NASE Blogs

Never believe anything you hear ... and only half of what you read!

Thursday, January 13, 2011

Can you believe that one of the most dreaded times of the year is almost here again? The time when we tear into our financial records looking for ways to beat the tax man out of a few extra dollars. It's also the time of year when all the self-declared tax pros come out of the woodwork with their advice about how you should do your taxes. Some of these advice givers ... especially the amateurs ... would do us more good if they simply kept quiet instead of letting their ignorance show.

For the next couple of months we are going to be inundated with information and advice from newspapers, magazines, television, radio, and the Internet about what we should be doing with the myriad of tax forms to be filed. And, let's not forget about our well-meaning friends, family members, and acquaintances who will be coming up with some obscure tax secret the even the IRS can't figure out. With advice coming at us from every angle it’s going to be important to sort out the fact from the fiction and make the best of an already bad experience.

Having said that, let me be one of the first to welcome you to the 2010 tax season and offer a few pearls of wisdom of my own. A little “TaxFact” and “TaxFiction” if you will just to start getting you in the mood for things to come.

The first realization you need to come to is that although there might be a few things you can do to lower your 2010 taxes ... like an IRA or SEP contribution ... but for most of us the tax year ended on December 31. All you have to work with is what your bank statement and receipts support about what your income and expenses were during the year.

 

TaxFact -- There is very little you can do about 2010 but you still have time to take control of 2011. Start by going online to www.irs.gov and reviewing publication 334 which has a lot of tax information and will help you understand many of the business deductions you can take. It might not be great bedside reading, but it could save you hundreds of dollars in taxes. If you are so inclined visit a local book store or go online and purchase Tax Savvy for Small Business by Nolo Press. It is an investment that will pay you back many times over.

 

It's amazing how easily people are enticed to believe what they want to believe. People will often take a tax deduction that is so obscure that it doesn't even make sense. But, of course, if they are ever audited they just tell that nice IRS person, "My brother-in-law said a friend of his read somewhere it was OK to deduct our trip to Hawaii because we made a telephone call back to our office to see if we had any messages." That'll fly won’t it?

 

TaxFiction -- If you are an "S" corporation with $50,000 in profit you can take $10,000 as a wage (subject to social security tax) and $40,000 as a stockholder distribution to circumvent paying Social Security taxes ... NOT. As a general rule you can take $1 in distribution for every $2 you take in wages.

 

Questionable advice doesn't come just from those who aren't "in the know"; it also comes from people who call themselves tax professionals. Some of these professionals are so aggressive they will talk you into taking illegal or highly questionable deductions on your tax returns. While on the other side of the spectrum, some pros are so conservative they try to convince you not to take legitimate deductions because it might raise a red flag. And just for the record, the too conservative tax professional is just as bad as the one who goes over the edge and uses questionable deductions.

 

TaxFiction -- You shouldn't take a home office deduction, even if you qualify, because it might cause an audit. “Hey! What does the tax preparer care? It's your money not theirs.” This is rotten advice and you should take every tax deduction you have coming. If a tax preparer is afraid of your return being audited because of a legitimate deduction ... you should be looking for another tax person!

 

Another area that has helped, but has also gotten small-business owners into trouble, is the easy access and use of computers and software programs. On one hand, accounting and tax preparation software has motivated small-business owners to pay closer attention to their finances. On the other hand ... a little knowledge can be dangerous ... and has caused many small-business owners to be their own worst enemies by trying to become the do-it-yourself tax preparer without having a solid base of tax knowledge.

The closest analogy I can offer for this issue is what happened when gasoline stations went to self-service. Instead of people in the know (service station attendants) looking under the hood and checking the oil, water, battery and other simple maintenance items in our cars, these tasks were left to us. And automobile repairs resulting from the lack of simple maintenance items has skyrocketed! The same is true with many small-business owners trying to wear an accountant's hat. They often end up doing more harm than good.

While it’s a smart move to do your own day-to-day accounting and even run your taxes through one of the tax preparation software programs, don’t leave the tax pros out of the picture. Letting them look over your shoulder could put a few more dollars in your pocket.

 

TaxFact -- Don't file your tax return on time. This should probably be a "TaxMaybe" instead of a "TaxFact." Different tax pros have different opinions, but the general consensus is, if you get an extension to file your tax return you have less chance of getting audited. Just remember that an extension to file your return is NOT an extension to pay your taxes before the due date ... March 15 for corporations and April 15 for sole proprietors and partnerships.

 

One of the biggest tax myths is that small businesses have a lot of loopholes and can get out of paying taxes the rest of the world is stuck with. This is not to say that small-business owners don't have deductions exclusive to their position, there really are quite a few deductions small-business owners can benefit from.

The truth of the matter, however, is that more often than not small businesses leave hundreds and even thousands of dollars on the table because they haven't taken the time to learn how to take advantage of the tax laws. They might assume they can throw a box of papers on their tax preparer's desk April 1 and have that person wave their magic wand to turn out a tax return with a big refund. But in the real world it just isn’t that easy.

 

So over the next weeks and months turn a listening ear and an inquisitive eye to everything you see and hear about taxes. Just know how to sort out the fact from fiction and determine who knows what they’re talking about and who sounds like they learned their tax secrets from a dream they had after eating a hot pastrami on rye sandwich at 2 o’clock in the morning.

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