Business Tax Tips

You have seen the commercials where business owners use expensive law firms to get their tax liability to the IRS reduced - upwards of 90%.

One, in fact, owed the IRS some $3 million and settled for just over $100,000. Not bad if you find yourself in that situation and can afford to pay the attorneys to take care of this for you.

A better way to avoid owing the IRS or having to pay lawyers to get your tax liability reduced is to not put yourself or your business in that situation in the first place.

While I have no direct statistics, I can almost guarantee that for every one business owner that gets his tax liabilities reduces there are nine or more other firms that end up paying the full amount to the IRS (plus additional interest and fees) as well as covering additional unnecessary legal expenses - most of which put such a huge burden on the business that the company is force to shut down and the owners end up in bankruptcy court.

But, all of this can be avoided very simply by understand the tax requirements of owning and operating a business or by hiring someone that does. Paying an employee who understands tax requirements and keeps up with the constant changes or hiring an outside firm to handle your day-to-day tax obligations is always much less expensive in the long-term than having the IRS come after you, your business and ultimately your personal assets.

NOTE: It is usually not the amount that is owed to the IRS that hurts the business but all the interest and fees included in the IRS's lawsuit - sometime more than 1,000% of the original amount owed.

Each year the IRS puts out tax tips for new and existing businesses to help both you and the IRS avoid the costly task of auditing and fining businesses. These will be discussed here as well as a few of our own suggestions:

First, according to the IRS, your type of business entity matters (not just for personal liability protection but for your tax liability as well). In fact; "you must decide what type of business entity you are going to establish (or change your business too). The type of business entity will determine which tax forms you have to file. The most common types of business are sole proprietorships, partnerships, corporations and S corporations."

Know that most LLC's are considered partnerships in the eyes of the IRS and can be taxed as either a pass-through entity or as corporations.

The key here is that there are different tax rates for each of these. Some, like partnerships and S corporations, pass-through their income and expenses to the business owners, partners, member, etc; who then pay taxes on their individual amounts. If your personal tax rate is lower than what an alternative corporate tax rate would be - then you might be better off filing for or changing your business to one of these forms of organization. Plus, with recent legislation targeting businesses - more tax issues will focus on the standard corporation as opposed to other forms of organization that are seen as smaller business entities.

Further, unless your business is a corporation, there are other taxes that business owners might face such as income tax, self-employment tax, employment tax and excise tax.

Just because you pay your personal taxes and include your business income on line 7 does not mean that you have covered your business's tax liability. Keep in mind that each government organization from your local and state governments to the IRS wants a piece of what you make and will not hold back in collecting it.

One of the keys in protecting your business and yourself regarding your tax liability is to always be thinking about what tax liability will occur from each decision. If you can train yourself to consider the tax consequence of each and every business decision you make, you are more likely to avoid possible bad future tax situations. Know that most business decisions (making money, spending money on capital purchases or operations, hiring -payroll tax, unemployment tax, etc - or even selling goods across state lines) could mean additional tax burden on the business.

If you always have the tax consequences at the front of your mind, you will either be able to avoid future adverse situations or at least take the time to ask your CPA or tax professional the right set of questions like which expenses can be deducted or capitalized and how those decisions can positively affect your bottom line.

The IRS also advocates and we agree whole heartedly, that; "Good records will help you ensure successful operation of your ... (business). You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes."

Some times the main issues is not something the business owner failed to do or an attempt to defraud the IRS but that its management and financial systems failed to properly account for some taxable items.

Moreover, not only can keeping good records help you avoid tax penalties and such but can be an invaluable tool in helping you run and grow your business.

Furthermore, all businesses, and persons for that matter, should file an annual return - regardless if you owe money or not. This keeps you and your business from coming up on "red flag" lists for missing filings as well as creates a solid record of all your transactions - should you need them later. In addition to filing annually, each business should understand when it is required to pay certain taxes. Not all taxes are due on a yearly basis. In fact, some employment taxes and self-employment obligations are require to be paid quarterly or sooner depending on the amount owed from prior years.

Lastly, avoid anyone (even tax professionals) that try to convince you that you can reduce or eliminate your tax obligations using so called 'tax schemes.' Most of these types of schemes are earnestly looked for by the IRS (and state tax authorities) in reviewing returns. Know this, if is seems too good to be true, it ALWAYS is! Much easier to pay your portion of taxes (even though none of us likes doing so) then trying to keep one step ahead of the revenuers.

Paying taxes is never pleasant but it is necessary if you want to own and operate a business in the United States. Thus, instead of wasting energy on trying to avoid taxes altogether or scheming ways around them - which will only end up costing you and your business in the end (think about the 9 of every 10 businesses that don't get relief from an IRS lawsuit) - and divert that energy into understanding the whys and whens you need to account for tax issues as you manage and grow your business. Much better to pay the IRS a small piece of what you earn now then end up with a shuttered business and no personal assets to show for it.

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