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A Tax and General Business Guide by Greg Noe
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This booklet was prepared by Professional Business Services, Inc. of Cincinnati, Ohio specifically for new business owners with some basic business principles and tools to get their businesses off to a good start.  Some of the topics discussed are complex so this pamphlet should not be your sole source of information but rather should be used as a starting point for further research.

INTRODUCTION

In a perfect world, it would be best to plan everything out and then implement the plan.  But people usually jump into business and are well on their way before they know exactly what they’re doing.  Some steps are out of order and we try to pull it all together while we keep pace with the day to day demands.  Before you get too far astray take a minute to consider some basic principles:

Plan, Plan, Plan. Take some time to determine what you hope to get out of the business; whether it’s  extra money, financial security, contact with people, or freedom from the corporate world.  Try to be specific and quantify your goals.

Set target dates matched to your goals. Then work the problem backwards; that is, what sub-goals and specific tasks will have to be accomplished to reach your overall goals.  Review and re-evaluate your goals often to recognize inconsistencies, opportunities and obstacles.

It Takes Money to Make Money. The business system is designed so that the business must spend money before receiving income.  However, try your best to concentrate your expenditures on the things necessary to generate income.

Depending on circumstance, beneficial but non-essential expenditures, may include such things as renting office space, buying computers, hiring employees, and advertising.  As your business grows you can begin the process of selectively and judiciously incurring these expenses.

Pay Your Taxes First. You may be inclined to pay yourself first; but, we say pay your debts, especially your taxes, first.

Remember that business tax liabilities may follow you into your personal life.  Unlike other debts, bankruptcy will not necessarily eliminate tax debts.  Tax liens, foreclosures and seizures can wreak havoc on a business and all persons involved.

The Easiest Way to Give Yourself a Raise is to Reduce Your Taxes.  Remember that you are only obliged to pay the minimum amount of tax.  There is no single correct way to prepare taxes.  There are numerous formulations that will yield acceptable results.  Tax evasion is the illegal act of not declaring income and intentionally violating IRS regulations.  Tax avoidance is the very lawful (and smart) practice of organizing your business in such a way as to minimize your tax liability.

Keep Good Records. It is important to keep accurate and complete records of income and expenses for several reasons.

When verifying transactions to tax agencies, without accurate records, you will have nothing to substantiate your case.

Good record keeping is also important in managing your money and verifying that bills have been paid and accounts properly credited.

Get Professional Help. If you are not already, you soon will become fairly expert at doing whatever it is that you are in business to do, whether that be selling, recruiting, helping others, solving problems, or whatever.  But there is no way that a business person can know everything they must to conduct their business successfully.  Areas where consultants are especially useful include; bookkeeping, tax preparation, marketing, and legal issues.  Our company, Professional Business Services, Inc. specializes in providing this type of expert assistance in the areas of bookkeeping, tax preparation, and payroll.

Persevere. Don’t quit.  All too often, people give up on the threshold of success.  When things look grim remember that from the bottom of the pit every direction you can go is up.

Stay Informed. Times change, and so does conventional wisdom, technology, and the law.  Decide which areas you will personally keep up-to-date on and which areas you will rely on others.  Establish a system for keeping informed.

FORMS OF ORGANIZATION

There are many forms of organization that a business might use to conduct its business, including proprietorships, general partnerships, limited partnerships, corporations, and limited liability companies.  Each form has particular properties which provides the business and the owner(s) advantages in specific circumstances.  As your business grows you may want to consider a form of organization other than proprietorship through which to conduct your business to reduce taxes and/or reduce risk.  Call us when your net income from your business approaches $25,000 to consider making a change.

A good example of why it is important to understand the tax consequences of the form of organization you choose is the self employment tax.  Proprietorships are subject not only to income tax; but they are also subject to self employment tax.  Anyone who has ever had a job knows that more than 7.5% of gross wages is deducted for FICA or Social Security.

This amount is also matched by the employer.  Since proprietors are both the employee and the employer, they pay both portions of this tax (15.3%) in the form of self-employment tax.

TAX PLANNING

All reasonable and necessary business expenses incurred in the course of business are deductible.  We shouldn’t need to tell you that the direct expenses incurred in making money in your business are deductible.  This includes the cost of goods sold, expenditures for labor and other such things.  In addition, indirect expenses are also deductible.  These include such things as accounting costs, advertising, most taxes (not federal income tax), office expenses, rent for business space, utilities for that space, bank service charges, business-related travel and even business-related meals and entertainment expenses.

Keep in mind that the rules for deductibility vary with the type of business. Consequently, the deductibility aspect of a business expense may vary according to whether the expense is reasonable and ordinary for that type business.

Furthermore, incurring a cost does not automatically mean that the cost can be expensed.  Expenses relate to charges for items or services that are used within a short period of time, certainly within a year.  However, a computer, a truck, a building or other fixed asset is expected to last well beyond a year and consequently would not normally be written off in one year.  Each year a portion of the value of the asset would be written off and is called depreciation.  Each major item needs to tracked individually as to:   1) date put into service,  2) purchase price,  3) amount received if sold,  4) percentage of business usage (if not 100%).  The government is generous to smaller businesses and does allow a business to accelerate depreciation write offs to one year subject to some restrictions.

Once upon a time, if you had a deduction, you would use it.  Tax preparation was little more than categorizing expenses and seeing what was left, plus or minus.  That is no longer true or at least it no longer should be.  Unfortunately, the one stop tax prep business is still alive and thriving even though circumstances have changed.

The earned income credit in particular has shown us that it is not always best to include all the expenses incurred.  It is not illegal or immoral.  Citizens are only obliged to pay the least amount of tax required by law.  If we can reduce our taxes by not including some expenses, that’s okay.  It is written into the system and really only applies to parents earning less than $28,000.  The best part is that the credit is not a true credit, it is considered a payment and can be refunded to the taxpayer as if payments had been set aside on one’s account all year long.  This could yield a sizable refund which could be used to help finance your business.  The point is that tax preparation is no longer as simple as it once was.  So called under-the-table income, if declared, may be the source of a substantial tax refund.  Likewise, it may be beneficial to not declare some expenses.  These facts coupled with choices about whether to write off fixed assets in one or a number of years, and the fact that these choices can change the outcome by thousands of dollars, surely indicates that tax preparation and tax planning has reached the point of being an art and a science.  Contact us at Professional Business Services, Inc. to customize your tax planning.

SOME EXPENSES THAT MAY BE DEDUCTIBLE

• COGS (Cost of Goods Sold) – The items sold
• Office Supplies – Business cards, pens, pencils, letterhead, etc.
• Supplies – Incidental items used directly in the goods or services for sale.
• Car & Truck Expense – IRS allows you to deduct either mileage or actual expenses.  The method you choose will be used throughout the life of the vehicle.  Mileage is usually greater.
• Depreciation – Assets purchased during the year will be depreciated to spread cost over the useful life of the asset.
• Wages – Money paid to employees (Before hiring employees and paying wages, contact us.  Businesses that get into financial problems, often do so due to payroll taxes and related issues.
• Subcontract Labor – Money paid to Independent contractors.

PRACTICAL MATTERS

After many years of providing business advice to small businesses, there has emerged a body of advice generally categorized as practical matters.  These issues take typical human behavior into account in such a way as to anticipate procrastination, less than perfect bookkeeping, poor memory, insufficient funds and the like.  For example, it is not uncommon for receipts to be lost, so we suggest placing several manila envelopes in strategic places such as in the car and in the bedroom (where men empty their pockets.)  The idea is to not lose the receipts and then sort them out later when time permits (hopefully this will be more frequently than annually).  Even the small receipts will accumulate to save one maybe hundreds of dollars in taxes.

Another common practice is to have a family member do much if not all of the bookkeeping including tax preparation.

Fight this feeling. You will add much stress to your life by mixing blood with money.  Arguments often erupt on how to spend money and the money you save is often lost due to the lack of business expertise of the person helping.

TAX ADVANTAGES OF RUNNING YOUR OWN BUSINESS

One of the great advantages of running your own business is the possibility of deducting some expenses that you are already incurring.  The areas where this most often comes into play is Meals & Entertainment, Travel, Car Expenses, and Home Office.  The idea is to set up your business in such a way as to make at least some of these expenditures deductible.

You can pay your spouse and children to help you in the business.  In so doing, it may be possible to avoid some income and/or self employment tax.  For example, if you pay your child $2,000 you will shift income to a zero percent tax bracket (assuming your child has no other income).  Whereas your income tax bracket may be 15% saving you at least $300 in tax.

Another opportunity is to turn a spare bedroom in your home into an office and begin deducting a portion of your home’s rent or mortgage, utilities and the like.  As long as the space is used exclusively for conducting your business, including the storage of goods for sale and/or the tools and equipment used in your trade, the space is considered a home office.  The deduction is calculated by figuring the square footage of the home office and dividing that by the total square footage of the home.  This often yields a 10%-30% ratio which when multiplied by the total of the annual rent or mortgage combined with the total annual utilities (both of which will be paid for whether or not you have a home based business) can yield a very substantial business deduction.  In similar fashion, you can write off computers and other business equipment, including on-line internet services, based upon one’s estimate of the percentage of business use.

Another opportunity is to turn your “vacation” into a business deduction.  This doesn’t mean that you’re not allowed to enjoy yourself.  Rather the regulations say that if the primary purpose of your trip is business (that means that more than half the time is spent on business activities) then the total cost of the trip can be deducted.  Even if you don’t want to spend that much time on business, the expenses associated with the time you do spend on business are still deductible (except the big one of getting there and back).  For example, you decide to go to Disneyworld for a few days.  If you can stretch your trip to a few more days such that more days are spent on business than at Disneyworld then your whole trip would be deductible including airfare, hotel, and meals.  However, if your business portion of your trip is limited to something less than the pleasure portion, then only the expenses relating to that portion of your trip are deductible, including the hotel for those “business” nights, the additional mileage to get to business meetings and the meals and entertainment expenses for that portion of you journey.  So when you go on vacation plan to conduct some business.

Another way to minimize your tax liability is to turn your friends and relatives into business associates.  This pays off when you consider that these are the people you are most likely to go with to dinner and other entertainment activities.  You can legitimately write off at least some expenditures you are already incurring.  First, make some business connection between those of your family and friends that you already socialize with whether they become customers, vendors, or consultants.  As long as there is a legitimate business reason for you to “entertain” the costs can be deducted.  After you have paid the check, write the names of your guest(s) and the business matters discussed right on the back of the receipt.  Then you won’t have to try to recall that information a year or two later.