As a business owner, you’re likely always looking for ways to reduce your tax burden and maximize your bottom line. But with all the rules and information to keep track of, it can be easy to accept some of the “tax myths” floating around. Let’s ensure you know some of the more common false beliefs, so you don’t run into problems.
- Myth: If you file for an extension, you get more time to pay your taxes. This is a common belief, but an “extension” is only an extension for sending the paperwork. You still have to go ahead and send in a check (so to speak) for the estimated total by the original due date. If you don’t have enough money to pay your estimated taxes, it is still better to pay as much as possible, as penalties and interest will only accrue on the unpaid amount.
If you expect a refund, then, of course, the situation is different. You don’t have to pay any estimated taxes because there aren’t any.
- Myth: If you file for an extension, you are more likely to be audited. This is a common belief, even among some tax advisors, but the data doesn’t back it up. If you would otherwise send in rushed and potentially inaccurate tax forms just to meet the deadline, applying for an extension and ensuring the numbers are correct is probably much safer.
- Myth: A big gambling loss is a straight write-off. Writing off true gambling losses is, of course, perfectly legal, but many tax filers forget to take their wins into account. Annual gambling losses are similar to yearly business losses; you subtract your profits from your losses to calculate a net loss, and that’s what you can deduct.
If you are looking for a deduction encouraging an IRS audit, a deduction for gambling losses could be it since many filers abuse it. So you’ll want to ensure that you keep detailed records of your gambling over the course of the year and make sure the rest of your return is as perfect as possible.
- Myth: Since they are deductions, business expenses are basically free. This doesn’t directly lead to problems on your tax returns since the tax forms do the math for you, but rather a problem with how much you think you’re (not) spending versus reality. A valid business expense does reduce your tax burden, but only by some percentage amount based on your tax bracket.
The problem comes when you overspend because business expenses feel “free” when in fact, a significant portion of that expense is still coming directly out of your profits. So it’s important to spend only on things that contribute to the business rather than just because it’s deductible.
- Myth: If you got paid in cryptocurrency, you don’t have to pay taxes on it. A profit is a profit, whether paid in cash, cattle, or cryptocurrency. If you got something worth more than what you gave up, that is a taxable profit in the eyes of the IRS, and you will need to account for it.
- Myth: You don’t have to pay taxes when you sell cryptocurrency for a profit. Again, selling something for more than it was worth when you bought it is a taxable profit, and you’ll need to track it and declare it. If your trading platform doesn’t offer you an easy way to track and download your tax information (or if you bought and sold outside of a platform), you will need to do it yourself and make sure you are in compliance.
- Myth: Your tax preparer is liable for any mistakes on your return. While it is true that a tax advisor can be punished for being too loose in their interpretation of the rules, you cannot absolve yourself of any risk simply by having someone else file your taxes. You are still ultimately responsible for the information on your return, and if you get audited, you will be responsible for any adverse findings.
There are a lot of tax-compliance myths out there, and we’ve only touched on a few of them. Staying up to date and educating yourself about taxes is one of the most critical steps to preserve your financial well-being and that of your business.