It’s difficult for a sole proprietor to find legitimate tax reductions. Tax codes are confusing, so it’s hard to decipher all of the rules and regulations.

In 1913, when income taxes were first instilled, the tax code book was only a half an inch thick. The very first tax return was only two pages with a four page instruction book. Things have certainly changed.

The tax code book is now two to four inch volumes and over a million regulations which explain what the code means. When you consider all of the tax-related court rulings that are attached to the code, you have 25 feel of library shelves.

The first thing a small business owner needs to realize is that with the same amount of profit, you won’t necessarily pay the same amount of taxes as another small business.

If you have ever wondered if others who make the same amount of money as you, but pay less in taxes, the answer is yes.

It’s legal for one business owner to pay less than another, even with the same income. Most small businesses pay more in taxes just because they own the wrong type of business. It doesn’t seem fair, but the truth of the matter is, it is legal.

The term “type of business” means whether you are a sole proprietorship, a partnership, a C corporation, an S corporation, or a limited liability company (LLC).

There are many types of business ownership. If you are not the “right” type, you will end up paying several thousand more in taxes than you need to. There are a lot of differences in the amount of taxes that these different kinds of businesses pay.

Sole proprietors generally end up overpaying their taxes because they are sole proprietors. Have you considered the tax benefits of a partnership, corporation or LLC? It’s what’s called a choice of entity analysis. By looking at the benefits of operating your business as anything other than a sole proprietorship, you could save thousands in taxes each year.

Talk to a tax professional to find out if changing your “type” of business will help you pay less in taxes.

Daniel Stoica Accounting Professional

People often  hold on to many myths when it comes to taxes.  Below is a list of those myths and how you can save money by separating fact from fiction.

Students are exempt.
A lot people think there’s an exemption for students, but students must pay taxes on all of their income, no matter how many credits they are taking or whether they are a full-time student.

There are special credits for students, though, such as, the Lifetime Learning Credit and the new American Opportunity Credit. Distributions from a 529 Plan are tax-free, but the income is taxed.

Students who during the summer check the “exempt” box on their W-4′s, but if they didn’t have any taxable income last year and don’t expect to have any this year, then they have nothing to claim.

I can’t claim my working child as a dependent.
If you are providing more than half your child’s support, they qualify as your dependent, and you can deduct any costs you paid for that child. Support is what’s spent, not what’s earned.

You can also qualify for an exemption if your child doesn’t earn more than the value of the exemption.

A child qualifies as a full-time student if he or she is a full-time student for at least five months during the tax year.

I can sell my house tax-free because I’m over age 55
The old law was that if you were older than 55, you could eliminate as much as $125,000 in gains from taxes, but you could only do that once. The new rules are even better.

Under the current law, age doesn’t matter. If you sold property that was your principal residence for at least two out of the last five years, you can exclude as much as $250,000 in gains, and $500,000 on a joint return. You can take the gain exclusion every two years if you qualify.

I can deduct my sales taxes too
If you file a Form 1040 and itemize your deductions on Schedule A, you can claim either state and local income taxes OR state and local sales taxes, but you cannot claim both.  If you decide to claim your sales taxes, you have to make sure that you save your sales receipts throughout the year so that you can add up the total amount of sales taxes you paid. 

If you were not very good about saving all of your receipts, you can choose to claim your state and local sales taxes instead.  One other option would be to fill out the worksheet and use the general sales tax tables found in the Instructions for Schedule A (Form 1040), but you can also use the IRS Sales Tax Deduction Calculator. 

I have to file a joint return if I’m married
If you’re married, you can always file married filing separately. You will pay more in taxes by doing so, but in some situations, this can be to your advantage.

If you’re married, you can’t file as single or head of household. However, if you’re separated and you have a child there are provisions that will let you file as head of household. Speak with a tax professional to get the most accurate information.

The tax codes are complicated and can change regularly. If you aren’t sure of the new rules, again, seek the advice of a tax professional.

Daniel Stoica Accounting Professional