We’ve saved the best (or worst) for last. If you’ve been heeding our advice throughout the 8 Steps to Managing Your Money: A Business Owner’s Guide, you’re now equipped with the basics of taking control of your money, making the most of it, and, hopefully, poised to make more of it.
All cynicism aside, we don’t view business taxes or even the taxman as an enemy of business. America is the most extraordinary place on earth to be an entrepreneur, and if we have to pay taxes to enjoy the unparalleled opportunities of doing business in this country, then by all means we will do so without complaint.
Having said all that – don’t blow money unnecessarily on Uncle Sam, who has a personal army of bookkeepers over at the Internal Revenue Service.
Our approach to taming your taxes is straight forward: Plan, prepare, and be proactive. Like the other processes in financial planning, the more work that you do in advance with your accountant, the more it will help your business through “tax season” and the toll taxes have on your business.
Selecting a Structure
You need to start your preparation by figuring out what kind of entity structure you should be classified under. This is to your benefit because it can avoid the need to pay as a sole proprietor of an enterprise and getting stuck with double taxation on both a personal and corporate level. Sole proprietorship might be attractive to some business owners because it takes less work to set them up, but you might be able to get more tax breaks if you structure your venture under a different entity. The type of structure you choose depends on what kind of business you are running. Some examples of structures are as follows
Most organizations that have some type of manufacturing function (and most businesses in the country, for that matter) fall under this category. These are set up as separate legal entities from the owners and involve the participation of shareholders who vote on the direction of your business and collect available dividends.
Software consultants, Web-site designers and programmers and other professional services can often fall under “S” corporations. These involve less taxation than C corporations, as shareholders report earnings under their individual tax forms as opposed to an S corporation, where taxes are paid on both dividends and the company’s profits.
An LLC, or limited liability company, is best suited for entities that own any type of real estate, such as those with storefronts. An LLC can guard those assets from certain tax liabilities and lawsuits.
We provide more details on these structures in our 10 Steps to Open for Business process. But even the advice we provide there is only supplemental to the professional advice you should get from a tax specialist.
Avoid raising red flags at the IRS by keeping records.
Whatever money comes in needs to be documented, whether it be from revenues your business generates or an investment a family member makes. No matter what, it must be recorded and accounted for in your books.
This will help avoid the scrutiny of the IRS, which, if it leads to an audit, can become a huge distraction and drag on your business, not to mention the expense. It’s truly one of the worst things a business owner can go through.
To stay out from under the IRS’s magnifying glass, make all monies received as transparent as possible.
Now, take everything you just read in this tip and apply the same advice to all outbound money as well. Even things like that car payment or insurance payment in your business must be recorded.
Remember, solid counsel from your accountant about how to treat these kinds of expenses can be a game changer.
Knowing What To Write Off
There are many things that small-business owners try to make the mistake of writing off but later get into trouble with the IRS. “There are certain things that are really problematic from a justification standpoint,” says Michael Minyard, president of an accounting firm in Phoenix that specializes in small businesses. “Personal expenses are personal. Don’t try to mix them with business.”
Some of the things that business owners will have problems expensing include health insurance and as well as vehicle payments. However, if you do use your vehicle for your business, you can probably deduct mileage. And depending on the nature of your venture, you might be able to lease a vehicle to it, Minyard says. In some cases, your corporation might be able to own the vehicle outright as well. But the IRS will often question the flat-out expense of car payments and insurance, so make sure you discuss this with your advisor before making any assumptions.
However, there are many instances in which business owners should be expensing charges and fail to do so. Oftentimes, entrepreneurs will overlook transactions that were made in December and not remember to include them at the end of the year because their credit-card statement shows up in January.
Business owners also commonly fail to expense their startup expenses that were used with personal funds when launching an enterprise. Just because those funds were deployed before the venture got off the ground doesn’t mean that they can’t be expensed.
Pay Attention to Personal Taxes
If you end up earning more cash than you spend on your business you may need to pay personal income taxes on your profit. This is particularly true if you are reporting the ‘profit’ on your personal tax return on a Schedule C, which itemizes your business revenue and expenses, that income ends up in your personal tax return no different than if you had received a paycheck from an employer.
Any earnings of this type on your personal tax return may also create self-employment taxes that you have to pay. Self employment taxes are payroll taxes that typically an employer pays to the government on a matching basis based on what you earn if you are drawing a paycheck. At a minimum you will likely have to pay the IRS something toward the Social Security component of these taxes. The IRS doesn’t like to wait for its money.
It’s smart to review with your tax accountant how much you may owe during the year and make quarterly payments to the IRS against that projected amount of earnings. For example, payments for this year are due on the 15th of April, June, September and next January. If you don’t make these payments on time, the IRS could hit you with fees and penalties. Again this tax liability is in addition to the federal and state income tax you owe as an individual on the business earnings passed through to your personal taxable income.