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IRS Summertime Tax Tip 2010-05

Are you opening a new business this summer? The IRS has many resources available for individuals that are opening a new business. Here are six tax tips the IRS wants new business owners to know.

1. First, you must decide what type of business entity you are going to establish. The type of business entity will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.
2. The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
3. An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.
4. Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.
6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

IRS Publication 583, Starting a Business and Keeping Records, provides basic federal tax information for people who are starting a business. This publication is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676). Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

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Rule:
“Accounts Receivable” is offset when you create an invoice for a customer and decremented when you use the “Receive Payments” feature to record a payment from the customer against the invoice. QuickBooks does this in the background. Using the “Receive Payments” feature is the only way you can successfully record a payment against an invoice in QuickBooks. Using another method will result in an overstatement of the “Accounts Receivable” account.

1. What did you purchase?
2. Where did you purchase it?
3. When did you start using it?
4. How much did it cost?
5. Accumulated depreciation?
6. Fixed asset or expense?

The big question is “when should you capitalize an item into the business so that it becomes an asset of the business?” This is a decision that your accountant can help you with. He/she can discuss with you whether the asset can be depreciated to your advantage, and whether or not business property taxes may be levied against it.. (this is a tax which is often assessed at the county level and should be a consideration along with an appropriate depreciation method). If you decide not to capitalize, then the item’s cost should be expensed. Examples of items that are often fixed assets of businesses are autos, trucks, and large equipment purchases.

The seminar is this Wed. May 5, 2010, (SBDC seminar, Bookkeeping 101 for small businesses). The seminar is from 2:00 pm to 4:30 pm at the Watsonville Library, second floor presentation room. The cost is $35 and it includes the opportunity for free one-on-one couselling with your choice of area speciality. SBDC has over 20 business advisors in different specialities such as marketing, bookkeeping, financial (loans), and business planning. You can register for the course through the SBDC website at www.centralcoastsbdc.org.

I will be teaching the seminar; and there will be plenty of material geared to small business issues, some real case examples, plus lots of visuals. 

Also, I may have a surprise guest (think loans.. grin) at the seminar.

Preregistration is required and you can do this online at http://centralcoastsbdc.org.  Free one-0n-one consulting with our sbdc consultants (over 20 of them) will be offered to the attendees. 

First rule: always research what others are paying, this can be a negotiation point. In fact good research on every aspect that supports your arguments is critical to your success.

Suggestion for how to proceed..

Divide the negotiation into problem definition .. from your prespective and verification of problem. Then proceed to talk about solutions and timelines that are acceptable to you.

An example of this is…

1) Present past and current situation… problem definition

Try basing your arguments on the fact that you’ve been there a long time and have done your best to pay.. and now your business is having difficulties because of the current economy (you might want to consider showing them your balance sheet and profit and loss as verification..or be prepared to talk in detail about it)

2) Problem resolution .. move, sell or improve business…and how long this might all take..

There is the obvious difficulty of moving, not only from the cost standpoint but the time and effort which is why you haven’t found a cheaper, perhaps more suitable lease at another location.. You can open and discuss this option in detail with them, to show that you’ve considered it and to refresh their minds at how inconvenient it will be for them also.

You may want to consider taking them into your confidence about the possibility of selling as well as streamlining your business in the future.. if you present either or both .. be prepared with details to show that you’ve thought about this..If you talk about them helping you out, then you need to talk about how long this might take.. again details will show that you are in control.

Remember to set the range of what you want with the rule of 3… set the range low enough so that if you meet to negotiate 3 times and move up in price, you will land on or near where you want to be. Additionally, always base your agruments on supportive fact, detail, and planning. Use emotional appeal very sparingly.

Mark your calendars! This Wed. April 7, 2010, SBDC seminar, Bookkeeping 101 for small businesses. The seminar is from 2:00 pm to 4:30 pm at the Watsonville Library, second floor presentation room. The cost is $35 and it includes the opportunity for free one-on-one couselling with your choice of area speciality. SBDC has over 20 business advisors in different specialities such as marketing, bookkeeping, financial (loans), and business planning. You can register for the course through the SBDC website at www.centralcoastsbdc.org.

I hope to see you there!