Distortions and just plain falsehoods are being told about income taxes. Believing them could be costing thousands of tax dollars!
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: Tax Preparers/CPA's/Accountants are not uniformly informed about ALL tax laws. Most are able to file a personal income tax and know all the laws and how to apply them.
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.
Even excellent tax people are not trained in tax reduction strategies. As a home-business owner you should know what deductions you are allowed and present the figures to your tax preparer.
Untruth #2: Home based business expenses can only be used if you "itemize" your return.
Truth: Many people misunderstand the terminology here. 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). Some people call this filing "long form." All taxpayers have the opportunity to itemize if it is to their advantage. Whether you "itemize" or not has NO bearing on your Business.
Myth #3: You're not making a profit so there is no advantage to filing business income taxes.
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. Time and Effort the Taxpayer puts into running the business. How much time and effort is enough? 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. If your primary reason for having a business is to produce income instead of create tax write offs then you qualify. It does not make any difference if you actually make any profit. Just to show that you have the intent to produce a 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: Average Small Business Owners have plenty of tax reduction strategies at their disposal. You just have to know what they are and how to use them.
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: Tax Preparers/CPA's/Accountants are not uniformly informed about ALL tax laws. Most are able to file a personal income tax and know all the laws and how to apply them.
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.
Even excellent tax people are not trained in tax reduction strategies. As a home-business owner you should know what deductions you are allowed and present the figures to your tax preparer.
Untruth #2: Home based business expenses can only be used if you "itemize" your return.
Truth: Many people misunderstand the terminology here. 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). Some people call this filing "long form." All taxpayers have the opportunity to itemize if it is to their advantage. Whether you "itemize" or not has NO bearing on your Business.
Myth #3: You're not making a profit so there is no advantage to filing business income taxes.
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. Time and Effort the Taxpayer puts into running the business. How much time and effort is enough? 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. If your primary reason for having a business is to produce income instead of create tax write offs then you qualify. It does not make any difference if you actually make any profit. Just to show that you have the intent to produce a 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: Average Small Business Owners have plenty of tax reduction strategies at their disposal. You just have to know what they are and how to use them.
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 small business specializing in tax preparation for home based businesses for 36 years. Her blog:Home Business Owners-Reap the Rewardsoffers 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 business associates.
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