Is your painting business making critical mistakes on its taxes? Check out these 5 common misconceptions.
"TAKING AN EXTENSION TO FILE TAXES IS AN EXTENSION TO PAY TAXES ALSO."
An extension to file taxes is simply that. You still must pay the amount you owe by April 15th to avoid penalties and interest.
"START-UP COSTS ARE IMMEDIATELY DEDUCTIBLE."
A taxpayer may choose to deduct up to $5,000 of business start-up costs and up to $5,000 of organizational costs in the current tax year. The taxpayer must deduct remaining costs over a 180 month period. Note: if your start-up costs exceed $50,000, you must reduce current year deduction for the amount exceeding $50,000.
For painting contractors, start-up costs include costs in connection with investigating or creating the creation of an active painting business.
Start-up costs for painting contractors include:
-Analysis of potential markets for where the painting business might be
-Advertisements for the start of the painting business
-Wages for employees and trainers who are under-going training
-Travel and costs for securing customers (such as cold calling), securing suppliers (such as the paint store)
-Salaries and fees for consultants or professional services (this might include marketing consultants or accountants)
-Organization costs include creating a corporation or partnership. To include costs for incorporation and legal services.
"THE HOME OFFICE DEDUCTION IS A RED FLAG FOR THE IRS."
The home office deduction is no longer a red flag, like it use to be. Due to today’s economy, vast amounts of taxpayers work from home and claim this credit. It’s not feasible for the IRS to red flag this deduction. However, the IRS does red flag a high deduction-to-income ratio for any deduction.
“IT’S MY TAX PREPARER’S FAULT”.
No matter who prepares your tax return, you are ultimately responsible for the tax return’s contents.
"IT’S NOT WORTH IT TO SET UP A RETIREMENT ACCOUNT AS A SOLE PROPRIETOR."
If you are a painting contractor with no employees, you can still set up a 401(k) for yourself. This actually can be an outstanding tax strategy. If you qualify, you can benefit from both “employee” and “employer” contributions to your retirement account. This allows you to save a significant amount of money in your retirement account.
With the solo 401(k), as an “employee” you can defer up to $18,000 (or $24,000 if you’re over 50) in compensation. Plus, as the “employer” you can defer the lesser of 25% of compensation or $53,000.
For example, as a sole owner, no-employee, painting contractor, you pay yourself $50,000 a year. You can defer $18,000 to a 401(k), plus another $12,500 (25% x $50,000); for a total of $30,500 saved for retirement in a single year.
About the Author
Daniel Honan is a bookkeeper and tax accountant who is also a former painting business owner and military officer. With his painting and accounting experience, he is uniquely positioned to help painting contractors save time, money, and resources.