Tax and Accounting Considerations for Entrepreneurs
Running a business is a lot of work, but most entrepreneurs are aware they’ll put in long hours and handle multiple aspects of their company. But these same small business owners are often blindsided by the time and effort required for tax and accounting issues. Here are a few issues that should be top of mind when it comes to tax planning and doing your bookkeeping.
Entity Type: Should your company be formed as a C corporation, a pass-through entity like an S Corporation, limited liability company (LLC) or partnership, or a sole proprietorship? Understanding the pros and cons of each will help you make a wise decision for which type is best. Considerations include taxation versus protection.
Estimated Taxes: Businesses pay tax liabilities on a quarterly basis. This applies regardless of the form of business ownership. Payments are due January, April, June and September each year.
Ordinary and Necessary Expenses: The tax law provides current deductions for numerous "ordinary and necessary" business expenses including things such as office supplies, subscription fees and equipment. But entrepreneurs sometimes consider expenses as deductible that the IRS does not.
Independent Contractors: Business owners sometimes want to avoid payroll taxes and related expenses by hiring independent contractors, but the IRS often contests the employment status of these workers, and your state may also have more stringent regulations requiring them to be paid as employees.
Payroll: It’s important to pay employees on time, withhold and report the proper amount of tax, and file payroll reports each quarter. Failing to pay the full amount of tax due can result in “Trust Fund Recovery” penalties as the amounts withheld form employees do not belong to you, but to the government agencies.
Depreciation: Under Section 179 of the tax code, a company can claim a generous current deduction for the cost of business assets. Alternatively, assets are "depreciated" over time according to specified schedules and rules.
Cash flow: Too much money going out, and not enough coming in, can sink a small business. It's important to regularly monitor accounts receivable and payable as well as other sources of cash inflows/outflows to understand the financial health of your company.
Bad debts: Even a profitable business may have difficulty collecting amounts owed by customers. To limit this, review your terms and credit qualifications. If needed, focus on collections and keep records of your attempts to be paid what is due in order to claim bad debts on your tax return..
Record-keeping: Good record-keeping will help you keep track of income, liabilities and other aspects of you company so that you can stay up to date with filings and track income and expenses for tax preparation.
If you have questions on how these issues affect your business, be sure to talk with your tax advisor. And if you need help with your bookkeeping, payroll, or improving your profitability, be sure to reach out to us at 310-534-5577 or contact@abandp.com.
