7 Tax Myths Exposed That Could be Costing You Tax Dollars!

Posted on February 5, 2009 @ 2:15 am
by Karin Russell

Misrepresentations to Small Home-Based Businesses That Are Causing Millions to Overpay Their Taxes!

Untruth #1: Tax professionals are trained to know everything about taxes so I don’t need to know 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.

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.

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.

Untruth #3: There is no reason to file business income taxes if your business did not make 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.

Misconception #4: Your Internet marketing business is just a hobby because you hold a full time job.

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 skill of the taxpayer or his/her advisers. Assuming you an Internet marketer and you are actively learning and applying what you are learning to home-based businesses and understand the principals…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 standards your business would be classified as a business not a hobby.

Misconception #5: In order to file home business taxes you must make a profit within 5 years.

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.

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.

Myth #7: Accounting and tax documentation for the Home-Business is not for the do-it-yourself-er.

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.

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