We are only two weeks from the April 15 filing deadline! And, believe it or not, around 20-25 percent of all tax-returns are filed during these final couple of weeks. With so many people still to file, I thought it'd be fun to look at some of the most commonly believed small business tax myths to find out if any of them hold water. And, hopefully in the process, I can help those of you still waiting to file from making any serious mistakes!
Myth #1: Home office deductions will get you audited
There is a grain of truth to this one, but claiming a home-office deduction will likely not, by itself, get you audited. Rather, home-office deductions can act as a red flag for two reasons. The first is that some less-than-scrupulous people use the deduction to claim a huge office -- like one that spans an entire floor of their house, instead of just one room. The second is that this deduction was, in the past, very difficult to calculate, so a lot of people made mistakes. Thankfully, there is now a simpler way to claim a home-office deduction. So as long as you're honest about the space you use to work, you shouldn't worry too much about this one.
Myth #2: You have to file your returns by April 15th
You definitely should abide by all the deadlines set by the IRS, but it is possible to get an extension on filing your returns. Individuals can file form 4868, and Corporations can file Form 7004, if either needs some more time to properly prepare their returns. So if you're feeling the pinch and are worried you won't be able to get as much out of your return as you may deserve, there are options available. However, remember that this is a filing extension -- you still need to have paid at least 90 percent of your estimated tax burden, or you'll be assessed late payment fees.
Myth #3: Only bigger businesses can qualify for healthcare tax credits
This one typically comes from the confusion about which businesses are required to provide healthcare for their employees. Most businesses with fewer than 50 employees -- which amounts to about 96 percent of U.S. companies -- don't have to concern themselves much with the Affordable Care Act. However, if you run a small business and still offer health benefits to your staff, you may qualify for tax credits. For example, companies with fewer than 25 employees that meet a few simple restrictions can claim a Small Business Health Care Tax Credit. If you think you may qualify, make sure to talk to your accountant or other professional about what credits the government offers.
Myth #4: There is no difference between a hobby and a side-business
While you may consider your side-business a hobby, or vice-versa, the IRS has strict definitions as to what qualifies for as each. Basically it boils down to whether or not you're making money. Business losses can be used to lower your total tax bill, but if your side-business has never made any money, the IRS may step in and say it's a hobby; something not engaged in for profit. You then have to be able to prove that you're either going to turn it into something profitable, or that you made some profit in at least three of five consecutive years.
Myth #5: A big refund means you perfectly planned out your finances
A big, fat refund may seem like a tantalizing reward for all of your hard work, but if it's too big, it may be a sign that you aren't correctly estimating your taxes. And that could be a symptom of wider financial problems. When you overpay your taxes, you're effectively giving the IRS a free, yearlong loan. You probably would've been much better off had you re-invested that money in your business, or at the very least put it in a savings account. It's certainly better to have money coming than to owe the IRS anything, but if they are sending a sizable amount back, you should review your finances and get everything in order.
Taxes can be difficult -- the U.S. tax code is notoriously complex, and people dedicate their entire professional lives to unraveling it. The best thing you can do is to take your time, be honest, and do your research. That way you won't be hung up by these sorts of myths, and you'll be able to file your returns confidently and on time.