7 Biggest Myths About Taxes
If you are familiar with the show “Mythbusters” you know that many commonly accepted myths turn out to be untrue. With tax season approaching, it’s helpful to talk about some tax myths that may be causing you unnecessary stress. In this article, we will discuss the 7 biggest myths about taxes and do our best to “bust” them.
1. All Business Expenses Are Deductible
As a service based or product-based business owner, you are undoubtedly familiar with business deductions and how they reduce your tax bill. However, not every business expense is deductible. For a business expense to be deductible it must be ordinary and necessary. This means that the expense is commonly accepted in your industry and is helpful to your business.
For example, suppose you operate a service based mobile pet grooming business. Your first expense is to buy a van to transport supplies and other materials. The cost of the van is deductible since you need transportation to meet clients. This type of van is also commonly used by other mobile pet grooming businesses.
Now suppose instead of a van, you purchase a brand new, two-door convertible. Although the convertible can still provide transportation, its cost is not deductible since using convertibles to operate a pet grooming business does not qualify as ordinary and necessary.
A good rule of thumb is to use common sense and look to similar businesses if you are unsure if a business expense is deductible. It is also important to separate business and personal expenses to avoid confusion.
2. A Filing Extension Delays Payments
Tax extensions are granted by the IRS if you need extra time to get your documentation organized to file a tax return. Another common myth is that filing extensions include extending the time to make tax payments. Unfortunately, this is not the case. The IRS still requires payment by the standard tax date, which is April 18th for 2022.
If you file an extension, you probably don’t know the exact amount of taxes you owe. In this case, you send the IRS an estimated tax payment that can be modified later when your return is completed. Making an estimated payment is important to avoid penalties from the IRS.
3. Self-Employment/1099 Income Is Tax Free
Over the past two years, many people have become self-employed (independent contractors) by operating popular service based businesses such as Uber and DoorDash. Many people believe that because there are no withholdings from payments received through self-employment, self-employment income is tax free.
However, because independent contractors are considered to be business owners, they are required to send in the appropriate Social Security and Medicare taxes themselves. It is important to note that although self-employed individuals are required to pay the self-employment tax, they also qualify for business deductions that are unavailable to employees who work for an employer.
4. You Can Claim Pets As Dependents
Many of us consider our pets family for good reason. Unfortunately, no matter how much you love your pet, pets cannot be claimed as dependents on your tax return. Pets meet the test for dependents by receiving all their financial support from their owners, but since they are not human, they do not qualify. You may be surprised how many taxpayers try to claim their pets as dependents and are subject to IRS penalties.
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5. Home Office Deduction Is A Red Flag to the IRS
In previous years, the home office deduction would increase scrutiny on a tax return. The recent increase in working from home has made business owners take a longer look at the home office deduction. If your home office qualifies for the deduction, there is no reason to be afraid of using it on your tax return.
For more details on the home office deduction and how it works, check out our blog post on the topic here.
6. My Accountant Is Responsible For Mistakes On My Tax Return
Another common myth is that your accountant or tax preparer is responsible for mistakes on your tax return. This is not the case. Your tax professional can help with an audit, but the IRS will hold you responsible for any penalties or issues since it is your tax return.
7. Cash Payments Are Not Taxable
The belief that cash, or “under the table” payments are not taxable is another widely accepted tax myth. However, the IRS is clear that any income, no matter the type or source, is taxable. (Income from illegal activities is even taxable!). When in doubt, it’s better to either consult a tax professional or include the amount in your taxable income.
We hope this short article has helped bust some of the biggest myths about taxes you may encounter.
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