Choosing the right tax preparer for your business is a decision best not left until April. A former tax preparer and small business mastermind offers insights into the secret world of tax preparers.
1. All tax preparers are not created equal.
It stands to reason, somewhere in the country is the Worst Tax Preparer. The bad news is you may have already booked your appointment with him. Preparing taxes is a complex activity. So complex that many of us simply throw in the towel, pack up our receipts, and head for the nearest tax office. When you arrive at the office, you fully expect our tax preparer to be highly competent and completely vested in getting you the best deal in town.
Back in my tax preparing days, I worked for one of the big name tax preparation franchises both as a preparer and as a tax return editor. I worked with seasoned professionals and total neophytes. I well remember the first time I stepped up to the plate as a new preparer. I was terrified. Terrified the customer would know I was inexperienced. Terrified I'd make a huge blunder and the customer would pick up on it. Terrified the more experienced preparers would laugh at my mistakes.
I quickly realized that as inexperienced as I was, I still knew way more than my clients did. And because the franchise had great systems, others would be checking and re-checking my work so my mistakes and oversights would be caught before I did any damage to the client.
As a tax return editor, I saw and corrected more mistakes than you would feel comfortable knowing about. Which brings me to a very important point, tax preparation is not a cut and dried, read the manual, do the formulas, follow the instructions, and poof! you're done kind of activity. The tax codes in this country are complex and open to interpretation.
Tax preparers have a wide range of experience from none to grizzled veteran. They also span the continuum from ethical to completely fraudulent. The more complex your return, the more you need a veteran preparer. And if your preparer tells you about this great deduction that you can take and it sounds suspicious to you, listen to your intuition. It's the difference between paying a little bit now or paying a whole lot later.
2. Tax preparers are not business experts.
The only business experts in the world are those who are running successful businesses. Tax preparers are trained to understand taxes. They're trained to know the proper forms and deductions. They're trained to help you with tax planning. They are not trained to understand how business works.
Now, you may have a tax preparer who is also a successful business owner. Many CPA's, accountants, bookkeepers, and tax preparers do run their own businesses. They're in a much better position to help you with your taxes because they understand the day to day challenges of running a business.
Understand that having your taxes prepared by a big name franchise, although it does ensure that your return is accurate, does not mean that your return is prepared in a way that is best for your business. Only a preparer who understands business can prepare a return that works for your business.
3. Hiring a tax preparer doesn't mean you're excused from understanding taxes.
I've seen it so many times. I sit down with a client to talk about finances or taxes. As I talk, the head is nodding, the mouth is saying, "uh huh, uh huh", but what they're really focused on is the pen in their hand. They don't want to understand, they just want to sign off on the paperwork and be done with it. "That's what I hire you for", they say.
Big mistake. I could be sentencing them to time in a federal prison. Trusting someone else to the point where you abdicate all responsibility and have no knowledge of what you're signing or what is being done in your name is a recipe for a big fat slice of disaster. That's how embezzlement happens-I trust Mary completely. Bob always takes care of that. And it's also how business owners end up in trouble-What do you mean he took a deduction for my Chihuahua as a guard dog? Hey, why didn't I get a deduction for my new computer?
You have to know enough about taxes to be able to read your return intelligently so you know what you're signing. You also need to know enough about taxes so you know what your tax preparer needs to know to prepare your return accurately and to your best advantage.
And don't get your education from your buddies. I heard a lot about these "special deductions" you can take. Usually the information is not based on facts or tax codes. It's a conglomeration of bad information that can get you into tax trouble.
4. Your tax preparer shouldn't be the one telling you how your business is doing.
It hits them hard. They couldn't be more shocked if you'd hit them upside the head with a dead fish. "I owe how much?!?!", they gasp. "How can that be? I don't have any money!" Then the desperation sets in. The tax preparer is accused of not doing a good enough job. "You must have missed something." Or, they dig deep trying to think of anything, anything at all, that can lower their tax liability. "Did I mention that vacation, I mean, business trip I took to the Caribbean? That's deductible right?"
If the only time you know how your business is doing is on April 15th, you're doing yourself a huge disservice. If you're not tracking your tax liability and making plans to satisfy that liability, you're in for a very long, painful, tortuous lesson delivered at the hands of the Internal Revenue Service. You will pay. You will pay way more than if you'd planned ahead. And it will take you forever to get caught up.
5. Why getting your tax return prepared shouldn't be an errand you run on your lunch break.
I was in a client's office one day getting her books closed out for the year so she could have her tax return prepared. I overheard a woman in the next office telling someone, "I'm just going to run out and get my taxes done." I was horrified. Having your taxes prepared is not something you just "run out" and get done like an oil change. Good tax preparers are like good hair stylists. They have followings. People pre-book them.
If you just "run out" and have your taxes done, who do you think you'll get as a tax preparer? The best and the brightest? Hardly. You'll get the first year preparers who haven't built up a following. The ones who are fresh out of tax class and generally have no experience preparing tax returns or running a business. The ones who don't have the expertise to know the ins and outs of interpreting tax codes to your best advantage while still keeping you within the law. Sure everyone deserves a chance to gain experience but do you really want to be the first patient a surgeon operates on?
6. Procrastination is your worst enemy.
It's April 14th. You think you probably should get your tax stuff together pretty soon. So, you work late into the night, gathering receipts, pawing through stacks of paper, digging under the seat of your car until finally you've got everything you need. Off you go on your lunch break on April 15th to get your return prepared. Your tax preparer, who has been working at a feverish pitch for weeks, has deep circles under her eyes, her hands are shaking from lack of sleep and too much caffeine, and you notice a small stream of drool running down her chin. "Oh look," she exclaims laughing maniacally, "Another return!". And you think to yourself, "What's her problem?".
You, my procrastinating friend, are her problem. Now she's got to frantically race around trying to keep you out of trouble because you didn't have the courtesy or forethought to be prepared well ahead of the deadline. And then she'll have to listen to you whine because now all of a sudden you have to come up with thousands of dollars that you didn't know you owed.
Do yourself a favor, get your return done early. If you owe money, you don't have to send it until April 15th. At least you'll know that your return was prepared by a tax preparer who wasn't fatigued, you'll know ahead of time what you owe, and you'll have it off your mind so you can focus on other important things. Like getting your oil changed on your lunch break.
By Caroline Jordan, MBA
Rabu, 16 Juli 2008
Choosing the right tax preparer for your business is a decision best not left until April. A former tax preparer and small business mastermind offers insights into the secret world of tax preparers.
Most people trying to make a crust online (or offline for that matter) are so focused on doing just that, they ignore taking simple steps to ensure that they hang on to just as much of it as they can. Instead, they hand over large lumps of their hard-earned money in tax, usually in one of two mistaken beliefs. Either:
It's a good thing, a sure sign of a civilised society. Or,
If they don't, the Feds will "get them", fining them, expropriating their assets, maybe even jailing them.
I'd respectfully suggest that those two "reasons" are mutually exclusive. Visiting penal sanctions on citizens because they decline to hand over their money to you could hardly be regarded as the mark of a civilised society. In fact it might more properly be regarded as the mark of a criminal one!
So how does this situation arise, and how can the thinking man or woman avoid it?
Most e-mails I receive regarding business opportunities trumpet the benefits of being an entrepreneur. Now the Shorter Oxford English Dictionary defines "entrepreneur" as follows:
"A person who undertakes or controls a business and bears the risk of profit or loss".
Yes, that's "risk", "profit" and "loss". All things that people with their own businesses regard as being as inevitable as night following day.
Interestingly, the SOED contains no definition of "rentseeker". Still, key the term in to Google and you'll discover that it refers to people who want to be paid to take your money for a "service" that you would not yourself choose to pay for.
Now let's just talk this one through:
They want to be paid. In practice, they don't just wish to be paid, but to enjoy substantial pension rights. All of this is funded by the taxpayer.
In return for these payments, they undertake to extract further sums of taxpayers' money to provide what they describe as "services".
Critically, taxpayers would not, either as individuals or collectively, freely choose to pay for these services. If they did, they would do so, in the marketplace.
The money is therefore taken by coercion.
They lack any concept whatever of risk (at least to themselves) or of profit (to taxpayers). Loss, on the other hand, is guaranteed to each and every taxpayer.
Now, in any other context, this process is known as "robbery", or, more subtly, "fraud".
After all, it IS your money, right? Well not according to Uncle Sam, or, depending where you're based, your nearest friendly local equivalent.
Governments seem to think that they've generally got a whole lot better set of ideas about what to do with your money than you might have yourself (despite all the evidence to the contrary in front of everyone's eyes). What they've particularly got, however, is a set of excellent ideas for using your income to pay their own salaries and pensions (final salary, index-linked, performance-irrelevant). And these people are known as rentseekers.
The legendary investor, Jim Rogers, writing in the Foreword to "Financial Reckoning Day", by Bill Bonner and Addison Wiggin, had this to say:
"In America, if you have a job, you pay taxes. If you save some money, you pay taxes on the interest. If you buy a stock and get paid a dividend, you pay taxes. If you have a capital gain, you pay taxes again. And when you die, your estate pays taxes. If you live long enough to get social security, they tax your social security income. Remember: you paid taxes on all this money when you earned it originally and yet they tax it again and again".
Now wouldn't it just be nice to avoid all of that?
Because it's the simplest thing on earth, particularly if your earnings are being generated in that weird nether land called cyberspace, to use a set of perfectly legal arrangements to process your money FREE OF TAX.
In other words, you set yourself up a company, a bank account, and a business address somewhere no predatory taxman stalks! That is, OFFSHORE. There are quite a large number of these jurisdictions, and there is not a single Fortune 500 company that doesn't use them. I kinda think that tells you a lot.
Once it's all in place it works just like any other company arrangement - you just don't pay any tax!
Now no-one's suggesting that it costs nothing to set up these arrangements, and it's true it's not going to figure high in your priorities if you've got a marketing budget of $10 and are wondering how to pay the rent. But, assuming that you're already generating even reasonable income, it just has to make sense to look into this.
After all, even if you're not interested in saving yourself a whole lot of money, there's another reason you might wish to avoid all of this. I'll leave you with another quote, this time from Charles Adams, in "For Good And Evil: The Impact Of Taxes On Modern Civilisation":
"Tax haven 'refugees' report that they are tired of fighting the taxman. They have had enough of audits, year in and year out, of having their banking and accounting records picked over and questioned. They are tired of having their privacy totally destroyed by inquisitional tax agents. They are tired of appeals, big fees for tax professionals, and endless tax litigation. Many complain that the soak-the-rich philosophy of their homelands was not as intolerable as the harassment and scorn they receive from revenue bureaucrats".
Personally, I can relate to that...
If what I've been saying strikes any chords at all with you, there's much more at http://www.advent-taxfreedom.com, and a free e-zine too.
By Leo Rogers
Many taxpayers are confused about how long they should keep tax records. The term "tax records" refers to your tax returns and the documents that support the information in the returns. These documents can include receipts, bank statements, 1099s, etc. If you are one of the unlucky few to be audited, these records will be vital to fending off the IRS.
To protect yourself from a nasty audit, you should keep all of your tax returns indefinitely. The IRS has been known to lose or misplace tax returns. While conspiracy advocates argue that this is evidence of a nefarious scheme, the simple fact is that the IRS receives millions of returns over a three-month period and lost returns are inevitable. So how do you protect yourself? You keep copies of every single tax return.
A quick word on the IRS e-file program. If you file your returns electronically, make sure you get copies from the company that filed your return. All such entities are required by law to provide you with paper copies.
Records Supporting Tax Returns
You should keep supporting tax records for a period of six years from the date the returns were actually filed. In general the IRS only has three years to audit you from the filing date. For example, if you filed your 2000 tax return on April 15, 2001, the IRS would have to start an audit by April 15, 2004. Keep in mind that if you filed an extension, the IRS will have three years from the date you submitted the return. As is always case with taxes, there are exceptions to this general time period.
If your tax return looks like the great American novel, the running of the three-year audit period may not save you. Failure to report more than 25% of your gross income gives the IRS an additional three years to pursue you. Using the previous example, the IRS would have until April 15, 2007 to audit your 2000 tax return.
Property Records - Get A Filing Cabinet
You may need to get a filing cabinet if you hold property for an extended period of time. For example, assume that you purchased a home in 1980 for $100,000 and made $50,000 in improvements over the years. You need to keep the purchase records, mortgage statements and receipts that relate to the improvements. When you sell the home, you will need the records to determine the tax consequences of the sale, to wit, your basis (original cost plus improvements) and profit. If the IRS decides to take a closer look at the reported profit, you will need to provide your tax records to support your claims. Once you actually sell the property, it is recommended that you keep all of the tax records for an additional six years.
Make sure you keep copies of all of your financial documents, tax returns and supporting documents if you get divorced. You should also keep copies of all divorce agreements and court orders that cover property and financial issues. When couples divorce, the tax and credit consequences can be nightmarish. If you don't keep records, you will have to ask your ex-spouse for them. Get the records now to avoid doubling your misery!
Hopefully, you will never need to show your tax records to the IRS. If you are one of the unlucky few that is audited, your tax records should keep your feet out of the fire.
By Richard Chapo
NOTE: This is the first in a series of 5 articles: "Small Business Tax Traps and How To Avoid Them"
If you're a sole proprietor, perhaps you've considered incorporating your small business or self-employment activity.
And so maybe you've been wondering, "When is the best time to incorporate?"
From a legal standpoint, any time is the best time. The sooner you incorporate, the sooner you make the move from the world of unlimited liability to the world of limited liability.
From a tax savings standpoint, any time is the best time. The sooner you incorporate, the sooner you will start putting more money in your own pocket and less in Uncle Sam's.
(For more about the potential tax savings of a corporation, see the second article in this series -- "Tax Trap #2: Double Taxation -- Isn't Once Enough?" http://www.YouSaveOnTaxes.com/tax-trap-2.html)
But from a **tax reporting** standpoint, there is one time of year that stands out as best: January 1st.
Why is that?
Assuming you have a sole proprietorship (or other entity, such as a partnership) that is up and running as of January 1, and assuming you then incorporate that existing entity on any date other than January 1, you face the possibility of filing not one but two business income tax returns for that year.
Here's an example to clarify this important point . . .
Let's say you've been operating your sole proprietorship for a few years, and in early 2005 you decide to incorporate. In January you get around to starting the paperwork, but life gets in the way and you finally get it done in late February. By the time your state processes the Articles of Incorporation, the start date of your new corporation is March 1.
For 2005, you must file a Schedule C for the period of January 1 through February 28, when your business was still a Sole Proprietorship. And you must also file a corporate income tax return for March 1 through December 31.
Maybe that's no big deal. Maybe you enjoy filing one business income tax return so much, filing a second one doesn't bother you. And it may be that the inconvenience of filing two tax returns in 2005 is far outweighed by the legal and tax advantages of incorporating.
Keep in mind, too, that 2005 will be the only year you have to do this "double duty". In 2006 you will only have to file the corporate income tax return.
But if you are thinking about incorporating, the best time to do it, from a tax paperwork standpoint, is as of January 1. Only then do you have a "clean break" from the old sole proprietorship to the new corporation.
This timing issue can also be relevant if you decide to make the switch late in the year. If the effective date of the incorporation is November 15, you will have to file a Schedule C for January 1 through November 14, and a corporate return for November 15 through December 31. In that scenario, you should ask yourself, "Do the benefits of incorporating outweigh the convenience of waiting until January 1?"
So before you decide when to incorporate, take a moment to reflect on the tax reporting consequences of incorporating on January 1 vs. any other date.
Sometimes it may make sense to wait a few weeks (as in the second example), and sometimes it makes sense to "do it now", especially when January 1 is nearby.
By Wayne M. Davies
Tax Trap #3 -- IRS Penalties, Interest and Love Letters
As a small business owner or self-employed person, one of the easiest ways to keep Uncle Sam off your back and out of your life is to file your forms, payments and other paperwork on time.
Over the next four months there are several key dates that you dare not forget! Here they are -- all in one place, along with links to the IRS website PDF file for that particular form, where appropriate.
NOTE: This article only addresses federal tax deadlines. Be sure to contact your state's tax department for their due dates.
Also, the calendar is adjusted for Saturdays, Sundays and federal holidays, because if a due date falls on a Saturday, Sunday, or federal holiday, then the due date is moved to the next business day.
Tuesday, Jan. 18
If you pay quarterly estimated income tax payments, it's time to make the fourth-quarter payment for 2004 via Form 1040-ES. http://www.irs.gov/pub/irs-pdf/f1040es.pdf
If you have employees, you must make the federal payroll tax payment for December 2004 by today (assuming you are on the monthly deposit schedule).
You use Form 8109 (found in the little yellow coupon book) or the IRS Electronic Federal Tax Payment System (EFTPS).
Monday, January 31
4th quarter and year-end payroll tax returns are due by January 31 of the following year.
Here's an overview of the 4 most common federal payroll-related forms due today:
1. Form W-2 (for your employees) http://www.irs.gov/pub/irs-pdf/fw2.pdf
If you mail the W-2's, the postmark must be on or before January 31, 2005.
You may also be a recipient of a W-2 (if you work as an employee for someone else), so don't give your employer a hard time unless the W-2 is postmarked, or delivered in person, later than January 31.
2. Form 941 (for payroll tax) http://www.irs.gov/pub/irs-pdf/f941.pdf
3. Form 940 (for unemployment tax) http://www.irs.gov/pub/irs-pdf/f940.pdf
4. Form 1099-MISC If you paid any independent contractors at least $600 in 2004, you must send each one a 1099 by January 31. http://www.irs.gov/pub/irs-pdf/f1099msc.pdf
Tip: if the independent contractor is a corporation, you usually don't have to issue a 1099. The main purpose of the 1099 is to track payments to Sole Proprietors, i.e. unincorporated self-employed people.
Tuesday, Feb. 15
If you have employees, you must make the federal payroll tax payment for January 2005 by today (assuming you are on the monthly deposit schedule).
Monday, February 28
If you prepared any W-2's or 1099's (mentioned above), today is the deadline for sending a copy of those forms to the IRS.
Form W-3 is sent to the Social Security Administration, along with Copy A of any Forms W-2 you issued. http://www.irs.gov/pub/irs-pdf/fw3.pdf
Form 1096 is sent to the IRS, along with Copy A of any Forms 1099-MISC you issued. http://www.irs.gov/pub/irs-pdf/f1096_04.pdf
Tuesday, March 15
Today is a big day if your business is a corporation.
Form 1120 -- the annual corporate income tax return for regular "C" corporations. http://www.irs.gov/pub/irs-pdf/f1120.pdf
Form 1120S -- the annual corporate income tax return for "S" corporations. http://www.irs.gov/pub/irs-pdf/f1120s.pdf
Form 7004 -- if you can't file Form 1120 or 1120S by today, here's a tip: just file Form 7004 by March 15 and you are granted an automatic, no-questions-asked 6-month extension of time to file the return (i.e. until Sept. 15, 2005) http://www.irs.gov/pub/irs-pdf/f7004.pdf
Form 2553 -- if you want your corporation to be treated like an "S" corporation for the first time, today is the deadline for telling the IRS that you want to be an "S" corp beginning with calendar year 2005. http://www.irs.gov/pub/irs-pdf/f2553.pdf
Also, If you have employees, you must make the federal payroll tax payment for February 2005 by today (assuming you are on the monthly deposit schedule).
Friday, April 15
Ah, yes, the most famous tax deadline of all.
And if you are a Sole Proprietor, don't forget that you must file several business-related tax forms with your Form 1040.
The most commonly used tax forms for the self-employed person include:
Schedule C (to report your business income and expenses) http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
Schedule SE (for self-employment tax) http://www.irs.gov/pub/irs-pdf/f1040sse.pdf
Form 4562 (to deduct equipment and other depreciable property) http://www.irs.gov/pub/irs-pdf/f4562.pdf
Form 8829 (to deduct a home office) http://www.irs.gov/pub/irs-pdf/f8829.pdf
Need more time to prepare your personal tax return? Go no further than Form 4868, which grants an automatic no-questions-asked 4-month extension to file the return. http://www.irs.gov/pub/irs-pdf/f4868.pdf
NOTE: this is only an extension of time to file the return, not an extension to pay any tax due. So if you think you might owe, it may be wise to estimate what you owe and send in a payment with Form 4868; otherwise you may have to pay extra in late payment penalties and interest.
If your business is a Partnership or Limited Liability Company (LLC), today is also your lucky day to file the annual business income tax return -- via Form 1065. http://www.irs.gov/pub/irs-pdf/f1065.pdf
To get an automatic 3-month extension of time to file Form 1065, file Form 8736 on or before April 15. http://www.irs.gov/pub/irs-pdf/f8736.pdf
As if April 15 wasn't already painful enough, it's also the deadline for the first quarter estimated tax payment for Year 2005:
Personal -- Form 1040-ES.
Corporate -- Form 1120-W
And if you're an employer, yup, it's time for yet another monthly federal payroll tax deposit -- for March 2005.
Monday, May 2
Form 941 is due for the 1st quarter 2005. http://www.irs.gov/pub/irs-pdf/f941.pdf
Form 940 federal unemployment tax deposit is due today, if your first quarter liability exceeds $100.
Had enough? OK, OK. I'll stop here.
That should get you through the first four months of the year.
By Wayne M. Davies
The U.S. Department of Agriculture estimates that it costs nearly $15,000.00 a year for a middle-class family to raise a child born in 2002 to age 17 (without adjustment for inflation). In recognition of this cots, you can claim a tax credit each year until your child reaches the ago of 17. The credit is currently up to $1,000.00 per child. This credit is in addition to the dependency exemption for the child.
You may claim a tax credit of up to $1,000.00 in 2004 for each child under the age of 17. If the credit you are entitled to claim is more than your tax liability, you may be entitled to a refund under certain conditions.
Generally, the credit is refundable to the extent of 10 percent of earned income over $10,750.00 in 2004.
To claim the credit, you must meet two conditions.
1. You must have a qualifying child. 2. Your income must be below a set amount.
You can claim the credit only for a "Qualifying Child." This is a child who is under age 17 at the end of the year and whom you claim as a dependent.
The child need not be your own child - he or she can be a stepchild, grandchild, great-grandchild, sibling, stepbrother, stepsister, or a descendant of any of these.
For example, if you support your 16 year old sister and claim her as a dependent on your return, she is a qualifying child. An adopted child is a qualifying child as long as the child has been placed with you by an authorized agency for legal adoption, even if the adoption is not yet final.
You must have modified adjusted gross income (MAGI) below a set amount. The credit you are otherwise entitled to claim is reduced or eliminated if your MAGI exceeds a set amount. MAGI for purposes of the child tax credit means AGI increased by the foreign earned income exclusion, the foreign housing exclusion or deduction, or the possessions exclusion for American Samoa residents.
The credit amount is reduced by $50.00 for each $1,000.00 of MAGI or a fraction thereof over the MAGI limit for your filing status. The phaseout begins if MAGI exceeds the following limits:
1. Married filing jointly $110,000.00 2. Head of household $75,000.00 3. Unmarried (single) $75,000.00 4. Qualifying widow(er) $75,000.00 5. Married filing separately $55,000.00
Example: In 2004 you are a head of household with two qualifying children. Your MAGI is $90,000.00. Your credit amount of $2,000 ($1,000 x 2) is reduced by $750 ($90,000 - $75,000 = $15,000 MAGI over the limit) = 15 x 50 = $750. Your credit is $1,250.00 ($2,000 - $750).
HOW TO CLAIM THE CREDIT AND GET A BIGGER REFUND.
If the credit you are entitled to claim is more than your tax liability, you can receive the excess amount as a "refund." The refund is limited to 10 percent of your taxable earned income (such as wages, salary, tips, commissions, bonuses, and net earnings from self-employment) over $10,750 in 2004. If your earned income is not over $10,750, you may still qualify for the additional credit if you have three or more children.
If you have three or more children for whom you are claiming the credit, you may qualify for a larger refund, called the additional child tax credit.
If you know you will become entitled to claim the credit (e.g. you are expecting the birth of a child in 2004), you may wish to adjust your withholding so that you don't have too much income tax withheld from your paycheck. Increase your withholding allowances so that less income tax is withheld from your pay by filing a new from W-4, Employee's withholding allowance certificate, with your employer.
The child tax credit is scheduled to decline to $700 per child in 2005 and then increase to $800 in 2009, and $1,000 in 2010 and later years.
You figure the credit on a worksheet included in the instruction for your return. You claim the credit in the "Tax and Credits" section of Form 1040 or the "Tax, Credits, and Payments" section of form 1040A; you cannot claim the credit if you file form 1040EZ
If you are eligible for the additional child tax credit, you figure this on Form 8812, Additional Child Tax Credit.
By Mr. Patel
Misconceptions, misinterpretations and just plain "untruths" are floating about income taxes. Believing them could be costing thousands of tax dollars!
Myth: A Professional Tax Preparer knows all there is to know about taxes so you don't have to know anything them.
Truth: Tax Preparer's/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 to personal income tax.
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.
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.
Myth: 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 2003 taxes?$4,700 single, $9,500 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: You're not making a profit so there is no advantage to filing business income taxes.
Truth: This is so not true! There's many tax advantages to filing a Home-Business tax return and especially so if you are not making a profit. If you also work a job, be it part-time or full time, in addition to your Home-Based business it is especially beneficial to you 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.
Myth: Because you work a full-time job your Internet Marketing Business is just a hobby.
Truth: Only another Internet Marketer can truly understand the hours and money spent on what someone else would call a "hobby"!
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 advisors. 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'. They just want to make sure you're running a real business, not just engaging in a hobby. 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.
I can't see anyone who is in Internet Marketing with a profit motive not qualifying here!
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. Is the Primary Purpose of your activity to 'Produce a Profit," or to 'Produce Tax Write-offs'? The best way to Pass the profit-motive test, is to have a Business Plan, and That Business Plan should include a table of Income and Expense projections, clearly showing profitability at some point in the future. Note that 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 are doing all this then there is no reason for your business to be considered a "hobby".
Myth: You must make a profit within 5 years to be considered a "business" and 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: 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.
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: Accounting and tax documentation for the Home-Business is not for the do-it-yourselfer.
Truth: All Small Business Owners can easily keep their own books using any number of software programs. It is not necessary to have an accountant.
No, you will not have to learn accounting. You will just need to be able to "categorize" and record expenses and sales.
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.
By Karin Workman