20 tax tips for small businesses

20 tax tips for small businesses
The Internal Revenue Service sent letters to thousands of small-business owners recently, questioning whether they underpaid their taxes last year. 

Titled “Notification of Possible Income Under Reporting,” the letters were mailed to small employers this summer requesting that they review and confirm that they accurately reported their income on their 2012 tax returns.

In response to this action by the IRS, American University professors Donald Williamson and David Kautter have created a list of “Tax Best Practices for Small Businesses,” a checklist designed to help small business entrepreneurs stay up to date on all tax-related issues, and away from the scrutiny of 
the IRS. 

Here’s what Williamson & Kautter recommend small-business owners should do: 

1. Keep good records about who is an “employee” and who is an “independent contractor.” 
2. Keep track of places where you may have "nexus" (“physical presence”) (even unknowingly), to properly comply with state rules governing sales and income tax collection. 
3. Invest in a good software accounting system — to track your records and regularly provide updates to new IRS rules. 
4. Hire a tax accountant who has experience in your type of business, whether it’s a coffee shop or a construction business. 
5. Keep good records on how much was paid and the date placed in service, for any equipment, vehicles or other business assets. 
6. Avoid using funds from employee payroll tax withholding (or any taxes, for that matter) as a short-term loan to tide your business over during a shortfall in your cash flow. 
7. One of the biggest traps for small-business taxpayers is estimated taxes — pay quarterlies on time, calculate quarterlies correctly, and know the safe harbors that can protect you against underpayments.  Miscalculating any of these steps can be a major headache, so small-business owners should speak with someone, most likely a tax accountant or enrolled agent, who knows the rules cold. 
8. If you are the owner, and your spouse, child, mother-in-law, or other close relative works in your business, you should make sure your relative abides by the same employment rules as your unrelated employees. When someone pays you in cash, it doesn’t mean that payment is nontaxable.
9. Select a “tax year” for your business that reflects the natural ebb and flow of your business’ receipts and disbursements. This way, you won’t get caught in a cash crunch when tax time comes. 
10. You (or your accountant) should retain all relevant tax records for at least three years, and if your records relate to property and depreciation, you should keep the records until the property is disposed of, plus an additional three years. 
11. Keep detailed records on how you use your personal or business-owned vehicle for business versus personal purposes. 
12. Hire a reputable third-party administrator (such as Fidelity or Vanguard) to manage your 401(k) plan and other tax-favored employee benefits. 
13. Make sure you (and your tax accountant) are familiar with the tax rules, including the favorable tax credits and deductions that are unique to your business. 
14. If it becomes necessary for your small business to open a foreign bank account in order to pay vendors or others in a foreign country, make sure you (and your tax accountant) are vigilant in following the new rules on foreign bank accounts enacted in the Foreign Account Tax Compliance Act, or FATCA. (FBAR reporting)
15. If your hope is that your business will continue after you die, under the leadership of another family member or designated heir, you should take steps to protect the business against a forced sale in order to pay inheritance taxes. 
16. Don’t become foolishly emboldened into thinking the IRS will have to “prove” you have done something contrary to the tax law. The "burden of proof" is always on the taxpayer, not the IRS. 
17. Become familiar with the tax rules surrounding starting, running, selling and shutting down a business. Determine whether you should operate as a Partnership, Corporation, S-Corp, LLC, or Sole Proprietorship. Your tax accountant should be closely familiar with these rules. 
18. Have a one-on-one conversation with your accountant about the Affordable Care Act. 
19. If you can’t pay the taxes you owe the IRS, or other tax agency, you should contact your accountant right away. The situation won’t get any better by ignoring it.
20. When someone pays you in cash, it doesn’t mean that the payment is nontaxable. The IRS has state-of-the-art statistical technology and models based on spending habits and bank accounts to build a case against alleged tax scofflaws.

Courtesy:  accounting today | October 2013 accountingtoday.com

Donald Williamson & David Kautter

Advantages & Disadvantages of Business Forms

Advantages & Disadvantages of Business Forms
Choosing the Right Business Form
Overview:  There are three basic business forms available for most business owners:

• Proprietorship (Schedule C)
• Regular Corporation (C Corporation)
• S Corporation

The matrix on below provides an excellent overview of the differences.  This section highlights important strategies for the different forms of business.

Description	Schedule C Proprietorship	Regular Corporation	S Corporation
Reasonable salary*	Not an issue	Deductible	Deductible
Unreasonable (excessive) salary	Not an issue	Not deductible by corporation;  dividend to shareholder/employee	Generally, not an  issue for shareholder/ employees
Social security taxes	Self-Employment tax based on bottom-line Schedule C income	Taxed 50% to  corporation and 50% to employee	Same as regular corporation
Net income	Taxed at individual tax rates	Taxed at corporate tax rates	Taxed at individual tax rates
Net loss	Deducted on individual return against other income; unabsorbed losses may be carried back 2 years and forward 20 years	Net loss on corporate return is carried back 2 years and forward 20 years	Deducted and carried back  and forward  on individual  return up to shareholder’s  basis in stock and loans  to corporation
Medical insurance premiums on owner	Deduct 100% on front of Form 1040	Deducted on corporate return	Same as proprietorship including ability to deduct 100% on front of Form 1040
Disability premiums on owner	Not deductible	Deductible to corporation; taxable to recipient of benefits	Not deductible by corporation or individual
Group term life insurance premiums on life of owner	Not deductible	Deductible as a tax-free fringe benefit on first $50,000 of coverage	Not deductible
Retirement benefits	Basically same as corporation	Basically same as individual	Basically same as individual
Supper money for owner	Not deductible	Deductible	Questionable
Election required	No	No	Yes – strict time limits
Ownership	Individual	Stock can be more than one class	Only individuals, estates, and trusts restricted to one class of stock (voting rights can differ)
Liquidation of ownership	Assets are sold and individual is taxed	Sale of stock or sale of assets and liquidation of corporation (double-tax problem)	Sale of stock or assets, no double tax problem, except for “built in gains”
Liability	Individual	Corporate, except for professional   corporations  wherein  professionals  remain liable under malpractice statutes	Same as regular corporation
Asset expensing IRC §179	Up to $500K if assets placed in service total less than $2MM	Claimed on  corporate return  with same  limits that apply  to an individual	Reflected on S Corporation  return and claimed  on individual return
Paperwork	Simplest form	Two separate entities for income tax purposes… payroll taxes… corporate minutes	Same as regular corporation;  however, may involve  more complex  state filing requirements
Hiring child	No social security tax if child under 18	Social security taxes apply	Social security taxes apply (may gift stock to children and eliminate social security on distribution, in addition, can still benefit from shifting income).

* Reasonable compensation:  Services performed by shareholder/owners must be reasonable compensated.  Reasonable compensation is subject to wide discretion. (Roob v. Commissioner, 50 TC 891, 898 (1968).  See Radtke vs. US; 712F. Supp. 143; Aff'd 895 F.2d 1196 (1990) in which no compensation was paid).   It must take into account: 

• Services performed
• Responsibilities involved
• Time spent
• Size and complexity of business
• Prevailing economic conditions
• Compensation paid by comparable firms for comparable services
• Salary paid to company officers in prior years

General Rules of Thumb

1. High medical expenses -- regular corporation
2. High disability premiums -- regular corporation
3. Income $20,000 to $70,000 -- S-Corporation to save social security taxes
4. High liability exposure -- corporation
5. Hiring children -- Sole proprietorship
6. Gift/Leaseback -- any form, but assets must be owned individually to create benefits
7. Appreciating assets -- S-Corporation or proprietorship

Reference:  Botkin, Sandy, Tax Strategies for Business Professionals, The Tax Reduction Institute

“Build a Business Plan” Online Tool

“Build a Business Plan” Online Tool
Having a business plan is a must for small business owners, but finding the time to put pen to paper often means putting them on hold until the very last minute, such as right before that big meeting with a loan officer or bank manager.

Every smart entrepreneur and business owner should already have a firm grasp of key information about their business and on what will influence the path they take and decisions they make over the course of 1-3 years.

Putting this information together into a concrete plan is essential if you want to secure a business loan or outside financing, of course. But the planning and mental exercise of writing it down is just as important to the success of your business. Writing a plan will not only help you succeed, but it will open your eyes to what it’s going to take to get there.

One of the big challenges for smaller businesses is actually building a business plan. What format should it take? What numbers should you pull together to demonstrate that you have a rock solid financial foundation? To simplify the process, SBA has just launched a new “Build a Business Plan” online tool that guides small business owners through the process of creating a basic, downloadable business plan. The great thing about this tool is you can build a plan in smaller bites, save your progress and return at your leisure.

To use the tool, you’ll need to be a member of the SBA Community (register here) and then log in. The tool offers a tab-based step-by-step guide that lets you enter information into a template for each section of the business plan, including market analysis, company description and financial projections. The tool is secure and confidential and will keep your plan on record for up to six months. You can also save, download or email the plan at any time.

Coutesy:  Building a Business Plan – New SBA Online Tool Can Help You Get Started
by Caron Beesley, Community Moderator 

Checklist for Sole Proprietor - Start-up Issues for New Business

Checklist for Sole Proprietor
Start-up Issues for New Business

Below is a checklist of actions that should be considered for the organization and operations of your sole proprietorship.
♦  Do assumed (fictitious) business name registration
♦  Consider tradename registration
♦  Apply for required operating permits, licenses, bonds
♦  Register for Federal SS-4 Tax ID #
♦  State ID# registration
♦  Register for State Sales tax number
♦  Register for State Unemployment, Withholding, Tax ID #
♦  Set-up bookkeeping systems for income/expenses, auto use, home office, equip. purchase, etc.
♦  Set-up bank / checking accounts
♦  Contact insurance company re. coverages (business liability, workers' comp, errors & omissions, disability, medical)
♦  If employees will be hired, order payroll deposit coupons and consider a personnel manual
♦  If subcontractors will be used,  have W-9 forms and consider a subcontractor agreement
♦  Establish association with loan officer
♦  Establish association with attorney
♦ Set up tax filing calendar of due dates (yearly, quarterly) 
♦  Consider putting spouse and children on payroll 
♦  Arrange for estimated tax payment filings 
♦ Consider a business pension / Profit Sharing plan (IRA, SEP, KEOGH)

Notes:

Reference:  Practice Enhancers, Able & Co.

Business Entity Choices

Business Entity Choices

In order to carry on a trade or business, a type of business entity must be chosen.  For all practical purposes, the four major business entities for the current year are:  sole proprietorship, partnership, corporation, and limited liability company.  For the purposes of this discourse, all references will be made to the active conduct of a business, rather than passive or limited-activity types.

The most efficient way of selecting a business entity revolves around trying to match the needs(present and future) of the business and its owners in legal, financial, and tax-related areas.  In other words, this selection process becomes a form of a needs analysis study.  In some cases, it is relatively easy; in fact the choice may be practically automatic.  In other cases, it can be quite complex to coordinate the current and future needs of both the business and its owners.

There are a number of variables that should be addressed in this process to help delineate it.  Further, the advantages and disadvantages of each type of entity from a legal and tax perspective play important roles in the overall planning process.

Definitions Of The Four Major Types Of Business Entities

A good starting point is to first know what each of the entity choices represents:

SOLE PROPRIETORSHIP:

This is a self-employed individual who operates a trade or business where all the tax consequences fall to that proprietor, including all liabilities, debts, profits, and losses.

PARTNERSHIP:          

An organization or association of two or more participants who carry on a trade or business together, and allocate the ownership and profit/loss aspects according to their contractual terms.  This Partnership is a separate entity for tax filing purposes, but not tax paying.  Rather it is a form of a conduit where income, losses, credits, and certain deductions are passed along to the partners' tax situation instead.  There is no liability protection for the partners.

CORPORATION:     

A separate, legal entity formed through a state charter using articles of incorporation.  It is authorized to perform primarily all the business activities an individual can, including such things as filing and paying taxes, signing contracts, and making loans. It is formed through the issuance of stock or securities. There are two main types:  Regular("C") or Subchapter S ("S").

LIMITED LIABILITY COMPANY(LLC):    

This is a hybrid, or  combination, with some of the features of a partnership and the limited liability aspect of a corporation.  To qualify as an LLC, it can't have at least two of the main components of a corporation:  continuity, centralized management, transferability of ownership.  Thus, the two most significant features of an LLC are that it affords the partners some degree of limited liability protection, yet it still acts as a conduit like a regular partnership. This choice is not available in all states, but the majority allow it.

While the list of determining factors for making the best choice for the type of business entity can be quite long, an overview of the more common ones that tend to affect the vast majority of businesses is in order.  In effect, the business owner selects the features or attributes of the entity that best suit the current and future combined needs of business and owner.  This is not always easy since many factors are not always so "black and white," but, rather, fall into the "shades of gray" category.  Nevertheless, the following represents a list of the more common significant factors to compare the business entity types:

LIABILITY OF OWNERS

Sole Proprietorship:	Unlimited liability for business actions
Partnership:	Unlimited liability for business actions
Corporation:	Possibly limited to assets in corporation
LLC:	Possibly limited to assets in company

  

TREATMENT OF INCOME/LOSSES

Sole Proprietorship:	Taxable to individual proprietor
Partnership:	Taxable to partners
Corporation:	Taxable to regular "C" corporation; Taxable to shareholders for "Sub S" corp on federal(and most states) level
LLC:	Taxable to partners

CONTINUITY OF EXISTENCE OF BUSINESS

Sole Proprietorship:	Ends with death of proprietor
Partnership:	Ends with death, bankruptcy of partner or more than 50% change of ownership
Corporation:	Continues indefinitely
LLC:	May end with death, bankruptcy of partner, or change of ownership

TRANSFERABILITY OF INTEREST

Sole Proprietorship:	Relatively easy transferability
Partnership:	May require partner's approval
Corporation:	Easy unless restricted by agreements
LLC:	May require partner's approval

CHOICE OF TAX YEAR

Sole Proprietorship:	Proprietor's tax year which is usually on a calendar year basis
Partnership:	Usually calendar year unless business purpose is met
Corporation:	Can be calendar or fiscal for most "C" types. Must be calendar for "Sub S" types unless business purpose and special permission is granted
LLC:	Usually calendar unless business purpose is met

EASE OF SETTING UP

Sole Proprietorship:	Very easy, no state charter, or legal agreements usually required, few administrative, filing headaches
Partnership:	Reasonably easy, but agreements are generally recommended, state and federal tax identification numbers needed
Corporation:	More difficult and costly, often requiring state applications, legal paperwork, fees, state and federal tax identification numbers to be filed
LLC:	Somewhat more difficult than a regular partnership to qualify for LLC status;  agreements generally recommended, state and federal tax ID numbers required

OWNERSHIP LIMITATIONS

Sole Proprietorship:	Only the individual proprietor can own
Partnership:	No limit
Corporation:	No limit for "C" types; maximum of 75 qualified shareholders for "Sub S" types
LLC:	No limitations

EASE OF SHIFTING OF FUNDS IN AND OUT OF BUSINESS

Sole Proprietorship:	Very easy; draw account is used
Partnership:	Easy; partner's draw or capital account used, but must be tracked
Corporation:	More complicated for deductibility purposes, liability protection, etc.
LLC:	Easy; partner's draw or capital account used, but must be tracked

MINIMUM RECORDKEEPING REQUIREMENTS

Sole Proprietorship:	Easiest of the four entities; no balance sheet requirements, no accounting to other owners, partners
Partnership:	Fairly complicated, especially if partners' capital accounts are tracked
Corporation:	Complicated; balance sheet requirements,  minutes of meetings, resolutions, other "arms length" requirements to be met
LLC:	Fairly complicated, more so than regular partnership to keep qualifications as LLC intact

MANAGEMENT TYPE

Sole Proprietorship:	A centralized system with sole owner
Partnership:	Not centralized; partners' agreements usually required
Corporation:	Centralized with appointment by board of directors
LLC:	Not centralized; partners' agreements usually required

AVAILABILITY OF QUALIFIED RETIREMENT PLANS

Sole Proprietorship:	Deductible retirement plan available
Partnership:	Deductible retirement plan available
Corporation:	Deductible retirement plan available
LLC:	Deductible retirement plan available

PASSIVE LOSS DEDUCTIBILITY

Sole Proprietorship:	Can't offset ordinary business income
Partnership:	Can't offset ordinary business income
Corporation:	May be able to offset ordinary income for "C" types; not for "Sub S" types
LLC:	Can't offset ordinary business income

POSSIBLE DOUBLE TAXATION ISSUE

Sole Proprietorship:	No double taxation problems
Partnership:	No double taxation problems
Corporation:	Double taxation possibility for "C" type; no double taxation for "Sub S"
LLC:	No double taxation problems

POSSIBILITY OF TAX-SAVING FAMILY INCOME SPLITTING TECHNIQUES

Sole Proprietorship:	Very possible, if owner is employing offspring, especially those under 18
Partnership:	Definite possibilities to shift income to family members in lower tax brackets
Corporation:	Limited possibilities for "C" type;more possibilities for "Sub S" type
LLC:	Definite possibilities to shift income to family members in lower tax brackets

DEDUCTIBILITY OF VARIOUS FRINGE BENEFITS

Sole Proprietorship:	Limited, especially in health, accident, life insurance, medical reimbursement,  death benefits
Partnership:	Limited similar to sole proprietorship
Corporation:	Much more fringe benefit possibilities,  especially for "C" types; some restrictions on "Sub S" types
LLC:	Limited similar to partnership or sole proprietorship

ABILITY TO RETAIN EARNINGS TO DEFER INCOME TO OWNERS

Sole Proprietorship:	Cannot retain earnings; taxable to owner in year posted
Partnership:	Cannot retain earnings; taxable to partners in year posted whether or not they are distributed
Corporation:	"C" types can retain earnings up to  certain limits; "Sub S" types cannot retain; they are taxable to the shareholders whether distributed or not
LLC:	Cannot retain earnings; taxable to partners in year posted,  whether they are distributed or not

LEGALITY ISSUES FROM A STATE PERSPECTIVE

Sole Proprietorship:	Legal form of business in all states
Partnership:	Legal form of business in all states
Corporation:	"C" types recognized in all states; "Sub S" types not recognized for income tax purposes in all states, but recognized as a legal entity in all states
LLC:	Not recognized similarly in all states,  so formation, filings, and limited liability protection may be questionable especially if operations of business extend to multi-states

TAX RETURNS TO BE FILED

Sole Proprietorship:	Certain business schedules get included on individual 1040 form, but no  independent, stand-alone return is filed
Partnership:	Federal Partnership Tax Return, Form 1065 must be filed
Corporation:	Federal Corporation Tax Return, Form 1120 for "C" type; Federal Form 1120S for "Sub S" type
LLC:	File similar to partnerships, Form 1065

Summary:  General Advantages/Disadvantages Of The Four Entity Types

As can be seen, while the four main entity types have some common denominators, they are mostly intended to fulfill different business and individual needs.  There are advantages and disadvantages within each of these entities:

SOLE PROPRIETORSHIP:  This is usually the easiest type of entity to set up or terminate.  Losses from the business can offset income from other sources.  Management is totally centralized since there is only one legal owner.  Recordkeeping may be a bit easier.  Taking money out of the business is very easy.

However, there are some notable disadvantages, also:  There is no way to "retain" earnings like other business forms; the owner has no limited liability protection; continuity and transferability of interest is limited; and certain deductible fringe benefits are not available as with other forms of business.

CORPORATION:  Advantages include limited liability protection to owners, easy transferability of ownership, continuity even if original owners no longer exist, easier estate tax planning opportunities, more possible tax-free fringe benefit plans, and more flexible pension plans.  In addition, it allows for a number of owners to participate.  Obviously there can be numerous advantages.

The disadvantages can be equally as numerous.   A corporation is usually more difficult and costly to set up or terminate.  Much more planning is required to avoid double taxation issues.  Recordkeeping can be quite complicated to preserve the limited liability feature. Taking money out of the corporation can also get tricky.  Finally, tax return filings tend to be more involved.

GENERAL PARTNERSHIP:  If there is more than one owner, it is the easier of the entity types to set up.  Active losses can be used to offset other income for the owners.  Some degree of income tax and estate tax planning is possible since ownership percentages can be transferred fairly easily.

The disadvantages are similar in scope to a sole proprietorship:  No limited liability protection exists; the partnership usually ends upon the termination of a majority partnership interest, so continuity is limited; earnings cannot be retained, and tax-free fringe benefits are limited.   

LIMITED LIABILITY COMPANY:  This entity has some of the better aspects of a partnership coupled with that of a corporation.  It has limited liability protection, yet allows for the "flow through" of income and losses to the partners so there is less chance for double taxation.  Unlike the "Sub S" corporation with its limitations on the number of shareholders, and the type and status of these shareholders, there is much more flexibility here.  Income and losses can be allocated more easily as well.

However, the disadvantages center around the fact that these LLC's are still relatively new, and the states have varying rules and regulations concerning their operation, legal status, and degree of limited liability protection available.  In addition, like a general partnership, tax-free fringe benefits are restricted. From a qualifying perspective on the federal level, there is always the possibility that the LLC will be challenged on its qualification. This could lead to a disastrous situation where it is re-classified as a corporation, and a double taxation event could occur.

Conclusion

Selecting the best type of business entity is as much an art as a science.  This should match the type of business,  and the individual needs and wishes of the owners.  In addition, it should anticipate the developmental aspects of a changing business so a look into the future is often necessary.  To try to make this selection process as efficient and effective as possible, two actions are in order. First, make out your own "wish list" of what you want and need in a business organization.  Second, consider getting professional advice from a legal and accounting perspective as early in the selection process as you can.  It can be some of the most important advice your business will ever receive.

Reference:  Practice Enhancers, Able & Co.