02/ 12/ 2008
by Kay Bell
When it comes to your business taxes, deciphering the Internal Revenue Code is hard enough. Don't complicate the process by falling for bad tax information. Tax-filing is fraught with enough land mines. Don't make the process any worse by buying into common—and potentially costly—tax myths.
A multitude of tax myths have persisted for years. Some are based on real tax laws, but have a rule or two wrong. Others are flat-out falsehoods. Regardless, falling for any of them could be costly. To keep that from happening, check out the real scoop behind the following collection of tax myths.
General filing myths
Tax protesters continue to insist that the U.S. tax system is without merit. A popular tax myth in this regard is that the filing of a tax return is voluntary.
Income tax opponents point to the IRS' own statements, as well as a 1960 Supreme Court tax case ruling that stated, "Our system of taxation is based upon voluntary assessment and payment …."
But, counters the IRS, perpetrators of this myth are misreading the word "voluntary." It refers not to the tax system, but to compliance with the tax laws; i.e., the IRS relies, at least in the beginning of the process, on taxpayers to voluntarily determine their tax obligations.
This is just one of dozens of tax-filing myths debunked in the IRS report, "The Truth About Frivolous Tax Arguments."
Income myths
However, even the majority of folks who acknowledge their tax responsibilities often hold onto to some income-related tax myths.
One common among self-employed taxpayers is that income doesn't have to be reported if there is no corresponding Form 1099-MISC. Not true. While payers are required to send this documentation only for amounts of $600 or more, all income received, regardless of amount, is taxable.
Audit myths
Failure to report income is a sure way to get the attention of IRS examiners. And the fear of an audit has led to several audit myths, including:
- Early or late filers or those who seek an extension are more likely to be audited. Wrong. It's what's on your return, not when you submit it.
- Tax form preprinted labels contain coded information that flags returns for audit. Actually, because the label information is more legible, it speeds the processing of the return.
One of the most enduring business audit myths is that claiming a home office is an automatic filing red flag. That might have been true many years ago, but with so many businesses now home-based, it's no longer the case.
Home office tax myths
The increase in home offices also has led to an increase in associated tax myths.
A common one is that by running a home-based business, you can deduct all expenses related to your residence. It is true that many expenses are allowed; for example, you can claim some of your home maintenance and other homeownership costs as business deductions.
But generally, the rules for home-based business tax deductions are the same as for companies headquartered elsewhere. A key question to ask yourself is whether you would have incurred a particular expense if you weren't in business.
Those necessary business expenditures are the subject of another myth: You have to take the home-office deduction in order to claim any other business expenses. Wrong. You still can deduct for all legitimate business costs regardless of whether you take the home-office deduction.
General business deduction myths
When you do get out of your office—regardless of where it's located—to conduct business, don't fall for these other tax myths.
Take your car, for example. A common misconception is that if by conducting any business while in your auto, all mileage is deductible. Not so. Simply stopping at a client's office between personal errands does not make all your driving tax-deductible business travel. Only the segment expressly for business can be claimed.
Or, as business tax author Eva Rosenberg puts it when some business owners insist they use their vehicles 100 percent for business travel, "Give me a break! You go to the market, dry cleaners or to pick up your children on the way home from work." The Southern California-based Enrolled Agent says that not only does the IRS look closely at excessive mileage claims, but California tax officials are targeting those returns for audit, too.
Don't fall for this business auto myth either: You can write off all your vehicle costs if you place advertising on the car. IRS Publication 463 specifically states that putting display material that advertises your business on your car does not change its use from personal to business.
And definitely don't believe that you can write off all business entertainment expenses. This myth is only half true. In most cases of wining and dining clients, the IRS only allows you to claim up to 50 percent of the cost of meals and entertainment as a business expense.
