Tax Tips for Entrepreneurs and Small Business Owners

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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. 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. There is a path to success, you must be aware of what youre doing in your business as well as how youre doing it. Accounting will be your road map, there are few ways around it and shortcuts only cost more in the end.


  • 1. Tax Tips for Entrepreneursand Small Business Owners

2. Hello Im LaQuitta Jones, a tax accountantwith Terrell Tax & Planning, LLC, Atlantaspremier small business tax accounting firm,where I specialized in maximizing profit andminimizing tax.Thank you for your time, I want to sharewith you some tax tips for entrepreneursand small business owners.Numbers are my passion, however, I dounderstand that most entrepreneurs andsmall business owners, do not share in thispassion, and did not become businessowners to rumble with numbers but toshare their gifts (services) and creations(products). 3. In 2013, an estimated 25 million Americans were starting orrunning new businesses, in addition, an estimated 14 millionAmericans 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 forchange, in your family, community, country or the world.With a massive effect on economies, there does not seem tobe an end to entrepreneurshipno where in site, matter of fact,if you pay close attention, moreand more politicians for buildingtheir political campaigns ongrowing and strengtheningentrepreneurship and smallbusinesses in the US. 4. Entrepreneurs and small business owners create social andeconomic value, opportunity and employment far beyond theirorganizations. Specifically affecting the U.S. economy by playingkey roles as suppliers, customers, and service providers for otherbusinesses.This is to let youknow you are not alone,your dreams of entrepreneur shipand small business ownershipare valid and can be all youdesire them to be.However, there is a path to that success, you must beaware of what youre doing in your business as well as howyoure doing it. Accounting will be your road map, there arefew ways around it and shortcuts only cost more in the end. 5. The SBA describes a small business, either in terms of theaverage number of employees over the past 12 months, or averageannual receipts over the past three years.There are millions of successful entrepreneurs and smallbusiness owners in the USA and millions more worldwide,each and every one of them at some point hired an accountantto assist them in the day to day operations of their business.Being open to knowledge, getting comfortable with yournumbers, knowing how they benefit you and your businessand joining forces with a professional, that you are able to callupon for guidance and assistance with strategic decisionmaking, will be that extra sauce, your business will need toplace you among the successful small businesses worldwide.If you dont know your numbers, you dont know yourbusiness. 6. Heres Some Things To Consider 7. With this presentation I want to be brutally honest, because truth,honesty and respect are among the numerous characteristics ofsuccessful entrepreneurs. So I will say, unless you're an accountant,the word "accounting" probably strikes fear in your heart or makeyou a little nervousness, at least. For young entrepreneurs, thefeeling is probably amplified. After all, starting out with pooraccounting or no bookkeeping, can really bite you over the longhaul.In my experience, I notice mostentrepreneurs try to keep the financialdetails of their business in their heads orthey have a genuine intention of maintainingaccurate and timely records, but the numerous other aspects ofrunning a business catch up with them. 8. Your Structure is your Business FoundationDeciding what small business structure will be most advantageous to yourbusiness is one of the most crucial decisions you'll have to make and thisdecision must be made early in your business formation process.The form you selectdictates such issues as,legal liability, taxtreatment, record-keepingobligation andthe type of shareholdersyou are allowed. To help decide your businessstructure, consider the nature of your business, future plans and how youoperate as an owner. One of the easiest things to do is to act fast and getthis wrong, it is strongly recommended that you consult a professional. 9. Your Business Structure Options: 10. SOLE PROPRIETORSHIPThe simplest structure is Sole Proprietorship, most individuals who work forthemselves with no partners, correctly choose this form. YOU are your ownbusiness, 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 aself-employment tax, which covers all portions of Social Security and Medicarerequired 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 canmanage one bank account, your personal account.DISADVANTAGE You are responsible for self-employment tax, currently 15.3percent, you dont have legal liability, meaning if you are sued, your personalproperty 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 11. PARTNERSHIPIf you are in business with one or more person(s), the business structure could bea partnership, all owners agree to share in the profits or losses of a business.There are two varieties, general partnerships and limited partnerships. In ageneral partnership, partners manage the company and assume responsibility fordebts and other obligations. A limited partnership has both general and limitedpartners. The general partners own and operate the business and assume liabilityfor the partnership, while the limited partners serve as investors only; they haveno control over the company and are not subject to the same liabilities as thegeneral partners.You should never operate a partnership without a partnership agreement.TAX IMPLICATIONS: profits or losses are passedthrough the business to the partners, who report iton their personal income tax return.ADVANTAGE: burdens of the operation areshared among the owners, so you are not alone.DISADVANTAGE: each partner is personally liablefor the financial obligations of the business. 12. CORPORATIONMost large companies will be a corporation, formally called regular or CCorporations. The most basic characteristic of the corporation is that it is legallyviewed as an individual entity, completely separate from its owners. This allowsowners, 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 onthe line.TAX IMPLICATIONS: The income from a corporation is double taxed, once forthe company tax return and again when the shareholder files a personal tax.ADVANTAGE: Limited liability, flexible ownership structure, a completelyseparate entity from owner(s), tax deduction for dividends, no self-employmenttax, well respected in business environment.DISADVANTAGE: Expensive to establish andmaintain, double taxation.POTENTIAL USER: Businesses that want to gopublic ( offer stock shares ) or garner venturecapital investments. 13. LIMITED LIABILITY CORPORATION, LLCWith the LLC, structure your liability is limited, double taxation that comes with a Ccorporation, is avoided. It gives you the feel of a small organization with the benefitsof a large one, you have more flexibility then other structures, however, with thatflexibility comes setup requirements, limitations and taxation.TAX IMPLICATION: same as Sole Proprietor, if youre a one owner, LLC and same aspartnership 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 fordividends, and there are some uncertainty in the legal environment compared to acorporation.POTENTIAL USER: Any business thatdoes not desire to go public or attractventure capitalist quickly. 14. S-CORPORATIONThe 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 ownerswith 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 doubletaxation.ADVANTAGE: owners without inventory can use a simpler accounting method,cash method. 75 shareholders are allowed, which helps with capital investmentsin company.DISADVANTAGE: There is a cost associated with setup and taxpreparation, similar to a regular corporation. They also must filearticles of incorporation, hold directors and shareholdersmeetings, keep corporate minutes, and allow shareholders to voteon major corporate decisions. There are numerous stock and taxrelated issues and a professional should be consultedbefore choosing this structure. 15. An EXAMPLE to help choose, a startup that haslosses during its first two (2) years would do betteras an LLC, because LLC members will be able towrite off the losses on their personal taxes.A regular corporationwith losses would not beable to use them untilthey make a profit. Andwith a S corporationyou can only deduct themoney you invested ordirectly loaned to thecompany. 16. 2. Don't mingle business and personal expenses.Your first year of business, from idea to inception, can moveextremely fast. There will be many things that require yourimmediate attention. Purchases made for the business should bemade from a business bank account or credit card, setup prior tomaking business transactions. Things can get complicated fast,separating business and personal transactions make it easy to keeptrack ofdeductibleexpenses. 17. A transaction has to be recorded when funds are earnedor spent and if personal items are intermingled, the IRSand others (investors, lenders) may consider you high risk,unprofessional and not serious about being a businessowner.With the IRS continuously trying to decide if taxpayers areoperating as a business or just a hobby, deductions areoften denied or not allowed for hobbies, co-mingling tellsthem you are not operating a legitimate business.Finally, if you want to claim this income or expenses youmust be able to prove they were for business purposes. 18. Whats the difference? A business transaction is an economicactivity or event that begins the accounting process for thebusiness, which is recorded in an accounting system, a personaltransaction does not have a connection to the business and wasmade 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 orsimplicity of avoiding this. The effects are often unnoticeableuntil tax time or when the IRS conducts an audit and requireexplanation of transactions.Best way to avoid combining business and personal is tooperate from a separate checking and credit card account foryour business.Personal transactions are not tax deductible regardless of thebusiness structure you choose. 19. 3. Record-KeepingAfter deciding, with a professional, the most advantageousstructure, the next decision to make is how you will maintain yourrecords. Accurate record keeping is important to a business'ssuccess, not only for tax compliance but all company assessments.There is no mandatory manner required by the IRS, as longas the records produce accurateaccounting of income and expenses andfinancial performance.Think of your record-keeping as avehicle to monitor efficiency inspecific areas, the path tocomplete and accurate income taxdata and a basis for soundstrategic future planning. 20. Good record keeping will begin with your source documents,canceled checks, receipts, invoices, bills, loan documents, cashregister tapes, bank and credit card statements, purchaseorders or other documents that provide the details associatedwith your business transactions.Your number one question as a business owner should be, AmI making money? And to get that answer, youll need to trackyour business accounting information.Most entrepreneurs and small businesses I work with, simplyjust dont know where to start, therefore they will forego theprocess as long as possible.There are two main ways in which business records can bemaintained: manual record keeping and computerized (orautomated) record keeping. 21. Manual Record-KeepingManual record-keeping will be most beneficial to smaller smallbusinesses, such as part-timers, freelancers, independent contractors andstartups. 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 thepoint, its no longer advantageous. Manual records satisfy the tax code aslong as they are accurate and can be understood or explained ifquestioned. Of course, if you decide to use a manual system, you mustlearn 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 keepaccurate records of all income received and expenses paid, in a timelymanner. Be sure to jot down a brief description, date incurred, amount,and to whom it was paid.Pros: Easy to use Low costCons: Manual, so you must total everything yourself No automatic checks and balance 22. Computerized Record-KeepingMaintaining financial records on a computer, is similar tomaintaining records manually, except the process isautomated, which usually means quicker, no handwritten set ofbooks, and more accuracy. Also, theres a system in place toprovide some level of assistance.To be successful with a computerized system, you or youraccountant will input each transaction into the software, timelyand accurately to generate forms, reports and financialstatements.Pros: Modern Eliminate math errors Information is instantaneous View Income and expenses bycategory Steady system to safely maintainrecords.Cons: More expensive Require regular updates You must have a computerand be comfortable using iton a regular basis. 23. 4. Tax PlanningAs an entrepreneur, small business owner you want to grow andkeep as much profit for your business as possible, one major way todo this will be through tax planning.Tax planning is a phrase often used, but not well understood. Toaccomplish the goal of tax planning, which is to grow your businessfinancially in the most tax-efficient manner, you will increaseincome, while reducing cost and making strategic, timely purchases.Three Basic Ways to Tax Planning1. Reduce your income2. Increase deduction3. Tax CreditsThere are several effective variationsto the above, each basic method willchange from year to year and differ,apply or not depending on your business structure. 24. KEY POINTS TO REMEMBERLets be clear, tax planning is in no way taxavoidance. The best tax planning, willmerely minimize tax liability. I...


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