Small Business Tax Folklore

Small Business Tax Folklore

We just wrapped up tax extension season for 2014 partnership and corporate returns.    I thought it would be a good time to remind our readers common “themes” we see each year with business tax preparation.

  1.  All Start-Up Costs are Immediately Deductible-    Costs incurred before your business opens their doors range from advertising, travel, training etc.    These costs include organizational matters such as legal fees and state licensing.    Since tax year 2011, you are only allowed to deduct up to $5,000 of business start-up and $5,000 or organizational costs incurred after October 2004.   Each of these $5,000 amounts are reduced when your total start-up or organizational costs exceed $50,000.   All remaining costs must be amortized  Additionally,   equipment costs are recovered through depreciation or Section 179 expensing.
  2. Requesting an extension on your taxes includes an extension to pay-    This is one of our firm favorites, tax payments are always due April 15 of each tax year (or March 15 for C Corps).   Extensions are for paperwork only, penalties and interest accrue accordingly
  3. Incorporation enables the most deductions-     The answers here remain in understanding your business structure in the first place.   Countless clients walk in our doors and don’t have any clear rationale on why their business is a Schedule C, S Corp or LLC.   The plot thickens when we inform them that IRS doesnt recognize LLCs and through lack of planning, can potentially increase your accounting and tax expenses with little benefit e.g. have you factored in your future plans of adding members or shareholders and how profits and losses will be split?
  4. S Corps with no salary-     IRS code requires shareholders to take “reasonable compensation” as an employee of your corporation.   All distributions are a red flag for an audit.  Additionally track capital contributions and have paperwork for all loans booked accordingly on your software
  5. Business Use of your Auto-   A travel log of business miles must be maintained during the calendar year and this includes commuting and personal use of the auto/truck.   Second, you typically get to select between business mileage reimbursement under IRS guidlines or deductions of actual expenses (gas, deprecation, brake job) based on pro rata business use of your vehicle.     It matters whether your lease and typically its best to use the mileage allowance in year one for reasons beyond the scope of this blog post.

      Contact us with questions and start getting organized if your personal return is on extension!