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
  Statement
• Form W-4, Employee’s Withholding
  Allowance Certificate
                                          3
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

                                  4
     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
     year
                                        5
    How Do You Pay Them?
              continued
• Calculated using Form 1040ES
• Includes both income tax and self-
  employment tax
• Three options to send the money
   EFTPS, check, credit card


                                       6
  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




                                     7
 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
  bill!



                                       9
      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
                                   10
   More Recordkeeping Tips
• Keep supporting documents
   invoices/purchase orders
• Update records on a timely basis




                                     11
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

                                     12
 Protect Your Bottom Line –
No Penalties!
3 key elements to avoid penalties:
1. File on time
2. Pay on time
3. File accurate returns



                                     13
  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
                                      14
        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.
                                        15
  Make Estimated Tax Payments
• Penalty for failure to make estimated tax
  payments
     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
                                              16
     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

                                           17
          Business Income
• Report it unless specifically excluded by
  law
  • Includes cash, checks, credit card charges
• Includes property or services received
• Keep good records!
  (see Publication 583)


                                                 18
    Home Office Deduction

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



                                           19
               Supplies
• 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
  depreciated
• Supplies used in the manufacture of
  goods are part of “Cost of Goods Sold”


                                             20
     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



                                           21
          Travel Expenses
•   Purpose of trip must be business
•   Must be traveling away from home
•   Meals, lodging, travel costs
•   Expenses must be reasonable



                                       22
        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)
                                                  23
    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
                                          24
     Information Reporting
          (1099-MISC)

• 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)


                                        25
    Where can you get more
    information?
• IRS web site: www.irs.gov
• Click on Business
• Click on Small Business/Self-
  Employed
• This is your gateway to information
  about tax law, products and services

                                     26
            Conclusion
• 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

                                          27
Questions?


 Thank you!