Ten Tax Myths Facing Business Owners

In the complex world of federal taxes, myths and misconceptions can lead to costly mistakes and missed opportunities — especially for business owners and high-net-worth individuals. Here’s a look at 10 tax myths that, if left unchecked, may limit tax breaks and potentially trigger IRS scrutiny.

Myth 1: Filing an Extension Means You Can Delay Paying Taxes

Reality: Filing an extension from the usual April 15 deadline until the extended October 15 deadline gives you more time to file your tax return. However, it doesn’t give you more time to pay any tax due.

To avoid interest and penalties, you must calculate your estimated tax liability for the year and submit payment with Form 4868. The IRS Safe Harbor Rule allows taxpayers to avoid a late payment penalty if by April 15 they pay either:

• 90% of the current year’s total tax liability, or
• 100% of the prior year’s total tax liability (or 110% if your adjusted gross income exceeded $150,000 in the prior year).

If you meet either threshold, you may avoid a late payment penalty, but interest will still accrue after April 15 on any unpaid amount. If you owe no tax or expect a refund, penalties don’t apply for late filing within the extension period.

Myth 2: Working from Home Means You Can Claim Home Office Deductions

Reality: Home office deductions are available only to eligible self-employed individuals, independent contractors and people who run a business from home. The Tax Cuts and Jobs Act eliminated the ability to claim home office deductions for remote employees.

In addition, eligible taxpayers can only claim deductions for spaces used exclusively and regularly for business. Mixed-use spaces don’t qualify. It’s important to keep detailed records to protect your deductions.

Myth 3: You Can Avoid Estate Taxes by Simply Giving Assets Away

Reality: Gifting can reduce the size of your taxable estate, but it’s not unlimited. The annual gift tax exclusion allows you to give up to a certain amount per recipient without incurring gift tax implications. However, gifts exceeding this amount may be subject to gift tax and must be reported.

Additionally, you should consider the lifetime gift tax exemption. In 2025, individuals can gift up to $19,000 per recipient per year without affecting their lifetime exemption of $13.99 million.

Myth 4: Businesses Can Write Off All Their Expenses

Reality: Although businesses can deduct a wide range of expenses, not everything is eligible. Business expenses must be “ordinary and necessary” for the industry, which can sometimes be subjective. For instance, the IRS may scrutinize lavish meals and personal expenses written off as business expenses.

Tax law also limits certain deductions. For example, most business meals are only 50% deductible, but some, such as office-wide events or meals provided for employee convenience, may be fully deductible. Entertainment expenses, such as sports tickets or theater outings, aren’t deductible, though meals during such events may still qualify if separately stated.

Understanding the distinction between legitimate business and personal costs is critical to avoiding IRS attention and disallowed deductions. Detailed records are essential for compliance.

Myth 5: Students Don’t Have to Pay Taxes and Don’t Need to File Returns

Reality: While it’s true that some students don’t make enough money from a part-time job to require filing tax returns, other students may have to file. It depends on how much income they earn. A student must generally file a tax return if he or she earns more than the standard deduction ($15,000 in 2025 for a single taxpayer, up from $14,600 in 2024). Other rules may apply if a student is a dependent and has more than $1,350 in unearned income in 2025, for example in interest, dividends or investment gains.

Even if filing isn’t required, students may want to. If they had taxes withheld from paychecks, they may be eligible for refunds by filing.

Myth 6: Businesses with Losses Don’t Need to File a Tax Return

Reality: A business operating at a loss isn’t exempt from filing tax returns. Corporations must always file regardless of profit or loss, while sole proprietors with no income or expenses may not need to file. Partnerships and S-corporations must still file since their losses pass through to owners.

Even if a business generates zero revenue, it still should file tax returns because losses can offer tax advantages. For instance, if your business incurs a net operating loss (NOL), you may be able to use it to offset taxable income in future years. Properly documenting and carrying forward NOLs can be a valuable tax tool.

Myth 7: Tax Deferrals Aren’t Worth the Hassle

Reality: Tax deferral strategies may seem cumbersome, but they’re among the most effective methods of managing tax liabilities. Deferred compensation arrangements and qualified retirement plans, such as 401(k)s and IRAs, allow individuals to grow tax-deferred wealth. For high-income business owners, deferred compensation plans and cash balance pension plans provide excellent opportunities to grow investments tax-free until retirement, when distributions are generally taxed at a lower rate.

Additionally, business owners may defer taxes on capital gains through Section 1031 exchanges for real estate. This strategy requires professional advice but may result in significant tax savings over time.

Myth 8: Tax Planning Needs to Happen Only Once a Year

Reality: Tax planning is a year-round activity, especially for business owners and high-net-worth individuals. Waiting until tax season to plan tax breaks and manage income may result in lost opportunities or unnecessary tax liabilities. Business owners should regularly meet with their tax advisors to manage cash flow, make estimated payments and take advantage of changing tax laws.

Effective tax planning includes forecasting income, assessing retirement contributions, and considering strategies for timing deductions and credits. Strategic quarterly reviews often yield more tax efficiency than an annual approach.

Myth 9: Hiring Family Members Provides Large Tax Write-Offs

Reality: While hiring family members can reduce a business’s taxable income and spread wealth among relatives, it must be done within IRS guidelines to avoid scrutiny. Wages paid must be reasonable, reflect actual services rendered and be well-documented. Misusing family hires for tax breaks can raise IRS attention, especially if the wages appear inflated or if no substantial work is performed.

Paying children under 18 in a sole proprietorship or family partnership can also offer some federal payroll tax savings. But those arrangements require meticulous documentation.

Myth 10: You Don’t Have to Bother Filing a Tax Return if Your Income Is Too Low

Reality: Even if your income falls below the threshold for owing federal income tax or filing a return, you might still benefit from filing a return. In some situations — especially if you’re eligible for refundable credits, such as the Child Tax Credit or the Earned Income Tax Credit — you could receive a refund.

Certain factors, including business or investment income, may also trigger a filing requirement regardless of overall income levels. For example, suppose investment losses cause you to have an overall capital loss for the tax year. In that case, the loss can be carried forward to future tax years and offset otherwise taxable capital gains in those years. However, until you file a return for the year, the IRS will have no way of knowing that you generated a tax-saving capital loss carryover.

Key Takeaways

Tax myths may lead to costly mistakes, missed deductions or increased IRS audit risk. Separate fact from fiction and stay informed. Your trusted tax advisor can help you tackle tax complexities, ensure compliance and keep more of your hard-earned money.

Copyright 2025

This article appeared in Walz Group’s March 10, 2025 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.