7 Common Small Business Tax Misperceptions

One of the biggest hurdles you'll face in running your own business is staying on top of your numerous obligations to federal, state, and local tax agencies. Tax codes seem to be in a constant state of flux making the Internal Revenue Code barely understandable to most people.

The old legal saying that "ignorance of the law is no excuse" is perhaps most often applied in tax settings and it is safe to assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an "I didn't know I was required to do that" claim. On the flip side, it is surprising how many small businesses actually overpay their taxes, neglecting to take deductions they're legally entitled to that can help them lower their tax bill.

Preparing your taxes and strategizing as to how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, money, and an auditor knocking on your door, is to have a professional accountant handle your taxes.

Tax professionals have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code.

When it comes to tax planning for small businesses, the complexity of tax law generates a lot of folklore and misinformation that also leads to costly mistakes. With that in mind, here is a look at some of the more common small business tax misperceptions.

1. All Start-Up Costs Are Immediately Deductible

Business start-up costs refer to expenses incurred before you actually begin operating your business. Business start-up costs include both start up and organizational costs and vary depending on the type of business. Examples of these types of costs include advertising, travel, surveys, and training. These start up and organizational costs are generally called capital expenditures.

Costs for a particular asset (such as machinery or office equipment) are recovered through depreciation or Section 179 expensing. When you start a business, you can elect to deduct or amortize certain business start-up costs.

Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced (but not below zero) by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized.

2. Overpaying The IRS Makes You "Audit Proof"

The IRS doesn't care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can't substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to "Audit Proof" yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.

3. Being incorporated enables you to take more deductions.

Self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do, and for many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend thousands of dollars in legal and accounting fees to set up a corporation, only to discover soon thereafter that they need to change their name or move the company in a different direction. In addition, plenty of small business owners who incorporate don't make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.

4. The home office deduction is a red flag for an audit.

While it used to be a red flag, this is no longer true--as long as you keep excellent records that satisfy IRS requirements. In fact, so many people now have home-based businesses that in 2013, the IRS rolled out the new simplified home office deduction, which makes it even easier to claim the home office deduction (as long as it can be substantiated).

Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction. A high deduction-to-income ratio however, may raise a red flag and lead to an audit.

5. If you don't take the home office deduction, business expenses are not deductible.

You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

6. Requesting an extension on your taxes is an extension to pay taxes.

Extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due.

7. Part-time business owners cannot set up self-employed pensions.

If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.

A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records and understanding how the tax system works is beneficial to any business owner, whether you run a small to medium sized business or are a sole proprietor.

And, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns.

 

If you have any questions, don't hesitate to give us a call today. We're here to assist you.

 

Barry Eisenberg, SCORE Counselor

 

visit us at: www.scoresouthflorida.net

 

 

Intellectual Property

In general there are multiple ways to protect your interest in intellectual property. A qualified Intellectual Property Attorney can help you through the processes needed to provide the best protection for your intellectual property. Here is a rough summary:

Patent: A grant made by a government that confers upon the creator of an invention the sole right to make, use, and sell that invention for a set period of time.

Trademark: A name, symbol, or other device identifying a product, officially registered and legally restricted to the use of the owner or manufacturer.

Copyright:  a legal concept giving the creator of an original work exclusive rights to it, usually for a limited time. Generally, it is "the right to copy", but also gives the copyright holder the right to be credited for the work, to determine who may adapt the work to other forms, who may perform the work, who may financially benefit from it, and other related rights.

Trade Secret:  a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers. In some jurisdictions, such secrets are referred to as "confidential information", but are generally not referred to as "classified information" in the United States, since that refers to government secrets protected by a different set of laws and practices.

 

Are you making the right choices for your business?

 

Steve Koenig, SCORE Counselor

Visit us at: www.scoresouthflorida.net

 

 

Doing Business with Florida's Government

 

The Florida Department of Management Service issues, 5,000 purchase orders each month.

The state agencies use three methods:

1. Formal purchases - greater than $35,000 which require competitive bidding;

2. Informal purchases - less than $35,000 with no requirement for competitive bids;

3. State contracts.

MyFloridaMarketPlace.com provides tools to support procurement for the state.

If you want some of this business, determine which level is best for you. Then register in the MyFloridaMarketPlace system.

 

Steve Koenig, SCORE Counselor

Visit us at: www.scoresouthflorida.net

 

Common New Business Issues

 

Market Research - before you invest do market research

Fiscal Motivation - financial risk for the right reason

Business Plan - focus the business

Startup Money - plan for the worst, at least two years without a profit

Marketing Strategy - what and how you sell and spend

Charging Less - you won't get lower prices than high volume buyers

Family - major time commitment strains families

Borrowing from Friends & Family - not the best money

Doing It Yourself - need at least a lawyer and accountant

Business Location – Office needed? Zoning? Home?

 

How is your business doing on these issues?

Steve Koenig, SCORE Counselor

Visit us at: www.scoresouthflorida.net

 

 

Master the Balance Sheet or else...

I recently came across a Forbes magazine article by Jeff Thermond that addressed the need a for a startup business to focus on the balance sheet and it made a lot of sense. Most startup entrepreneurs do not have keen financial backgrounds. They very often come from marketing, sales, or operations. They may even understand income statements, and gross margins and be able to talk to financial analysts and bankers.

The balance sheet lists (read as BALANCES) the assets against the liabilities plus stockholders equity of a company. The two sides of this equation must be equal. In businesses generating positive cash flow and operating income, current assets will be greater than current liabilities resulting in increased stockholder equity. This situation generally does not exist in the early days of a startup. During this time profits are not being generated and losses are mounting with negative shareholder equity. In the beginning it is not uncommon, even with high margins (if they are possible), to be unable to cover operating costs.

The article makes the point that the startup CEO should admit that there is a gap between the amount of time it will take the cash to run out and his experience and seek experienced help. This is not a bookkeeper, but someone, even on a part time basis, experienced with startups.

How are you handling this in your business?

Steve Koenig, SCORE Counselor

Visit us at: www:scoresouthflorida.net

 

 

Financial Troubles? 5 Ways to Improve Your Situation

If you are having trouble paying your debts, it is important to take action sooner rather than later. Doing nothing leads to much larger problems in the future, whether it's a bad credit record or bankruptcy resulting in the loss of assets and even your home. If you're in financial trouble, then here are some steps to take to avoid financial ruin in the future.

If you've accumulated a large amount of debt and are having difficulty paying your bills each month, now is the time to take action--before the bill collectors start calling.

1. Review each debt. Make sure that the debt creditors claim you owe is really what you owe and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General.

2. Contact your creditors. Let your creditors know you are having difficulty making your payments. Tell them why you are having trouble-perhaps it is because you recently lost your job or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness.

Tip: Most automobile financing agreements permit your creditor to repossess your car any time you are in default, with no advance notice. If your car is repossessed you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. Do not wait until you are in default. Try to solve the problem with your creditor when you realize you will not be able to meet your payments. It may be better to sell the car yourself and pay off your debt than to incur the added costs of repossession.

3. Budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and health care) and optional expenses (such as entertainment and vacation travel). Stick to the plan.

4. Try to reduce your expenses. Cut out any unnecessary spending such as eating out and purchasing expensive entertainment. Consider taking public transportation or using a car sharing service rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Leave your credit cards at home. Pay for all purchases in cash or use a debit card instead of a credit card.

5. Pay down and consolidate your debts. Withdrawing savings from low-interest accounts to settle high-rate loans or credit card debt usually makes sense. In addition, there are a number of ways to pay off high-interest loans, such as credit cards, by getting a refinancing or consolidation loan, such as a second mortgage.

Tip: Selling off a second car not only provides cash but also reduces insurance and other maintenance expenses.

Caution: Be wary of any loan consolidations or other refinancing that actually increase interest owed, or require payments of points or large fees.

Caution: Second mortgages greatly increase the risk that you may lose your home.

You can regain financial health if you act responsibly. But don't wait until bankruptcy court is your only option. If you're having financial troubles, don't hesitate to call us. We can help you get back on your feet.

Barry Eisenberg, SCORE Counselor

Visit us at: www.scoresouthflorida.net

 

 

Best For The World

The B Corp (Benefit Corporations) Best For The World recognizes companies creating the most impact for a better world.  They get a designation as a Certified B Corporation and recognized for creating the most positive social and environmental impact. Their web site: www.bcorporaton.net identifies the group as follows:

B Corp certification is to sustainable business what LEED certification is to green building or Fair Trade certification is to coffee. B Corps are certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency. Today, there is a growing community of more than 800 Certified B Corps from 27 countries and 60 industries working together toward 1 unifying goal: to redefine success in business.

We have one of these Best For The World Corporations right here in Delray Beach, Florida, the first south Florida firm with this designation. Among other things it does, consulting firm Sequel Systems Inc. helps clients obtain eco-friendly building certification; offers employee’s unlimited time off; pays all employee health insurance costs; provides an electric car; and all employees must volunteer in the community.

How does your company stack up?

 

Steve Koenig, SCORE Counselor

Visit us at: www.scoresouthflorida.net