Biz Tip: Avoiding the top five tax pitfalls for small businesses
Ignorance of the law is no exemption
By Mary Ellen Hall
For each small business that opens during a year, another one closes. One reason is lack of knowledge about taxes. Wrong choices, misunderstanding of tax law, and failing to seek help can doom a business from the start.
Structuring your business and pleasing Uncle Sam at the same time can be challenging, especially for the small business owner and entrepreneur. Awareness of the available tax breaks is the first step towards keeping your company from spiraling into the tax abyss.
For those already in business, and those contemplating starting one, these steps can help create, and maintain a business free of tax headaches.
Choose your form of business carefully: What to call your company has a very big impact on how the government taxes you. From Corporation to LLC to Sole Proprietor, how a small business chooses to operate can directly affect its tax status.
Budget smartly: Many businesses, especially new or seasonal ones, fail to allocate money to pay their taxes, waiting until filing time only to realize the funds have already been spent. Even if your business does not have the cash to pay the tax bill, file anyway. The penalties and interest may be inevitable but they are far less severe than those for not filing at all.
Know the law: Business owners often overlook deductions that were designed to help small businesses such as the Section 179 deduction, which allows an upfront deduction of the cost of placing equipment into service. For 2006, a business owner can write off up to $108,000 of the cost of that new equipment.
Take advantage of tax breaks: Tax laws can be confusing enough to stump the most astute businessperson. But some tax "loopholes" can save you a bundle. The complex Domestic Production Law, for example, allows many small businesses a tax break for having employees who work in a variety of industries. Many professions include manufacturing, producing, farming, software, and sound recording, as well as construction and renovation of real property. Businesses in these industries may be eligible for this type of deduction. They just don’t know it.
Stay active in the business to claim deductible losses: The principals of companies may find themselves unable to claim what should be deductible losses on their personal tax returns, if they are not active participants in the business operations. Their losses are considered passive and only deductible if there is passive income.
Taxes and the ability to navigate them need not be an obstacle for small business. Many small business owners are in a mindset to do it all – run the business, add profits, manage employees and keep the books. In most cases, something has to give. By working with a tax expert, companies can thrive without the fear of the IRS knocking at the door.
Mary Ellen Hall is Tax Manager of Rauker, Scheinfeldt & Co., Inc. with offices in Auburn and Littleton.
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