Making It Legal:

As tax time closes in, it’s no surprise that people will do whatever they can to avoid paying their taxes. And while you have a right to question certain determinations, there comes a point where you cross a line from the thoughtful to the ridiculous.

From the IRS website, here are just a few of the line-crossing arguments you should not waste one iota of your time making, because they will not fly.  Not only that, but you’ll get fined $5,000 for even trying (another good reason to have a competent accountant advising you):

• I don’t have to file a tax return–it’s a voluntary system.
• I don’t have to pay taxes–that’s voluntary, too.
• I can avoid taxes by forming a corporation as a “religious leader.”
• My First Amendment rights to freedom of expression mean I can protest by not paying taxes.
• Wages and tips received for personal services are not taxable.

As they say, “Don’t mess with the IRS!”

Ah, wouldn’t it be nice . . . to cash out of your business and have the time, freedom and buckaroos to lounge in Tahiti, build that extra extension on the house or give to the charity of your choice.

But there’s more that has to go on behind the scenes–before you get to that big splash with lots of zeros to the left of the decimal point. Particularly in the realm of tax planning. (Because you can be sure that when there’s a windfall, Uncle Sam will be right there next to you with his hand out!)

Here are some steps to think about (and AllBusiness.com neatly outlines):

1. What are you selling? There are two ways to sell your business: Sell the entire thing, entity and all, or sell the assets (and leave you holding the shell of the old entity). No surprise, sellers usually want to unload the whole kit and caboodle. Buyers usually want to avoid the liabilities that the business may have accumulated, so generally prefer to cherry-pick the assets.
2. What can you sell? If you’re a sole proprietor, you have no entity to sell. If you’re a service-based business where the value of the company is based exclusively on the services you provide, there’s nothing for prospective purchasers to “buy” (unless they plan to hire you to work in-house, in which case it’s not strictly a business sale). Have you created any intellectual property that has an independent value?
3. What’s the payout? Depending on the circumstances, you could have a number of options. Do you want all of it in cash, paid immediately? A payout over time? A mix of buyout for the assets and an employment (or consulting) contract to help with business transition for a few years? Part payment in stock of the acquiring company? Each one should be evaluated to see which provides the greatest tax advantage to you.

It’s been said that “every silver lining has a cloud,” and that certainly applies to having business bad debt. In a number of cases, you can get a tax deduction and write off the bad debt against income. But the fact remains that, to get the write-off, the debt has to be uncollectible. Which means that you’ve lost a paying customer.

In addition, there are several things you have to establish before you can legitimately write off the debt:

• You’ve already declared the income. As noted on BrightHub.com, unless you have already reported or booked the income from the sale (such as if you run your business on an accrual tax-paying basis), you cannot write off the debt. This can be a source of huge frustration for service-based businesses, so speak to your tax advisor about ways to minimize the damage.
• Your company had a legal relationship with the debtor. How can you show that? According to BadCrediting.com, either by having a written agreement or invoices showing what was provided/owed.   You can’t write off a handshake.
• The receivable is worthless. Have you taken any steps to try to collect what you’re owed? (If not, sign up for a free copy of my Contracts & Collections Info Kit, which will help you develop a collections policy and procedure.)  Has the debtor filed for bankruptcy? A little legwork is necessary–you can’t just sit back, take no steps, and then throw up your hands and say “write it off.”

As access to credit gets tighter in the “new economy,” many business owners may look to friends and family to help them get through the lean times. Friends and family are a tried-and-true source of funds.

That said, business deals with friends and family can be enormously counterintuitive. Because you’re dealing with your college roommate Patrice or your Aunt Louise, entrepreneurs have a natural tendency to want to handle these situations on a handshake, in the same kind of casual rhythm as you’d ask them out to lunch.

Don’t.

Once you have a business proposition on the table, let the pendulum swing to the opposite extreme.  Be overly vigilant about documenting the deal, clarifying the interest and payback terms, and adhering to your agreement. As I mention in my article, “Raising Capital from Friends and Family,” failing to put your loan agreement in writing can lead to a variety of tax and legal complications. For example, your family member can’t claim the appropriate deductions for the loan.

Underlying it all, you have a very special asset at risk: trust. Because of the personal relationship, it’s not “just business,” the way it is with, say, a bank. Make sure you keep your benefactor apprised of how you’re using the money. Be proactive if you run into problems meeting the payment terms. Open and honest communication–just as you would use on the personal front–will go a long way to keeping all facets of your relationship strong and vibrant.

 There’s no use trying to find an accountant on April 14th and hoping that your issues will miraculously be resolved by tax deadline time. Like hiring other professionals and vendors for your business, you want to take your time to select them carefully. And you want to have them in place before you have an immediate need (read: crisis).

So how can you go about finding one and what should you ask? As Gray Rollins points out in his article, “How to Choose the Right Accountant,” there are certain things you want to look for:

• Find someone local. Tax laws vary from state to state and you want someone who’s up to date on your issues.
• Ask people you trust. Sure, you could go to the Yellow Pages, or find an online ratings system. But if you ask people you know (like other entrepreneurs), you can better gauge whether a particular accountant is a fit for you.
• Get their qualifications. You’ll want to work with an accountant who understands your issues. Those who specialize in tax preparation for W-2 employees may not know all of the benefits in the Tax Code that are available to business owners. Similarly, accountants whose client base focuses on machine manufacturers might not have the same level of familiarity with the best tax structures for knowledge workers.

Still stumped? My How to Choose and Use Attorneys program  contains a full questionnaire of 20 issues you’ll want to raise with most professionals you hire—not just attorneys.

It’s coming up to that time of year again. The time that most business owners dread. Tax season.

Most entrepreneurs would rather have root canal surgery without anesthesia than go through the nightmare that is tax return preparation. Where are my documents? What can I deduct? Given everything going on with the economy, am I going to get “hosed” by the IRS? Saddled with a tax bill I can’t pay?

I’ve managed to keep tax trepidations at bay with two simple steps:

1. Stay up-to-date with my computerized bookkeeping throughout the year.
2. Pay someone else to do it.

Notice, I said these steps were simple–not necessarily easy.  Keeping current with bookkeeping means one of two things: Either you’re spending a fair amount of time doing it, or you’re paying someone else to do it. But once you develop a system (such as taking the first and third Friday morning of each month to make sure all bills are paid, invoices are sent out and outstanding statements get collection calls), you can pretty much move on autopilot.

As to doing your own tax returns, my opinion is: Don’t. According to Chicago attorneys Horowitz & Weinstein, 2008 alone saw no less than six bills changing tax legislation.  That doesn’t include state and local income taxes, property taxes, sales taxes, employment taxes, utility taxes . . . and the list goes on.  Good luck to you trying to keep up with all of it.

And the issue is not just your business taxes; it’s your personal taxes, too. For those operating LLCs (pass-through entities), your whole tax outlook can be affected by plugging in the wrong numbers on the wrong line, or not knowing about a deduction that’s available to you. I prefer to hand this off to my accountants–people whose job it is to keep up with all of the minutiae that make even my head spin.

Think of it this way: Would you let your least qualified employee handle your most sophisticated business assignments?

Q: I will be starting an online gift basket business in a couple of months and have a couple of questions:

1. Although I will be operating a sole proprietorship business (and I was told that an EIN number is not required for sole proprietorship businesses), I do not want to use my Social Security number. So will I need an EIN number? I would like to know what do I need in order to comply.
2. I will be collecting sales tax from customers who order from my website, which is based in New York. I will not be opening up a retail store; my business will be conducted by mail order, phone and internet orders only. I would like to know what forms will I need for tax purposes. I will be paid a monthly commission every month.

A: Congratulations on starting a new business!

You can apply for an EIN online, although you will want to confirm your responses to the online questionnaire with your accountant. Here is a link to the IRS.GOV website where you can get information regarding an EIN: http://www.irs.gov/businesses/small/article/0,,id=102767,00.html

In addition, you are correct that you will need to pay sales tax on purchases made through your website. The New York State Department of Taxation and Finance website can provide you with the basic information you need to get acquainted with sales and use taxes. http://www.tax.state.ny.us/nyshome/stidx.htm

[Note that if you, dear reader, are based in another state, your state’s Department of Taxation (or whatever name it uses) should also have this information online].

However, you will definitely want to make sure that you confirm your decisions with your accountant. You will also want to be sure to set up a reminder system to file sales tax returns in a timely fashion. Even if you make no sales, you are required to file a sales tax return. Failure to do so will cost you in penalties.

Finally, you will want to give some thought to the business structure that you are using for this new venture. You referred to a “sole proprietorship,” and that legal form of business carries with it certain risks–most especially, the fact that you are not shielded from personal liability. Assuming it’s not already within your plans to form a corporation or limited liability company, you may want to have a look at my article, “The Top Five Reasons to Avoid Sole Proprietorship,” available at http://www.greatbusinesslawtips.com/businesslaw_soleproprietorship.htm

Q: Do I have to charges taxes on an online business, even though my business does not have an actual storefront location?

A: You don’t really think that the federal, state and local governments would give up an opportunity to receive tax revenue, do you?   Generally, any time you sell goods to a customer (whether online or off), you are responsible for paying sales taxes. That’s the rule.

The fun (?) thing about rules, laws and taxes is that there are exceptions. You may not need to collect and remit sales taxes if you are selling goods to a customer outside of your home state. That said, tax laws change at rapid pace–particularly nowadays, when federal, state and local treasuries are desperate to replenish their coffers–so be sure to check with your accountant regarding the situations when you need to charge sales tax to your online purchasers.