Donald Williamson and David Kautter for Accounting Today write: The Internal Revenue Service has sent letters to thousands of small
business owners recently, questioning whether they underpaid their taxes
last year.
Titled “Notification of Possible Income Underreporting,” the letters
were mailed to small employers this summer requesting that they review
and confirm that they accurately reported their income on their 2012 tax
returns.
In response to this action by the IRS, American
University professors Donald Williamson and David Kautter have created a
list of “Tax Best Practices for Small Businesses,” a checklist designed
to help small business entrepreneurs stay up-to-date on all tax related
issues, and away from the scrutiny of the IRS.
1. Keep good records about who is an "employee" and who is an "independent contractor."
2.
Keep track of places where you may have a "physical presence" (even
unknowingly), to properly comply with state rules governing sales tax
collection.
3. Invest in good tax software accounting systems—those that track your records and regularly provide updates to new IRS rules.
4. Hire a tax accountant who has experience in your type of business, whether it's a coffee shop or a construction business.
5.
Keep good records on how much you paid for, and the date you placed in
service, all business equipment, business vehicles, etc.
6. Don't
consider using funds you have withheld for employee payroll taxes (or
any taxes, for that matter) as a short-term loan to tide you over during
a shortfall in working capital.
7. One of the biggest traps for
small business taxpayers is estimated taxes—paying them on time,
calculating them correctly, and knowing the safe harbors that can
protect you against underpayments. Miscalculating any of these steps can
be a major headache, so speak with someone, most likely a tax
accountant or enrolled agent, who knows the rules cold.
8. If your
spouse, child, mother-in-law, or other close relative works in your
business, make sure he or she abides by the same employment rules as
your unrelated employees.
9. Select a "tax year" for your business
that reflects the natural ebb and flow of your business's receipts and
disbursements. This way, you won’t get caught in a cash crunch when tax
time comes.
10. You or your accountant should retain all relevant
tax records for at least three years, and if your records relate to
property and depreciation, keep them until the property is disposed of,
plus an additional three years.
11. Keep detailed records on how you use your personal or business-owned vehicle for business vs. personal purposes.
12.
Hire a reputable third-party administrator (such as Fidelity or
Vanguard) to manage your 401(k) plan and other tax-favored employee
benefits.
13. Make sure that you and your tax accountant are
familiar with the tax rules, including the favorable tax credits and
deductions that are unique to your business.
14. If it becomes
necessary for your small business to open a foreign bank account in
order to pay vendors or others in another country, make sure you and
your tax accountant are vigilant in following the new rules on foreign
bank accounts, known by the acronym FATCA (short for Foreign Account Tax
Compliance Act).
15. If your hope is that your business will
continue after you die, under the leadership of another family member or
designated heir, take steps to protect the business against a forced
sale in order to pay inheritance taxes.
16. Don't become foolishly
emboldened by thinking that the IRS will have to “prove” that you have
done something that doesn’t comport with the tax law. The burden of
proof is always on you, not the IRS.
17. Become familiar with the
tax rules surrounding starting, running, selling and shutting down a
business. Determine whether you should operate as a partnership, an S
corporation, an LLC, or a sole proprietorship. Your tax accountant
should be closely familiar with these rules.
18. Have a one-on-one conversation with your accountant about the Affordable Care Act.
19.
If you can't pay the taxes you owe to the IRS, or another tax agency,
contact your accountant right away. This situation won’t get better by
ignoring it.
20. When someone pays you in cash, it doesn’t mean
that payment is nontaxable. The IRS has state-of-the-art statistical
technology and models based on spending habits and bank accounts to
build a case against alleged tax cheats.
Friday, August 23, 2013
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