How Much You KEEP, That Counts! Not how much you Make'for all her clients.
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