Distortions and just plain falsehoods are being told about income taxes. Believing them could be costing thousands of tax dollars!
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.
Your tax professional may have done everything possible to reduce your taxes. Most do not look for reductions but know how to prepare your return in their sleep. They know what numbers go on what form. They are doing a great job of preparing taxes.
A good tax preparer is not trained in tax reduction strategies. The only way you are assured to get the tax deductions you are entitled to, as a Home-Based Business Owner, is to become informed yourself.
Misconception #2: You cannot deduct home based business expenses unless you "itemize".
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.
Misconception #3: There is no advantage to filing business tax forms if you are not making a profit.
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.
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. 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 way you carry on your business activity. If you conduct your business mostly on the telephone, over the Internet and in-home presentations you'll do fine. On the other hand if you do most of your business on the golf course, during lunch or at the bar you have a hobby not 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 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.
Untruth #6: Learning tax reduction strategies is complicated and hard to understand.
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: If you can "categorize" and record expenses and sales using accounting software, you do not need an accountant. It only takes 5 minutes a day and your records will withstand any government scrutiny. - 15224
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.
Your tax professional may have done everything possible to reduce your taxes. Most do not look for reductions but know how to prepare your return in their sleep. They know what numbers go on what form. They are doing a great job of preparing taxes.
A good tax preparer is not trained in tax reduction strategies. The only way you are assured to get the tax deductions you are entitled to, as a Home-Based Business Owner, is to become informed yourself.
Misconception #2: You cannot deduct home based business expenses unless you "itemize".
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.
Misconception #3: There is no advantage to filing business tax forms if you are not making a profit.
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.
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. 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 way you carry on your business activity. If you conduct your business mostly on the telephone, over the Internet and in-home presentations you'll do fine. On the other hand if you do most of your business on the golf course, during lunch or at the bar you have a hobby not 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 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.
Untruth #6: Learning tax reduction strategies is complicated and hard to understand.
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: If you can "categorize" and record expenses and sales using accounting software, you do not need an accountant. It only takes 5 minutes a day and your records will withstand any government scrutiny. - 15224
About the Author:
Karin Russell has owned a home business specializing in tax preparation for home based businesses for over 3 decades. Her blog:Home Business Owners-Reap the Rewards offers 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 friends with home businesses.
