Misrepresentations to Small Home-Based Businesses That Are Causing Millions to Overpay Their Taxes!
Myth #1: A Professional Tax Preparer knows all there is to know about taxes so you don't have to know anything about them.
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.
Your tax preparer does a good job filling out your taxes with the figures YOU provide. Most do now ask questions in search of further deductions to reduce your taxes. Only by becoming informed about home business tax laws will you be assured of taking every deduction allowed by law.
Misconception #2: You cannot deduct home based business expenses unless you "itemize".
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: There are many tax advantages to filing a home business tax return and especially so if you are not making a profit. If you work in addition to having a home-based business in is in your best interest to file a business tax return. Expenses incurred in your business can be taken against your job income thus reducing your taxable dollar, which decreases 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 United States Federal Tax Court has ruled that 45 minutes a day, 4 to 5 days a week qualifies the Time and Effort stipulation.
3. The Manner in Which the Taxpayer Carries On the Business Activity. This one is common sense. Do you conduct your business mostly on the telephone, over the Internet and in-home presentations (these are good), or mostly at the golf course, during lunches and at the pub (not so good). Just treat your business like a business.
4. If your primary objective is to produce a profit you qualify as a business. On the other hand if your primary objective is to produce tax write offs the IRS will frown on that. You don't have to actually yield a profit in order to qualify. Just show that you have the intent to profit.
If you meet those 4 criteria then there is no reason your business would be classified as a hobby.
Misconception #5: In order to file home business taxes you must make a profit within 5 years.
Truth: The government would LIKE you to show a profit within 5 years but there is no penalty if you do not. Follow the 4 stipulations above and conduct your home business as a business and there is nothing to worry about. You are a business and some businesses do not make a profit for a number of years.
Myth #6: Learning how to reduce you taxes is hard and complicated.
Truth: Once you learn what deductions are allowed you will know what figures your Tax Preparer/Accountant needs and you can configure your accounting accordingly.
Untruth #7: The home business owner should not attempt to do their own accounting and tax documentation.
Truth: Documentation for the government is very easy if you use a pocket calendar and keep your receipts. In just 5-10 minutes a day you can have records that will withstand any government scrutiny.
Myth #1: A Professional Tax Preparer knows all there is to know about taxes so you don't have to know anything about them.
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.
Your tax preparer does a good job filling out your taxes with the figures YOU provide. Most do now ask questions in search of further deductions to reduce your taxes. Only by becoming informed about home business tax laws will you be assured of taking every deduction allowed by law.
Misconception #2: You cannot deduct home based business expenses unless you "itemize".
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: There are many tax advantages to filing a home business tax return and especially so if you are not making a profit. If you work in addition to having a home-based business in is in your best interest to file a business tax return. Expenses incurred in your business can be taken against your job income thus reducing your taxable dollar, which decreases 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 United States Federal Tax Court has ruled that 45 minutes a day, 4 to 5 days a week qualifies the Time and Effort stipulation.
3. The Manner in Which the Taxpayer Carries On the Business Activity. This one is common sense. Do you conduct your business mostly on the telephone, over the Internet and in-home presentations (these are good), or mostly at the golf course, during lunches and at the pub (not so good). Just treat your business like a business.
4. If your primary objective is to produce a profit you qualify as a business. On the other hand if your primary objective is to produce tax write offs the IRS will frown on that. You don't have to actually yield a profit in order to qualify. Just show that you have the intent to profit.
If you meet those 4 criteria then there is no reason your business would be classified as a hobby.
Misconception #5: In order to file home business taxes you must make a profit within 5 years.
Truth: The government would LIKE you to show a profit within 5 years but there is no penalty if you do not. Follow the 4 stipulations above and conduct your home business as a business and there is nothing to worry about. You are a business and some businesses do not make a profit for a number of years.
Myth #6: Learning how to reduce you taxes is hard and complicated.
Truth: Once you learn what deductions are allowed you will know what figures your Tax Preparer/Accountant needs and you can configure your accounting accordingly.
Untruth #7: The home business owner should not attempt to do their own accounting and tax documentation.
Truth: Documentation for the government is very easy if you use a pocket calendar and keep your receipts. In just 5-10 minutes a day you can have records that will withstand any government scrutiny.
About the Author:
Karin Russell has owned a home business specializing in tax preparation for home based businesses for 36 years. Her blog:Home Business Owners-Reap the Rewardsextends more tax information 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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