The Congressional statues passed related to tax which is in two volumes. The first volume is 1,404 pages, and the second volume is 1,248 pages, for a total of 2,652 pages. Additionally, the total number of statues and regulations at the time of this post numbers somewhere in the ballpark of 9,000 pages. Court cases relating to tax rulings? Well, the combination of those rulings comes out to somewhere around 70,000 pages. So…it’s entirely possible that you might be missing something while starting your own business.
3 Key Tax Mistakes You Might Be Making Without Even Knowing It
James Dodd, MBA, EA
Knowing If You Are Required to File a Self-Employment Return
No matter how much revenue you make in your business, you’re required to file that income with your income taxes. However, there’s an important milestone here. If you make $400 or more in your business, you are required to file form SE (1040) to determine self-employment tax, and schedule C to calculate net earnings. Now that you must file these forms, you need to know the difference between your deductible expenses for tax and how they differ from your book income deductions.
KEY TAKEAWAY: If you are earning more than $400 from your small business, you are required to file schedules SE and C.
Is Your Business in Danger of Becoming Considered a Hobby?
One of the benefits to running your small business is being able to deduct your expenses related to the business against your business income. Your business expenses (if you are set up as a flow-through entity) will be deducted from your taxable income. However, the IRS requires that you make a profit in 3 of the previous 5 years in order to be considered a business and not a hobby. Most businesses will have a loss in the first couple of years, that’s the nature of starting a new business, but the IRS does expect you to become profitable if you want to keep deducting those expenses.
KEY TAKEAWAY: You must turn a profit in 3 of the past 5 years of your business operations in order to continue to be viewed by the IRS as a business and not a hobby, or otherwise have substantial proof of a business purpose.
Are You Filing Your Partnership Informational Returns?
Partnerships are flow-through entities, which means that the partnership itself does NOT pay tax on its income, but rather the profits and losses are “passed through” to the partners who include those items on their own individual tax returns. However, partnerships are required to file Form 1065. Form 1065 is an informational return that provides the IRS with the details of the partnership’s income and expense activities and includes several schedules that are required to demonstrate the individual partner’s distributive shares of the partnership. Additionally, you may not know that this form is due on the 15th day of the 3rd month after the end of your partnership’s tax year, meaning that you should be filing this no later than March 15th of a calendar tax year, not April 15th like your personal tax.
KEY TAKEAWAY: Your partnership must file an informational return no later than the 15th day of the 3rd month after the end of your partnership’s tax year.