It’s exciting to have a world of information at our fingertips. You can google anything. A search on “How can I save money on my taxes?” yielded 249 million results in 0.57 seconds!
In a free society more and greater accessibility to information is essential. Sorting through that amount of material is impossible, however. Sometimes inaccurate information is spread leading to myths and misunderstandings that can have horrible consequences for taxpayers.
There are plenty of strategies on how to save money and decrease your tax liability but make sure you base your decisions on accurate interpretations of IRS regulations.
In this article, we will bust the 3 Biggest Myths About Taxes to protect you from making costly mistakes.
Myth #1: Filing an Extension Means A Delay in Paying Your Taxes
Sometimes April comes too quickly and you need more time to get your documents for your tax return. The IRS understands this can be a common scenario and provides forms for you to file an extension, allowing for 6 additional months.
The confusion here is this is an extension of time to file your return, but not to pay your taxes.
You are still obligated to pay your taxes on the applicable tax day every year even if you file an extension. This can be a challenge to determine how much you need to pay come tax day. It is also going to depend largely on your circumstances.
If you are unsure how much you should pay with an extension, be sure to talk with your tax accountant: Contact Us.
Myth #2: Create a Limited Liability Company to deduct personal expenses
This has become a popular strategy among taxpayers online in recent years, especially with the rollout of the PPP Loan during the pandemic.
Even if your entire family is involved in your business, you can never classify personal expenses like groceries or gas for personal use of your auto as deductible business expenses.
Sometimes it’s a straightforward matter to determine whether expenses are business or personal. When traveling, however, it may be more difficult to sort out what expenses are deductible to your business.
For example, let’s say you were to take a trip to another state for a business conference. At first glance, you may think everything on the trip is deductible. This turns out not to be true to the extent you mix business with pleasure.
If on this out-of-state trip you spend 1 day at a conference and 2 days sightseeing, the expenses tied to those 2 days are not business in nature and should be recognized as such on your financial statements.
A good rule of thumb is to follow the ordinary and necessary rules when it comes to business expenses. For an expense to be considered a business, it must be ordinary and necessary.
The IRS defines ordinary as, “one that is common and accepted in your industry.” Whereas the definition of necessary is, “one that is helpful and appropriate for your trade or business.”
While the IRS does not list specific expenses as ordinary and necessary, existing guidelines allow us to differentiate between business and personal expenses.
Myth #3: You can deduct use the home office deduction if you work from home
This is only partially true. The home office deduction is great for many who work from a home office but there are regulations around who can take this deduction. It does not apply to every home office worker and if you are an employee there are very few circumstances under which you can take this deduction. Pennsylvania and New York are two of only a handful of states that allow employees to deduct home office expenses and this deduction is not available on the federal 1040.
On the other hand, many self-employed workers can apply the home office deduction to great advantage.
The requirements of the home office deduction include:
- Regular and exclusive use – meaning the space is frequently and solely used for your business. If you use your dining room for meals, you can’t claim that space as your home office. If you live in a studio apartment, however, and your work desk and reference materials occupy 25% of your space, that area can qualify as your home office.
- Principal place of business – meaning you do not have another dedicated office space in a commercial building. Space in your home could still qualify as your principal place of business even if you conduct business outside your home but use your home office for administrative or management functions.
You must meet both of the above requirements for you to claim the home office deduction.. Included among the kinds of expenses you can deduct are:
- Mortgage interest and rent
- Depreciation for the area
Keep in mind, however, that the deduction includes the expenses related to just that percentage of your home occupied by your home office.
Understanding if and how IRS regulations apply to your situation can be tricky. There is plenty of tax information out there which is why it is so helpful to have a CPA who knows and understands your particular situation and is an expert on taxes. To learn more about our tax services and how we can help, click the link or fill out the form to the right to contact us.