Distortions and just plain falsehoods are being told about income taxes. Believing them could be costing thousands of tax dollars!
Misconception #1: My professional tax preparer knows everything about taxes so I don't have to.
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.
There are thousands of excellent, hard-working accountants doing a great job. And if you use a tax professional, maybe they have done everything possible to reduce your taxes. But many professional tax preparers are just tax preparers. They may know how to prepare a tax return in their sleep. They know what numbers go on which form. But that's about all they know.
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.
Myth #2: You must "itemize" in order to take Home-Based Business expenses.
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.
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. Expertise of the taxpayer or his/her advisers. That would mean your expertise in Internet Marketing or those who advise you. If you're learning and actively applying what you learn to your Internet Marketing activities and have a good "handle" on this 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. 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 meet those 4 criteria then there is no reason your business would be classified as 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.
Myth #6: Learning how to reduce you taxes is hard and complicated.
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
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.
Misconception #1: My professional tax preparer knows everything about taxes so I don't have to.
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.
There are thousands of excellent, hard-working accountants doing a great job. And if you use a tax professional, maybe they have done everything possible to reduce your taxes. But many professional tax preparers are just tax preparers. They may know how to prepare a tax return in their sleep. They know what numbers go on which form. But that's about all they know.
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.
Myth #2: You must "itemize" in order to take Home-Based Business expenses.
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.
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. Expertise of the taxpayer or his/her advisers. That would mean your expertise in Internet Marketing or those who advise you. If you're learning and actively applying what you learn to your Internet Marketing activities and have a good "handle" on this 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. 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 meet those 4 criteria then there is no reason your business would be classified as 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.
Myth #6: Learning how to reduce you taxes is hard and complicated.
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
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 saving tips 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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