Some Small Business Tax Deductions Aren’t Worth Taking
The words “tax deduction” are music to a small business owner’s ears. After all, money is usually tight, and small business owners often have to squeeze out every penny in value, so a few extra dollars really can make a meaningful difference.
But believe it or not, once in a while, it makes sense not to take a deduction. In fact, some small business tax deductions can end up costing you far more than they save you.
Here’s a look at a few instances in which moderation really is the best rule when it comes to dealing with the tax man.
3 Times Small Business Tax Deductions Can Come Back to Bite You
1. When They’re Not Legitimate: In its annual “Dirty Dozen” list of tax scams to avoid, the IRS warns businesses to not “fudge” their tax returns by trying to claim deductions, expenses or credits that they don’t’ qualify for. Deductions the IRS lists as ripe for padding are charitable contributions or business expenses. The IRS warns that its auditing system is becoming increasingly more complex and efficient – thus more able to catch such transgressions – and that falsely claiming deductions and other credits can result in criminal prosecution.
2. Social Security: Self-employment taxes are determined based on how much taxable income your business generates. However, while it might seem like a good idea to lower your tax burden no matter what, business owners should remember that the lion’s share of those self-employment taxes go toward Social Security. Thus, if you work hard to reduce how much you pay in self-employment taxes, you’re effectively cutting down on how much Social Security you’ll receive in retirement. Small business owners do have options – namely, investing any savings so they’re still contributing toward their own retirement – but that route does involve more risk.
3. Selling Your Business: Like with Social Security taxes, there are other times when your company will benefit from recording more income rather than try to reduce it in order to save on taxes. Income can be used to determine eligibility and worthiness for loans and other financing. But this stretches all the way to the end, when a small business owner is finally ready to sell the business. Depending on how business valuations are calculated for your business, lower income can actually result in a lower overall price tag on your company.
When should you take tax deductions and credits, and when should you resist the urge? The tax specialists at McManamon & Co. can help small and midsize businesses determine the best strategies every year, ensuring you pay less without handicapping yourself later on.
Learn more about the deductions you should (and shouldn’t) take. Call us at 440.892.9088 or contact us online.
Tags: McManamon, small business, small business taxes | Posted in business valuation, McManamon & Co., small business, small business taxes, taxes