Tax Tips for Entrepreneurs and Small Business Owners

Hello I’m LaQuitta Jones, a tax accountant with Terrell Tax & Planning, LLC, Atlanta’s premier small business tax accounting firm, where I specialized in maximizing profit and minimizing tax.

Thank you for your time, I want to share with you some tax tips for entrepreneurs and small business owners.

Numbers are my passion, however, I do understand that most entrepreneurs and small business owners, do not share in this passion, and did not become business owners to rumble with numbers but to share their gifts (services) and creations (products).

In 2013, an estimated 25 million Americans were starting or running new businesses, in addition, an estimated 14 million Americans were running already established business, according the Global Entrepreneurship Monitor (GEM).

The beauty of Entrepreneurship is that it provides freedom, wealth, financial stability, jobs and the opportunity for change, in your family, community, country or the world.

With a massive effect on economies, there does not seem to be an end to entrepreneurship

no where in site, matter of fact,if you pay close attention, moreand more politicians for buildingtheir political campaigns on

growing and strengthening entrepreneurship and small

businesses in the US.

Entrepreneurs and small business owners create social and economic value, opportunity and employment far beyond their organizations. Specifically affecting the U.S. economy by playing key roles as suppliers, customers, and service providers for other businesses.

This is to let you know you are not alone, your dreams of entrepreneur ship and small business ownershipare valid and can be all youdesire them to be.

However, there is a path to that success, you must be

aware of what you’re doing in your business as well as how

you’re doing it. Accounting will be your road map, there are few ways around it and shortcuts only cost more in the end.

The SBA describes a small business, either in terms of the average number of employees over the past 12 months, or average annual receipts over the past three years.

There are millions of successful entrepreneurs and small

business owners in the USA and millions more worldwide,

each and every one of them at some point hired an accountant

to assist them in the day to day operations of their business.

Being open to knowledge, getting comfortable with your

numbers, knowing how they benefit you and your business

and joining forces with a professional, that you are able to call

upon for guidance and assistance with strategic decision

making, will be that extra sauce, your business will need to

place you among the successful small businesses worldwide.

If you don’t know your numbers, you don’t know your

business.

Here’s Some Things To Consider…

With this presentation I want to be brutally honest, because truth, honesty and respect are among the numerous characteristics of successful entrepreneurs. So I will say, unless you're an accountant, the word "accounting" probably strikes fear in your heart or make you a little nervousness, at least. For young entrepreneurs, the feeling is probably amplified. After all, starting out with poor accounting or no bookkeeping, can really bite you over the long haul.

In my experience, I notice most entrepreneurs try to keep the financial details of their business in their heads or they have a genuine intention of maintaining accurate and timely records, but the numerous other aspects of running a business catch up with them.

Your Structure is your Business Foundation

Deciding what small business structure will be most advantageous to your business is one of the most crucial decisions you'll have to make and this decision must be made early in your business formation process.

The form you select dictates such issues as,

legal liability, tax treatment, record-

keeping obligation and the type of shareholders you are allowed. To help decide your business

structure, consider the nature of your business, future plans and how you operate as an owner. One of the easiest things to do is to act fast and get this wrong, it is strongly recommended that you consult a professional.

Your Business Structure Options:

The simplest structure is Sole Proprietorship, most individuals who work for themselves with no partners, correctly choose this form. YOU are your own business, simply report your income on Schedule C of your 1040 tax form.

TAX IMPLICATIONS- In addition to your normal income tax, you will also pay a self-employment tax, which covers all portions of Social Security and Medicare required by the government.

ADVANATAGE –Setup is easy, expenses are usually low, you save on overhead, only one tax return is filed, opposed to two with corporations and you can manage one bank account, your personal account.

DISADVANTAGE – You are responsible for self-employment tax, currently 15.3 percent, you don’t have legal liability, meaning if you are sued, your personal property can be taken, you are personally liable for all the debts of your business.

POTENTIAL USERS: Freelancers, start-ups earning less then $50,000 annually

SOLE PROPRIETORSHIP

If you are in business with one or more person(s), the business structure could be a partnership, all owners agree to share in the profits or losses of a business. There are two varieties, general partnerships and limited partnerships. In a general partnership, partners manage the company and assume responsibility for debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.

You should never operate a partnership without a partnership agreement.

TAX IMPLICATIONS: profits or losses are passed through the business to the partners, who report iton their personal income tax return.

ADVANTAGE: burdens of the operation are shared among the owners, so you are not alone.

DISADVANTAGE: each partner is personally liable for the financial obligations of the business.

PARTNERSHIP

Most large companies will be a corporation, formally called regular or C–Corporations. The most basic characteristic of the corporation is that it is legally viewed as an individual entity, completely separate from its owners. This allows owners, now called shareholders to not be liable for the actions of the company. Therefore if the company is sued, the personal assets of the owner are not on the line.

TAX IMPLICATIONS: The income from a corporation is double taxed, once for the company tax return and again when the shareholder files a personal tax.

ADVANTAGE: Limited liability, flexible ownership structure, a completely separate entity from owner(s), tax deduction for dividends, no self-employment tax, well respected in business environment.

DISADVANTAGE: Expensive to establish and maintain, double taxation.

POTENTIAL USER: Businesses that want to gopublic ( offer stock shares ) or garner venture capital investments.

CORPORATION

With the LLC, structure your liability is limited, double taxation that comes with a C corporation, is avoided. It gives you the feel of a small organization with the benefits of a large one, you have more flexibility then other structures, however, with that flexibility comes setup requirements, limitations and taxation.

TAX IMPLICATION: same as Sole Proprietor, if you’re a one owner, LLC and same as partnership if there are multiple owners.

ADVANTAGE: Flexibility with such things as ownership and dividend (income) allocation, liability (is limited, but allows you security), there is no double taxation.

DISADVANTAGE: Are you responsible for self-employment tax, no tax deduction for dividends, and there are some uncertainty in the legal environment compared to a corporation.

POTENTIAL USER: Any business that does not desire to go public or attract venture capitalist quickly.

LIMITED LIABILITY CORPORATION, LLC

S-CORPORATION

The S corporation is more attractive to small-business owners than a regular (or C) corporation because it has favorable tax benefits and still provide business owners with the liability protection of a corporation.

TAX IMPLICATION: income and losses are passed through to owners (shareholders) to be included on their personal taxes. Therefore no double taxation.

ADVANTAGE: owners without inventory can use a simpler accounting method, cash method. 75 shareholders are allowed, which helps with capital investments in company.

DISADVANTAGE: There is a cost associated with setup and tax preparation, similar to a regular corporation. They also must file articles of incorporation, hold directors and shareholders meetings, keep corporate minutes, and allow shareholders to vote on major corporate decisions. There are numerous stock and tax related issues and a professional should be consulted before choosing this structure.

An EXAMPLE to help choose, a startup that has

losses during its first two (2) years would do better

as an LLC, because LLC members will be able to

write off the losses on their personal taxes.

A regular corporation

with losses would not be

able to use them until

they make a profit. And

with a S corporation

you can only deduct the

money you invested or

directly loaned to the

company.”

Your first year of business, from idea to inception, can move extremely fast. There will be many things that require your immediate attention. Purchases made for the business should be made from a business bank account or credit card, setup prior to making business transactions. Things can get complicated fast, separating business and personal transactions make it easy to keep track of deductible expenses.

2. Don't mingle business and personal expenses.

A transaction has to be recorded when funds are earned or spent and if personal items are intermingled, the IRS and others (investors, lenders) may consider you high risk, unprofessional and not serious about being a business owner.

With the IRS continuously trying to decide if taxpayers are operating as a business or just a hobby, deductions are often denied or not allowed for hobbies, co-mingling tells them you are not operating a legitimate business.

Finally, if you want to claim this income or expenses you must be able to prove they were for business purposes.

What’s the difference? A business transaction is an economic

activity or event that begins the accounting process for the

business, which is recorded in an accounting system, a personal

transaction does not have a connection to the business and was

made by or on behalf of the owner, for personal use.

First-time business owners are notorious for combining the two,

mostly because they are unaware of the ramifications or

simplicity of avoiding this. The effects are often unnoticeable

until tax time or when the IRS conducts an audit and require

explanation of transactions.

Best way to avoid combining business and personal is to

operate from a separate checking and credit card account for

your business.

Personal transactions are not tax deductible regardless of the

business structure you choose.

3. Record-Keeping

After deciding, with a professional, the most advantageous structure, the next decision to make is how you will maintain your records. Accurate record keeping is important to a business's success, not only for tax compliance but all company assessments. There is no mandatory manner required by the IRS, as long

as the records produce accurate accounting of income and expenses and financial performance.

Think of your record-keeping as a vehicle to monitor efficiency in

specific areas, the path to complete and accurate income tax data and a basis for sound

strategic future planning.

There are two main ways in which business records can be

maintained: manual record keeping and computerized (or

automated) record keeping.

Good record keeping will begin with your source documents,

canceled checks, receipts, invoices, bills, loan documents, cash

register tapes, bank and credit card statements, purchase

orders or other documents that provide the details associated

with your business transactions.

Your number one question as a business owner should be, “Am

I making money?” And to get that answer, you’ll need to track

your business accounting information.

Most entrepreneurs and small businesses I work with, simply

just don’t know where to start, therefore they will forego the

process as long as possible.

Manual Record-Keeping

Manual record-keeping will be most beneficial to smaller small

businesses, such as part-timers, freelancers, independent contractors and

startups. Yes, the pencil and paper method is still around and adequate,

one of the goals of those able to use this manual process is to grow to the

point, its no longer advantageous. Manual records satisfy the tax code as

long as they are accurate and can be understood or explained if

questioned. Of course, if you decide to use a manual system, you must

learn how to use it.

Your options are: Preformatted record books and Ledger sheets.

Both are inexpensive and available at most office supply stores.

Either will require a significant commitment of time, you must keep

accurate records of all income received and expenses paid, in a timely

manner. Be sure to jot down a brief description, date incurred, amount,

and to whom it was paid.

Pros:• Easy to use• Low cost

Cons:• Manual, so you must total everything yourself• No automatic checks and balance

Computerized Record-Keeping

Maintaining financial records on a computer, is similar to

maintaining records manually, except the process is

automated, which usually means quicker, no handwritten set of

books, and more accuracy. Also, there’s a system in place to

provide some level of assistance.

To be successful with a computerized system, you or your

accountant will input each transaction into the software, timely

and accurately to generate forms, reports and financial

statements.

Pros:

• Modern

• Eliminate math errors

• Information is instantaneous

• View Income and expenses by

category

• Steady system to safely maintain

records.

Cons:

• More expensive

• Require regular updates

• You must have a computer

and be comfortable using it

on a regular basis.

4. Tax Planning

As an entrepreneur, small business owner you want to grow and keep as much profit for your business as possible, one major way to do this will be through tax planning.

Tax planning is a phrase often used, but not well understood. To accomplish the goal of tax planning, which is to grow your business financially in the most tax-efficient manner, you will increase income, while reducing cost and making strategic, timely purchases.

Three Basic Ways to Tax Planning

1. Reduce your income2. Increase deduction3. Tax Credits

There are several effective variations to the above, each basic method will change from year to year and differ, apply or not depending on your business structure.

Tax records in disarray can cost you money saving deductions and cause a problem if audited. After all, to avoid a huge tax liability you want to get each, credit and deduction you can and be able to back them up.

KEY POINTS TO REMEMBER

Let’s be clear, tax planning is in no way tax avoidance. The best tax planning, will merely minimize tax liability. It's a mistake to make business decisions based solely on taxes.

We entrepreneurs are do-it-yourselfers. We take pride in our ability to micromanage every aspect of our business. But accounting, bookkeeping and taxes are a few of those areas where you should definitely seek professional help.

Start off on the right foot. Make your business record-keeping a priority, just In the same way you go through your email every morning, set a day and time that is convenient for you and stick to it. I advise my clients to set a recurring alarm on your calendar: "Reviewbooks" or “Enter Business Transactions”, how often is up to you, at least once a month, if not more, is ideal.

In the end, accounting isn't really that scary. If you start off right, it can actually be fun. After all, that's where you will see your fortune grow.

The above is just the tip of the iceberg whether for

entrepreneurs, who are contractors or business

owners, however, they serve the purpose of providing

you direction on being successful.

Small business success, is

another passion of mine, your

success is my success; my

company goal is to be of value

while helping entrepreneurs and

small businesses do big

business.

Thank you again for being proactive with your business

and finances, good luck and best wishes with all your

future endeavors, now go grow that business…

Call To Action:So if you agree accounting is and should be an important

aspect of your business, your next steps is:

1. Get a “Free Consultation” from an accountant

call (404) 720-4232 or email: laquitta@terrelltaxandplanning.com

2. Keep accurate, timely records of each transaction

you make in your business.

3. Select an efficient financial record keeping system

(software), that you understand and will keep updated

regularly.

“Numbers Don’t Lie, People Do”, You Should Know Where Your Business Stands Financially…

Terrell Tax & Planning, LLC

www.terrelltaxandplanning.com

(404) 720-4232