Tax Strategies for Business Owners

Tax returns for a business are full of rules that sound simple but are not, and a few myths come up again and again. Believing them can cost you money or invite trouble. Here are seven of the most common.

1. "If I get a refund or owe nothing, my taxes are fine."

The result on the return tells you little about whether it was prepared well. A big refund can mean you overpaid all year, and a small balance can hide missed deductions. What matters is whether income and expenses are reported correctly and whether you used the planning opportunities available.

2. "Any expense I pay for the business is deductible."

An expense generally must be ordinary and necessary for the business, and you must be able to document it. Personal costs do not become deductible because they went through a business account. Mixing personal and business spending also makes it harder to defend real deductions.

3. "A business loss is always deductible against my other income."

Several rules can limit losses, including basis and at-risk limits, passive activity rules and the requirement that an activity be run with a profit motive. An activity that loses money year after year can attract IRS scrutiny as a hobby.

4. "Forming an LLC or corporation will cut my taxes."

The legal entity mostly affects liability. Taxes depend on how the entity is treated, and a single-owner LLC is typically taxed like a sole proprietorship by default. Another structure may save tax in some situations, but it also brings requirements such as payroll and reasonable salary for S corporation owners. See our formation services for more.

5. "I do not need to pay estimated taxes."

If no employer withholds tax from your business income, you generally must pay estimated taxes during the year. Missing them can lead to penalties and a large bill at filing time.

6. "Cash payments do not need to be reported."

All business income is taxable whether it arrives by cash, check, card or app. Unreported cash is a major audit focus, and underreporting can bring penalties.

7. "My tax preparer is responsible for everything on my return."

Preparers have professional duties, but the return is your responsibility and you sign it. Keep good records, answer questions honestly and review the return before it is filed. Relying on guesses about deductions is risky.

A Better Approach

• Keep books current and separate business from personal accounts.
• Meet with your CPA during the year, not only at filing time.
• Ask about planning before major purchases, hiring or structural changes.

Our business tax preparation team can help you avoid these traps, and you can reach out to us with questions about your own return.