Small Business Guide

While your know-how is certain to make an important difference in your business' success, you're no doubt well aware that producing a winning combination for a smooth-running operation depends on may other factors as well.

High on list of considerations for your business should be creating the ability to meet criteria imposed by Uncle Sam and the IRS. To help you avoid headaches that can come with trying to meet tax law requirements, this brochure highlights pitfalls to be aware of and provides some tips on how to overcome them.

From the very outset have a separate bank account for your business in which you deposit only business gross receipts and from which you write checks for business expenses. By maintaining separate checking accounts it is easier to determine the success of your business, and the cash flow it provides.

If your business is unincorporated, the income you earn from it is reported on your individual tax return and is subject to income and self employment tax. Since no withholding is usually taken from self-employed income, you may need to pay estimated taxes to avoid getting assessed a penalty. My office would be happy to provide you with a schedule and tax remittance coupons to ensure that no penalty is assessed. Tax payment due dates for estimates are April 15, June 15, September 15, and January 15 of each year

It is very important to keep good records for your business. Recordkeeping goes much farther than actual check writing, depositing income, and keeping receipts. It also entails accounting methods, inventory valuation, and compliance with tax requirements. You may find this task time-consuming and frustrating to say the least. If you have specific questions, please feel free to call my office to discuss specific options which are available to you.

If you hire workers in your business, they will be classified as either independent contractors or employees. The employee-independent contractor issue has even been a touchy one between business owners and the IRS for years, so think about this issue carefully. The amount of control you have over the job done determines worker status. The more control you have, the more likely it is that a worker is an employee. Then you have to deal with employment taxes, withholding, payroll tax returns and W-2 filings.

The tax law only allows you to deduct expenses that are "ordinary" and "necessary" for your business. Tax payers and the IRS often dispute over the meaning of these two terms. These definitions are somewhat general:

An "ordinary" expense is one which is common and accepted in your type of business. On the other hand, a "necessary" expense is one that is helpful and appropriate in your business, it does not have to be indispensable

By doing all you can to make certain that your expenses are ordinary and necessary, not overly lavish and are backed up with a good paper trail, you will have a head start on every year's tax return.

From a tax standpoint, you should retain books and records of your business for three years after the due date of your tax return. There are some sections of the tax law where the statue of limitations is longer than three years, however. Because of these, it is wise to keep records for at least six years. When it comes to the records that support cost basis of property, equipment or any item that you are depreciating, keep these records for at least three years beyond the life shown on the depreciation schedule in your tax return.

An S corporation operates much like a partnership; no taxes are paid by the partnership or the S corporation. Income and loses are passed through to the shareholders on a current basis and shareholders report on their personal income tax returns, as income, their pro-rata share of profits and losses (except losses are limited to the shareholder's basis in his or her stock or debt). Generally, the corporation pays no tax; however in some states an S corporation tax may be assessed on its taxable income. A C corporation is a separate tax paying entity with its own tax rates. The C corporation files a tax return and pays the tax on its profits. If the C corporation then distributes its earnings to its shareholders, the shareholders take that amount into income as dividends, creating a double taxation.

Startup corporations generally have losses in the first few years of operation and by electing S Corporations status the shareholders will receive those losses as individuals. Those losses can then be claimed on the individual's tax return. By contrast, a C Corporation may never be in a position to utilize its losses unless it turns a profit in the future.