Taxes and the Small Business Owner

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					Taxes and the Small
 Business Owner
        Kristen Hoiby
     Stakeholder Liaison
  Internal Revenue Service
The Tax Life of a Sole Proprietor

• Start with the familiar
   Form 1040, 1040A or 1040EZ
• In the future, Form 1040
• Other forms and schedules as needed
• Sch. C or C-EZ
• Sch. SE
• Form 4562
• Form 8829                             2
 Have Employees? There’s More

• Form 941, Employers Quarterly Federal
  Tax Return
• Form 940, Employers Annual Federal
  Unemployment Tax Return(FUTA)
• Form W-2, Wage and Tax Statement
• Form W-3, Transmittal of Wage and Tax
• Form W-4, Employee’s Withholding
  Allowance Certificate
What Personal Taxes Do You Pay?

• Income tax – from Sch. C to Form
  1040 gross receipts minus expenses
  equals net earnings
• Self-Employment Tax – from Sch. SE
  to Form 1040 based on net earnings
• Generally, that’s your total tax

     How Do You Pay Them?
• The tax system is pay as you earn
  as employee, employer did withholding
• The self-employed have no employer,
  rather make estimated tax payments
• Payments are four times a year
   4/15, 6/15, 9/15 and 1/15 of following
    How Do You Pay Them?
• Calculated using Form 1040ES
• Includes both income tax and self-
  employment tax
• Three options to send the money
   EFTPS, check, credit card

  Keeping Track of It All
• Recordkeeping is vital!
• Pick a system and stick to it
• Computer based or paper - choose
  a system that works for you

 The Value of Recordkeeping

• Monitors progress of business
     shows the past
     guides the future
• Backbone of financial statements
     income statement
     balance sheet
     cash flow                       8
 The Value of Recordkeeping
• Aid in obtaining financing/credit
• Aid in preparing tax returns
• Could even lower your accountant’s

      Recordkeeping Tips
• Business is business – keep
  separate accounts
• Keep only one checking account for
  your business
• Deposit all business income into
  your business account
• Create a paper trail by writing
  checks for all business expenses
   More Recordkeeping Tips
• Keep supporting documents
   invoices/purchase orders
• Update records on a timely basis

Q. How long do I keep records?
 A. As long as you need them!
  • Tax related records: 7 years
  • Property related records: as long as
    you own the property (if also tax
    related, 7 years more)
  • Keep them if someone else might
    want to see it

 Protect Your Bottom Line –
No Penalties!
3 key elements to avoid penalties:
1. File on time
2. Pay on time
3. File accurate returns

  File on Time/Pay on Time
• The law requires it
• It saves you money!
  Combined penalty is 5% a month or
  part of a month.
            4.5% is for filing late
            0.5% is for paying late
• Always file even if you can’t pay
        File Accurate Returns
• e-File your returns
• Accuracy related penalty of 20% if
  tax understated due to negligence or
  substantial misstatement
• Accuracy also means taking advantage
  of all the deductions and credits you are
  entitled to. No one is expected to pay
  more tax than they should.
  Make Estimated Tax Payments
• Penalty for failure to make estimated tax
     No penalty if amount due is less than
  $1,000 after credits and withholding
     No penalty if amount paid is equal to
  100% of last year’s tax or 90% of this
  year’s tax, which ever is smaller
• Use EFTPS for these payments
    Schedule in advance
    Confirmation of payment
     Business or Hobby?

• Reasonable expectation of earning
  a profit
• Profit during at least 3 of the last 5
  tax years
• Consider various factors that show
  intent is to run a profitable
  business activity

          Business Income
• Report it unless specifically excluded by
  • Includes cash, checks, credit card charges
• Includes property or services received
• Keep good records!
  (see Publication 583)

    Home Office Deduction

• For business use of a portion of the
• Exclusive and regular business use
• Not for investments or hobbies
• Deduction may be limited (see Pub 587)

• Used in a trade or business
• Usually deducted in the year used
• “Useful life” of one year or less
• If useful life is > 1 year, item must be
• Supplies used in the manufacture of
  goods are part of “Cost of Goods Sold”

     Car & Truck Expenses

• Business use of a car or truck
• Choose standard mileage rate or actual
  expense method (see Pub. 463)
• Commuting expense not deductible
• Keep good records

          Travel Expenses
•   Purpose of trip must be business
•   Must be traveling away from home
•   Meals, lodging, travel costs
•   Expenses must be reasonable

        Depreciation Basics
• Depreciation is a challenge! Get help!
• If an asset is expected to last more than one
  year, it must be depreciated
• To depreciate an asset, you must:
  • Own it
  • Use it in your business or income-producing
    (investment) activity
  • Be able to determine its useful life
  • Expect it to last more than one year
• Some property cannot be depreciated (land,
  intangible assets like franchises)
    Business Start Up Costs
• Related to creating an active trade
  or business
• Investigating creation or acquisition
  of active business
• Usually amortized
• For 2006, can choose to deduct up
  to $5,000 of certain costs
     Information Reporting

• File Form 1099-MISC if $600 or more
  paid for services during year
• See instructions for exceptions
• Check instructions for:
  • use of Box 3 (Other Income) vs.
  • Box 7 (Non-employee Compensation)

    Where can you get more
• IRS web site:
• Click on Business
• Click on Small Business/Self-
• This is your gateway to information
  about tax law, products and services

• Make understanding your new
  obligations and responsibilities part
  of your business plan for success
• Start and maintain a good record
  keeping system
• Protect your bottom line


 Thank you!