Stop, Look, Listen - Isn't that one of the first lessons we learn and pass on to our children? It is a life lesson we should carry with us in most things we do. If you are about to start a business follow this simple advice - Stop, Look, Listen.
There are three, often overlooked steps, by first time business owners, and with good reason. They have never started a business and the tax laws, regulation and requirements for businesses are constantly changing and increasingly complex.
Before launching your new business take time to reevaluate and reassess by following these three simple steps.
1. Speak with a CPA. and a Lawyer.
Amazingly many business owners never consider meeting with a CPA or a lawyer until it is time to file taxes, or the business has put themselves into a difficult situation. Even before you write your business plan, consider sitting down with a CPA to evaluate the information that you should include in the business plan and see if the projected cash flow, income statements and balance sheets make sense. If you do not know how to do this, consider having a CPA assist you. Depending on the complexity of the business plan and amount of time required, the fee for assistance with this task can be as little as a few hundred dollars.
A lawyer will help you work out ownership or partnership agreements, licensing agreements, review franchise agreements, sales agreements, etc. Too often, spouses, family members and friends start a business with no formal ownership agreement in place. Owner and partners do not expect the relationship, philosophy or vision to change between them and do not plan for it. Isn't it better, to enter into a business relationship and understand what your recourse or exit plan is before things fall apart or take an unexpected turn?
2. Choose an Entity Appropriate for Your Business.
A new business can be setup as a Sole Proprietorship, Partnership, S Corporation or C Corporation. Note, I did not list an LLC. To the IRS the LLC has no tax meaning. When a business is setup as an LLC it is up to the owner or partners to let the IRS know how they want to be treated for tax purposes (an LLC can be treated as a sole proprietor, partnership, S corporation or C corporation).
The sole proprietorship, partnership and S Corporation are referred to as flow through entities. This means, the income of the business flows from the business to your personal tax return and is taxed at your personal income tax rate. The amount of taxes you pay is dependent on what business entity you choose, your personal federal income tax rate and the state income tax rate where the income is generated.
For flow through entities, the income from the business can be subject to taxes as high as 60%. That's correct, depending on the business entity chosen, the personal income tax rate, state income tax rate, local tax rate and self employment taxes (if applicable) can total as much as 60% of the business' net income. The C Corporation is treated differently and has it's own separate income tax schedule, along with it's share of complexities. Each entity has advantages and disadvantages.
During your sit down with a CPA, he or she can help estimate the tax consequence of each entity. There is no worse feeling for a CPA than to tell a business owner they owe tens of thousands of dollars in unexpected taxes because the owner did not seek advice beforehand.
3. Establish a Separate Bank Account.
No matter how convenient you think it is to have just one bank account for both your personal and your business expenses commingling your funds is a big mistake. The IRS, if they ever audit your business, will look at your business expenses with suspicion.
Suppose you setup a business to tutor students after school. The students, when they arrive at your facility are always hungry. You buy snacks and drinks to have available for them. so they are focused on learning and not their hunger. You purchase the snacks and drinks using a debit card tied to your personal account, often when you are buying other groceries.
This is a red flag to the IRS auditor. It will cause him to not only challenge these expenses, but many other business expenses regardless of whether they are legitimate. Needless to say, many of the expenses coming out of your personal account will be treated with suspicion and may be disallowed by the IRS. This is avoided by having separate bank accounts and using only your business account for expenses directly related to operating your business.
You can launch your business with confidence, by taking a little time to stop, look and listen and following the few simple steps listed above.
Over the past several years, it seems like we have been posting negative information for business owners regarding new regulations and the possibility of significant tax increases in 2013.
Taxmageddon is approaching in January, 2013 if Congress, the Senate and the President don't make any changes to the federal tax laws before then.
Well, amidst all the negative news, here is some great news for NC business owners.
Beginning this tax year (2012), NC business owners who have a Sole Proprietorship, S Corporation, Partnership or LLC will be able to deduct up to $50,000 of business income from their state taxes.
The news is even better if you and your wife are partners or co-owners of one of these entities. The new law allows you to each deduct up to $50,000 of income. So if you are business partners or co-owners, you can deduct up to $100,000 of income between the two of you.
This new income deduction falls under North Carolina statute, N.C.G.S 105-134.6(b)(22) and does not apply to C Corporations or passive income. If you have a rental property or any other investment that generates passive income, you are not allowed to use this income deduction.
A business owner whose business net income exceeds $50,000 can expect to save at least $3,500 on NC state income taxes and for married couples who share ownership of a North Carolina company, that tax savings can double to more than $7,000.
What a great incentive to start a small business in NC. If you are a small business owner or about to start a business, we can assist you. You may contact us here.
Are you a small employer and have fewer than 10 full time employees whose wages average less than $50,000 per year? If so, you can save money in 2010 and even more money in future year.
Eligible small employers may receive up to a 35% tax credit on the portion of the premiums paid for employees in 2010. Even better news for small business owner's is that this credit is scheduled to increase to 50% by 2014.
Now the details. The credit starts to phase out at more than 10 full time equivalent employees and/or when the average salary for your full time equivalent employees (FTE) exceeds $25,000. At 25 FTEs the credit is phased out or if the average wage for your FTEs exceed $50,000.
A Full Time Employee (FTE) is defined as either a full time employee who works 40 hours per week or multiple part time workers whose hours add up to 40 hours per week.
When determining FTEs seasonal workers are typically excluded, unless they work for an employer more than 120 days during the year. A seasonal worker is defined as a worker who performs labor or services on a seasonal basis as defined by the Secretary of Labor. This would include workers employed during the holiday season.
To learn more about the Healthcare Tax Credit download our Healthcare Tax Credit Guide.
Businesses scored a big win yesterday as the Senate voted to repeal the 1099 reporting requirements that was part of the Healthcare bill. This requirement had been the topic of several blog articles that can be found here, here, here and here. In these blog articles, we highlighted the devastating impact and high costs that this requirement would have had on businesses. Fortunately, both parties realized this was a burdensome reporting requirements.
This provision was slipped into the Healthcare bill and required that businesses would have had to report all business transactions with any single person or business that totaled more than $600 in a calendar year. According to Kenneth Schortgen, JR in his article that appeared on examiner.com today, he highlights the cost to businesses: "The sheer cost of doing this, coupled with the cost many people would have incurred by hiring accounting help just to deal with this provision, could have burdened small businesses to the point that up to 40% would have had to close their doors, or layoff workers."
The bill must still pass the House and be signed into law. Few problems are anticpated with it passing the House and President Obama during the State of the Union address indicted hew was willing to compromise on the 1099 reporting requirement.
Congress has returned from its August and recess and wasted no time getting down to business. Yesterday, the Senate cleared a hurdle to pass It's Mini-Tarp, aka the Small Business Bill. After the cloture vote passed, the Republicans could not stop it. They then turned their attention to amendments to the bill.
One issue they tried to tackle was to to ease the 1099 requirement that was passed in the Health Care bill. We posted here, here, here and here regarding the 1099 issue and how onerous this will be to all businesses in every industry and every size. Businesses from sole proprietorships to large corporations will be impacted with the additional cost and time required to track every business they sepnd more than $600 per year with and send out a 1099 to each of these businesses. For many business this could mean sending out hundreds to thousands of additional 1099s per year. Unfortunately, both the proposed amendments to correct this issue failed.
For now, starting in 2012, all of your expenditures with any one vendor that total more than $600 will have to be issued a 1099. Although, I would expect over the next year we will see additional efforts to eliminate or modify this requirement. Both parties recognize, how this is a bad idea and was a bad piece of legislation that was allowed to pass.
Here is a video put out by the Center for Freedom & Prosperity. This was put out two years ago. It discusses how the US corporate tax rate is among the highest in the world and how it puts the US at a competitive disadvantage when competing to bring jobs to the US.
In a previous post Welcome to Healthcare Tax Compliance Hell, a little known clause that was slipped into the Health Care legislation, was highlighted. This clause required that any taxpayer, with business income, is required to issue a 1099 form to any, and all vendors that they purchase goods or services from, and spend more than $600 per year with.
As highlighted previously, this means that when a painter or contractor goes to Home Depot or Lowes and purchases goods that total more than $600 in a year, they must issue Lowes or Home Depot a 1099. This is applicable to all individuals that generate business income regardless of how small they are.
The IRS is starting to come to grips with how extensive and onerous this new law is for individual taxpayers, small business owners and large businesses.
As always there are unintended consequences when laws such as this are implemented. One significant unintended consequence is that a number of companies may scale back on the number of vendors they use in order to minimize the number of vendors they have to track and issue 1099s to.
Neil deMause, in an article posted on CNN money.com, IRS Starts Mopping up Congress's tax reporting mess, highlights information from a report released by National Taxpayer Advocate Nina Olson.
An estimated 40 million taxpayers will be subject to the requirement, including 26 million who run sole proprietorships.
The article goes onto comment how Nina Olson is concerned with the new requirement.
Like may who have delved into the new rules, Olson is concerned about the far-reaching scope and potential unintended consequences.
"The new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate with any resulting improvement in tax compliance," the taxpayer advocate wrote in a report released this week.
The intent of the law is to create a paper trail for all business transactions. However, the massive burden and requirements for small business owners to comply may outweigh the benefits. In the CNNMoney article, they highlight how Pennsylvania business networking organization, SMC Business Councils, surveyed its members and found the requirement for issuing 1099s will increase on average from 10 to over 200.
In a previous post, Does Your Business Accept Credit Cards, If so, be Aware of What Awaits You in 2011, we highlighted how starting in 2011, credit card companies will be required to issue merchants a 1099. The purpose is so the IRS can track income to a business from credit card sales. This was a little known provision slipped into the Housing Assistance Tax Act of 2008.
IRS commissioner, Douglas Shulman, announced in May that credit card and debit card transactions to vendors would be exempt from this new 1099 reporting requirement. The reason, being is that the IRS will be capable to track the information based on the 1099s issued from the credit card companies.
This could be a a big boost to credit card processing companies, as more companies may use debit or credit cards in an effort to minimize the 1099s required to be issued. However, it could also drive up costs, since credit card processing fees are typically 2%-3%. of the purchase price. At some point in time, these costs will be passed on, in the form of higher prices.
In addition, it would also be likely that a number of business that use a number of different vendors, would try and consolidate to fewer vendors in order to reduce the reporting requirements. Finally, this law promises to drive up administrative and record keeping costs for businesses in order for the businesses to comply with the new regulations and filing requirements.
All of these new reporting requirements are all about tracking revenue and identifying businesses that are underreporting income. With the issuance of 1099s by the credit card companies, and taxpayers who generate business income, the IRS can cross reference the 1099 payments to reported business income listed on the year-end tax return for that business. If there is a disparity between the 1099s issued to that business and the reported income on the tax return, the return could be flagged.
Earlier this year, PA launched an aggressive amnesty campaign to collect back taxes owed to the PA Department of Revenue. Apparently, PA's amnesty campaign was extremely effective. According to Governor Rendell, the PA amnesty program brought in $261 million in previously uncollected revenue. The goal of the program was $190 million.
Because of the program's success, the state revenue agency and Governor Rendell plan on implementing new measures to go after additional back taxes owed. The Governor will be requesting additional money to fund the budget to hire additional revenue agents.
It should come as no surprise to anyone, that as the budget shortfall in the majority of states continues to be a problem each state will evaluate ways to collect moneys owed in back taxes. This may include implementing amnesty programs, hiring additional revenue agents and taking a much more aggressive stance in regards to collecting back taxes owed.
Now is not the time to try and evade or avoid paying taxes owed as it can lead to hefty fines, penalties and possible criminal charges for tax evasion.
As a business owner you may now have an opportunity to either receive a payroll tax savings for the rest of 2010 on employees you hire or take a tax credit against business income on your 2011 tax return.
The Work Opportunity Tax Credit offers business owners to take a tax credit against the income of the business if they hire an individual that is part of a "targeted group." Currently there are 11 differented targeted groups. The Work Opportunity Tax Credit Guide includes the list of targeted groups along with the definitions and the amount of credit that you can obtain by hiring a new employee from one of these groups.
The HIRE Act of 2010, aka '"The Jobs Bill", passed last month includes an opportunity for businesses to not have to pay the 6.2% employers portion of social security tax if they hire an individual that has not worked for more than 40 hours in the previous 60 days. the employee will have to fill out and sign an affidavit to that effect. This HIRE Act Guide of 2010 includes a more detailed summary of the Act and here is the HIRE Act affidavit that has to be filled out and signed.