7 Tax Tips for Small Business

Starting a small business involves a host of little details -- some more complicated than others. One of the most complex involves how your business will be taxed.

Like individuals, businesses face a host of taxes imposed at every level of government, from the federal Internal Revenue Service, to state departments of revenue, to county and city tax assessors. Not only will you have to pay taxes on your business profits, but you may also have responsibilities for withholding, collecting, and remitting certain other taxes, such as payroll and sales taxes, to the appropriate authorities. Although rules specific to your state and city may have special quirks, we can still cover some general issues about which you should remain aware.

Federal income taxes
If your business makes a profit, you'll probably of income tax. However, what you pay depends on the form of business entity you choose. If you operate your business as a sole proprietorship, partnership, or limited-liability company, then the income tax is usually not imposed on the business entity itself, but on the owners. Those owners will then include their respective shares of the total profit on their individual tax returns, usually by filing Schedule C to Form 1040.
If you operate a partnership with one other person, and the business makes $1,000, then if you have agreed to split profits equally, each of you will report income of $500 on your individual income tax returns. Businesses set up in this fashion are sometimes referred to as pass-through entities. For partnerships and LLCs with more than one member, your business will generally need to file an information return with the IRS to report the overall profits of the business, and to allow the IRS to make sure the various individual owners report all of their income.

If you choose to incorporate your business, you will have a choice to make. Most small businesses can qualify to be treated as a subchapter S corporation, the name referring to the part of the Internal Revenue Code that governs such companies. By electing S-corporation status, your business will be treated as a pass-through entity that needs to provide only an information return. However, if you choose not to elect this status, then your corporation will be an entirely separate business entity, requiring a separate income tax return and incurring its own tax liability. If the corporation makes payments to you, you may have to treat those payments as income; you therefore will either have to find a corresponding corporate deduction, or end up paying tax twice. The potential for double taxation leads many small-business owners to choose S-corporation treatment, if they form a corporation at all.

State taxes
Every state has some unique tax rules. That can make it harder for businesses operating in multiple states to calculate tax liability and conduct proper tax planning. Business taxes at the state level come in many different varieties, and it's crucial for you to understand the way your state works so that you are prepared when you have to pay.

For the most part, states tend to tax businesses using one of two different figures as a tax base: the net taxable income of the business or the total revenue of the business. For states that use a tax on net income, the rules often closely resemble those for individual income taxes -- the business reports income and deductible expenses, and it pays tax on the net taxable income using a rate schedule that the state legislature sets.
States that base their tax on the total revenue of the business, however, use rules that more closely resemble sales-tax rules -- a tax rate is applied to the gross receipts of the business, without regard to whether the business made a profit. As a result, you may well owe tax to your state, despite having no federal tax liability, and even though your business may have lost money during that year.

In addition, if your business owns inventory, equipment, or other property, you may need to pay property tax. Again, the specific aspects differ greatly from place to place. Some jurisdictions impose property taxes on even small amounts of property, while others impose no tax unless the business owns property with a value above a certain amount.

Most states have excellent resources for new business owners, available either on the state's website or by getting in touch with the state agency responsible for collecting tax. In reviewing a state's materials, you should especially consider a few important issues:

• If your state imposes business taxes, determine whether they apply to the type of business entity you have chosen. Some states impose taxes only on corporations, but allow pass-through entities to follow federal income-tax rules and collect individual income tax from the owners of the business.

• Find out whether your state follows federal income-tax rules for calculating deductible expenses. While some states have self-adjusting laws that automatically incorporate changes in federal tax law, other states use the federal law in effect on a certain date in the past, and still other states have their own special rules that may differ completely from federal tax rules.

• Speak to your taxing authority to get more information about anything you don't understand. It's far better to spend time now than to wait until an unexpected tax notice arrives in the mail.

Federal and state taxes imposed directly on new businesses can be extremely complicated. But even once you get a handle on them, you may still be responsible for collecting some other types of taxes, such as payroll tax and sales tax. The rules for these taxes are often just as complicated as income-tax rules are, and the consequences of making mistakes can be equally devastating to your business.


Payroll and self-employment tax
If you hire employees, your responsibilities don't end once you hand them their paychecks. You have to make sure you withhold the proper amounts from their paychecks for the various taxes that your employees must pay, and your business will have to pay employment-related taxes of its own. You don't even have to have employees to incur employment-related taxes. Even a sole proprietor who works completely independently without any employees must pay a self-employment tax.

As an employer, you have an obligation to withhold certain taxes from the paychecks of your employees. These taxes include Social Security and Medicare withholding, federal income-tax withholding, and any additional withholding your state imposes, including state income tax, unemployment, and disability-insurance withholding.

Determining the proper amount to withhold for federal and state income tax requires that you consult withholding-tax tables. To use the tables, you will need to know the number of withholding allowances your employees wish to claim; your employees will make this election on federal tax form W-4, which you should provide to them when you hire them. Depending on the amount of your total payroll, you must turn over these withheld taxes to the IRS on a regular basis, either twice a week or monthly. IRS Publication 15 contains additional information for employers about their obligations. Similar provisions apply to any taxes that your state requires you to withhold from employee pay.

In addition to withholding employment-related taxes from your employees' pay, your business itself incurs taxes that result from hiring employees. The employer is required to match the amount withheld from employee pay for Social Security and Medicare. In addition, the employer must pay federal unemployment tax for each employee. This amount may be reduced if your state requires your business to make payments into a state unemployment fund.
New businesses often have cash-flow problems. However, making payments of withheld payroll taxes is the single most important thing for you to do as a business owner. The IRS takes it very seriously when an employer diverts money withheld from employees' wages. Congress has given the IRS substantial power to deal with situations involving a failure to pay withheld taxes. In addition to large penalties, the IRS can collect not only from the business itself, but also directly from the personal assets of the business owners, officers, and directors responsible for making financial decisions for the business. You may be tempted, but you don't want to go down this road.

Sales tax
Many states and some cities and counties charge a sales tax on purchases. Some states limit the application of sales tax to physical goods, while others also impose sales tax on services. In most cases, it is the responsibility of the business to collect the tax from customers and to remit collected funds to the state government.

Although many commentators have suggested that replacing the federal income tax with a national sales tax would simplify the tax system dramatically, there are still many things to keep in mind in dealing with sales tax. For instance, most states provide exemptions from sales tax for certain items, such as food or clothing. Other states charge different rates for different categories of purchases. In addition, you may not need to collect sales tax if the purchaser intends to resell the item as part of the purchaser's business.

For example, if you own an auto-parts store and sell a part to a consumer, then you probably need to collect sales tax. However, if you sell a part to a repair-shop owner who will then resell the part to a customer, then you may not need to collect sales tax because the repair shop-owner will get the tax from the final customer. Most states require such purchasers to present a sales-tax exemption certificate.

Hi

The deductibility of health insurance premiums can be a confusing subject for S corp owners. If you own more than 2% of the stock in an S corp (which you probably do if it’s your company), then the corporation can NOT deduct as a business expense the cost of health insurance premiums it pays for you.
Wait, don’t shoot, I’m just the messenger. Sorry if this is news to you, but it’s the law. What can you do about it?
You’re allowed to include the cost of the health insurance premiums on line 29 (self-employed health insurance deduction) of your individual Form 1040 as an adjustment for adjusted gross income. The amount should have been reported to you on your W-2. Of course, you would have had to tell your payroll service what the amount was in order for them to include it.



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Taxes are one of the most important issues facing small and growing businesses. And like a company's profits, its annual tax bill will in part reflect the owner's skills and knowledge. Business owners need to be sure that they are meeting all of their responsibilities to the tax man -- and also seizing every opportunity to reduce their taxes. These tax tips will ensure Uncle Sam is not getting more than his due.
1. Writing It Off: Deductions. Businesses can deduct all "ordinary and necessary" business expenses from their revenues to reduce their taxable income. Some deductions are obvious—expenditures in such areas as business travel, equipment, salaries, or rent. But the rules governing write-offs aren't always simple. Don't overlook these potential deductions:

• Business losses. Business losses can be deducted against a business owner's personal income to reduce taxes. If a business owner's losses exceed personal income for the year, some of the year's business losses can be used to reduce taxable income in future years.
• Trips that combine business and pleasure. If more than half of a business trip is devoted to business, deduct the traveling costs, as well as other business-related expenses.

2. Employee Taxes. If a business has employees, a variety of taxes will have to be withheld from their salaries. Among them are:

• Withholding. Social Security (FICA), Medicare and federal and state income taxes must be withheld from employees' pay.
• Employer matching. Businesses must match the FICA and Medicare taxes and pay them along with employees.
• Unemployment tax. Businesses must pay federal and state unemployment taxes.

3. Quarterly Estimated. This area trips up many an entrepreneur and is especially vexing for home-based businesses. Failure to keep up with estimated tax bills can create cash flow problems as well as the potential for punishing IRS penalties. Among the issues are:

• Who should pay? A business probably must pay quarterly estimated taxes if the total tax bill in a given year will exceed $500.
• How much should you pay? By the end of the year, either 90 percent of the tax that is owed or 100 percent of last year's tax must be paid (the figure is 110 percent if a business's income exceeds $150,000). Businesses can subtract their expenses from their income each quarter and apply their income tax rate (and any self-employment tax rate) to the resulting figure (their quarterly profit).

4. Sales Taxes. Most services remain exempt from sales tax, but most products are taxable (typical exceptions are food and drugs). If a business owner sells a product or service that is subject to sales tax, he or she must register with the state's tax department. Then taxable and nontaxable sales must be tracked and included on the company's sales tax return.

• Having what is considered a "presence" in a state is the criteria used by the IRS to determine whether or not you are liable for paying state sales tax.
• If you do not have a physical presence in another state, but sell items via the Internet or by catalog in that state, you can be subject to a state’s "use tax," but typically not to their state sales tax. A "presence" in another state does not necessarily mean that you have a retail outlet in that state. If you have an office, warehouse, or employees working for you in that state, the IRS may consider you to have a presence in that state. Make sure you are aware of your sales tax responsibilities in all states in which you are doing business.

5. Keep Tax Documents for at Least Seven Years. Good record keeping saves money. Some things like copies of business tax returns, licenses, incorporation papers, and capital equipment expenses should be preserved indefinitely. Keep any tax-related documents (e.g., expense receipts, client 1099 forms, and vehicle mileage logs) for a minimum of seven years.
6. Charitable Contributions. Unless your business is a C corporation, charitable contributions typically "flow through" the business and are claimed as deductions on the individual tax returns of the shareholders of the company. That's true whether you're running a sole proprietorship, partnership, limited liability corporation, or S corporation.

• If you want to get the maximum tax benefits, you should know these basic rules:
• Only contributions to charities listed as "qualified organizations" by the IRS are deductible. Consult IRS Publication 78 for a list of qualified organizations or search online at the IRS home page.
• Contributions of more than $250 require a letter of receipt from the qualified organization. For contributions of less than $250, a canceled check is sufficient.
• In general, donations of property can be deducted for their fair market value at the time of the contribution. You cannot deduct a contribution that has already been written off as a depreciated asset.
• You cannot deduct the value of time or services that you volunteer.
• You cannot deduct the part of a contribution that benefits you. If you receive a gift in exchange for a charitable donation, for example, you can deduct only the amount of the contribution that exceeds the value of the gift.
• In general, you can deduct contributions only in the year you make them. Pledged contributions cannot be deducted until they are actually paid.

7. Important Tax Deadlines for Businesses. April 15 isn't the only important tax date for business owners. The following dates are important to keep in mind:

• Annual returns. Most annual returns are due April 15 for unincorporated companies and S corporations. C corporations must file annual corporate returns within two-and-a-half months after the close of their fiscal year.
• Estimated taxes. Estimated taxes are due four times a year: April 15, June 15, September 15, and January 15.
• Sales taxes. Sales taxes are due quarterly or monthly, depending on the rules in your state.
• Employee taxes. Depending on the size of your payroll, employee taxes are due weekly, monthly or quarterly.

8. Deducting Loans. Most business loans are not considered business income. One notable exception is a situation in which you negotiate with a creditor or lender to reduce your debt. If any debt is forgiven, you will owe taxes on this amount. On the other hand, business loans can offer substantial tax benefits. The principal and interest you pay on your loan are business expenses, and you can deduct them from your taxes as such. In order to take advantage of a tax deduction, you must report the total amount of the loan, and the assets and expenditures financed must be necessary to operating the business. 9. Tax Audits. The very thought of an IRS audit is enough to make most business owners break into a cold sweat. But not all audits are created alike: There are several different types of tax audits, ranging from simple requests for a particular piece of information to comprehensive reviews that cover every aspect of a business.

• Correspondence Audit This is a relatively simple procedure in which the IRS asks you to document an item on your return by a specified date. This is usually a routine test for compliance with certain items on your return.
• Office Audit The IRS may ask you to report to a nearby IRS office and document one or more items on your return. You may be able to send them copies of this proof in advance of the appointment and resolve the issue without actually going to the office.
• Field Audit This is the audit most people dread. The IRS will ask you to provide documentation of various items on your return and to meet with an IRS agent for a thorough review of your records. Be prepared to answer the auditor’s questions, but don’t volunteer information.
• Taxpayer Compliance Measurement Program Audit This rather lengthy and detailed audit asks you to document and prove every single item in your return. The IRS and Congress use the data from these audits for research and statistical purposes. These audits are arbitrary, and anyone can face them regardless of how carefully they prepare their tax returns.
• Criminal-Investigation Audit If you are suspected of tax evasion, the IRS will conduct a criminal-investigation audit. If they prove that you have purposefully not paid your income taxes, you can face substantial fines and even jail time. Obviously, you should retain qualified legal counsel if you face this type of audit.

10. The IRS. The IRS small business Web site provides a wealth of information to small and growing businesses. There's a section for businesses getting off the ground that includes a handing checklist and advice on choosing business structure. It's particularly helpful on important topics such as employee taxes and business tax deductions. In addition, it has a list of small business resources with links to other government resources for small businesses.

Writing It Off: Deductions

Businesses can deduct all "ordinary and necessary" business expenses from their revenues to reduce their taxable income. Some deductions are obvious — expenditures in such areas as business travel, equipment, salaries, or rent. But the rules governing write-offs aren't always simple. Don't overlook these potential deductions:

• Business losses. Business losses can be deducted against a business owner's personal income to reduce taxes. If a business owner's losses exceed personal income for the year, some of the year's business losses can be used to reduce taxable income in future years.
• Trips that combine business and pleasure. If more than half of a business trip is devoted to business, deduct the traveling costs, as well as other business-related expenses.

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Hi

If you hire employees, your responsibilities don't end once you hand them their paychecks. You have to make sure you withhold the proper amounts from their paychecks for the various taxes that your employees must pay, and your business will have to pay employment-related taxes of its own. You don't even have to have employees to incur employment-related taxes. Even a sole proprietor who works completely independently without any employees must pay a self-employment tax.

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