June 4, 2018 Version CONTENTS Advisor Savvy: What to Look for in Tax Consultant If you’re smart, your business accountant can be much more than a bean counter. They can advise you on all sorts of important items related to your business. Seek out the best using these tips as a guide. Recent Tax Law Changes: What Do They Mean? How recent tax law changes impact the small and medium-sized business owner. Other tax law items to keep in mind every year, too. Your Business Entity & How It Impacts Your Taxes Are you an S corp? LLC? Sole proprietorship? Something else entirely? Your business entity can impact your bottom line tremendously. This chapter will give insight into how different entities can provide you with tax savings. Money Matters: Bills, Invoices, Paychecks How do you prepare your invoices and pay your bills? How many bank accounts do you have? These are just some of the “money matter” questions that can frustrate you but be smoothed out with the help of a tax advisor. Employees, Overhead & Their Impact on Your Business Finances If there’s more than “just you” in your business, things become more complex. It’s the same with expenses related to your operation, especially insurance, facilities and overhead. Do a deep dive into these areas to find potential cost savings and tax benefits. Growth Is Good: What to Know & Actions to Take What’s done is done—what’s to come can be the place for real focus and energy. Many tax advisors look to work with growing businesses or find ways to take a business that’s stagnant and get it moving forward again. Here are some ways to tap into the expertise of your advisor. Advisory Savvy: What to Look for in a Consultant If you’re smart, your business accountant can be much more than a bean counter. They can advise you on all sorts of essential items related to your business and set you up for success in the future. What is a business tax consultant? Any doctor will tell you that the best time to beat a disease is before you get sick. The preventive medicine of a healthy lifestyle and regular check-ups can keep illnesses at bay and make your body stronger for when sickness strikes. The same is true for your taxes. Neglecting your bookkeeping all year then dropping a pile of receipts on your tax preparer at the last minute

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won’t fetch a healthy return. But careful planning and regular check-ups can mean the difference between good financial health and putting your business on life support. But not all “tax doctors” are created equal. They run the gamut from highly trained and certified professionals to common document preparers without professional [same word twice] training. The best tax advisors have a deep understanding of tax law and a long history of working with clients like you. The worst do little more than fill out the proper forms and, hopefully, double-check their math. A good tax advisor will have knowledge and practical experience that are uncommon. They will ask you questions about your business, your past, your ambitions, and your understanding of your current tax situation. Good advisors go to lengths to teach their clients new ways of understanding their taxes, and guide them toward a better, less-expensive course of action. Not-so-good advisors will tell give you the same 10-cent advice you can find anywhere: try to save more, keep good records, don’t get audited. But following the same advice everyone else has won’t put you ahead of the pack. If you want to really want to save money, you need better ideas. The truth is that even well-run businesses can be throwing away money because they don’t know all the tax rules. It happens every day. The system isn’t set up to be easily understood. The U.S. Tax Code is over three-and-a-half million words and written in legalistic jargon. It’s designed to be difficult. No business owner in their right mind would choose to read through that dense thicket of exemptions, rules, and loopholes. Even if you tried, the laws change regularly. Your newly acquired knowledge might only be good for one or two years before the advantages you find would close up or get legislated away. A good tax expert not only understands how tax laws operate, they have a working understand of how the laws change. They know when exemptions expire, when special deductions sunset, and what new opportunities are coming down pike. The best tax consultants are experts in financial analysis. They know how to assess the health of a business by reading its books, and how to present it to the IRS. But a great tax advisor doesn’t only look at your history. They help you plan for the future. Just like with your physical health, there are things you can start doing today that will save your business money in months and years ahead. These can range from simple accounting practices to more complex opportunities that restructure your business in a way that means you pay fewer taxes and take home a larger profit each quarter. The question is: are you willing to put in a little more work now for a much bigger reward later? And can you find the right person to guide you? Why hire a tax consultant? There’s a tendency to see taxes, even business taxes, as uncomfortable at best and scary at worst. And, like so many unpleasant things, people don’t want to think about taxes very often. But giving time and attention to your business taxes now will save you a lot of time and headache later. Businesses that avoid taking a deep dive into tax situation do so at their own peril. There’s an attitude that taxes simply are a necessarily evil, so it’s best to do only the minimum amount of work, pay the government what you owe, and move on. After all, if you haven’t been audited so far, you must be doing something right. Right? Wrong. The problem with getting comfortable

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with your current tax situation is that you’re probably missing out on a lot of savings. Just because the IRS accepts your current filings as legitimate, doesn’t mean that you couldn’t pay less and still stay legal. In fact, if you haven’t had a professional take a long look at your financial situation, there’s a very good chance you are paying too much – or will be in the future. The U.S. Government Accountability Office estimates that taxpayers overpay taxes by about $945 million each year due to mistakes they and their tax preparers make on their tax returns. Would you rather keep overpaying the government or keep your hard-earned money? Don’t be a statistic. A tax consultant is the person who help you solve that problem. Like calling an exterminator to get rid of the termites in your basement, hiring a tax professional can help you identify and fix troubled areas of your business and protect you against similar threats in the future. They have the knowledge you don’t. And that knowledge can save you money. The more complicated your tax situation becomes, the more necessary a trained professional is. Just like in personal finance, where the more money you make, the more you need to pay in taxes, business taxes become more convoluted with success. A business can outgrow its current tax situation in the same way it can outgrow its original building. What worked for you in the past may not be the most optimal way to move forward. A good tax consultant can not only help you identify when it’s time to make a change, they can put you on the best path to future success. [1. Do you have anything to add here about why it’s a good idea to work with someone like you?] Kinds of consultants There are many kinds of tax consultants. They vary in their levels of education, abilities, and expertise. Knowing the difference can help you find the right fit your business. You’ll want to consider what you want from your future tax consultant. Are you looking for someone to help your business grow? Do you need help with payroll and accounting ledgers? Are you in a specific space, like real estate or the nonprofit sector, that has a second layer of laws requiring a niche understanding? Whatever the case, it helps to know the difference in tax professionals before you consider individuals to help your business. A Certified Public Accountant (CPA) is an accounting professional who has passed a state licensing exam. CPAs generally have an advanced degree in accounting and often have specializations. For example, a CPA may have also be a Certified Information Technology Professional, with expertise in helping businesses manage their technical capabilities. Other CPAs specialize in real estate, business valuation, forensic accounting, and more. The more specializations a CPA has, the more thoroughly they are invested into their niche. CPAs are licensed by state governments and have the power to represent taxpayers to the IRS. An Enrolled Agent is a tax professional licensed by the federal government and can work across all 50 states. Enrolled Agents must pass a rigorous test from the IRS about the agency’s codes and practices, and must keep with the yearly continuing education requirements. It is the highest designation given by the IRS.

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A Tax Attorney is a lawyer with a specific degree in tax law or a specialization certificate from a state bar association. They can represent clients in court cases, mediation matters and during an IRS audit. They can provide help with tax problems, guidance in dealing with the IRS, and offer business and estate planning. Professionally certified tax consultants like CPAs and Enrolled Agents provide an additional level of safety and security because they have the ability to represent clients in an IRS audit. In the unlikely event of an audit, it’s no small comfort to have high-level expertise and technical knowledge on your side. Common tax preparers or regular accountants are not certified to represent a business in an IRS audit, even if they work for the company being audited. Certifications and designations Beyond broad professional titles, many tax preparers have met further educational requirements that take the form of professional designations. These specializations represent the deeper focus that a tax consultant has applied to specific areas of practice. Taking advantage of the fine expertise these specialists have can have big effects on your business’ efficiency and bottom line. A Certified Tax Coach is a designation given to consultants who have advanced training in tax planning. The certification requires completion of a rigorous academy of classes focusing specifically on long-term tax strategies. Certified Tax Coaches usually have years of practical experience in helping businesses navigate the waters of the U.S. Tax Code, and must meet continuing education requirements to keep up to date on changes to the law. A Certified Financial Planner has undergone at least 18 credit hours of post-graduate work and passed the CFP Certification Exam. They mostly work with individuals on financial strategies to ensure retirement, children’s education savings, estate planning, and the like. An Accreditation in Business Valuation (ABV) is given to CPAs who have demonstrated expertise in business valuation. They have a set of skills that includes business valuation process, professional standards, qualitative and quantitative analysis, financial reporting and more. To earn the ABV credentials, CPAs must pass the ABV Exam or its equivalency. The tax industry has a lot of professional associations, accrediting bodies, and certifications. This happens to create public trust through rigorous examinations and accreditations. And, in part, to fool unwitting customers into accepting fake legitimacy. Don’t be fooled by fly-by-night accrediting services that add an air of legitimacy to subpar tax preparers. CPAs are licensed by state boards of accountancy; Enrolled Agents are accredited by the IRS and tax attorneys must pass the state bar. All of these institutions offer free, online databases that are searchable. Do not fall for tax preparers who are unlicensed or who pass off shady designations. How to choose a tax consultant To get the biggest benefit, it helps to pick the right professionals. While most tax professionals will gladly take your money, not all of them will produce the kind of results that will save you money in both the short-term and the long haul. You’ll want to pick a professional who not only

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holds the right skill set for your specific situation, but someone who you work well with because you’ll need to rely on their advice on serious legal and professional matters. Assess the situation The best way to make the right hire is to know what you’re looking for. If you have a clear idea of the kind of help you need, you’ll be in a better position to select the perfect candidate to help you get there. If you have a solid understanding of your business’s current financial footing and a detailed outline of where you want it to be in the future, a tax consultant skilled in long-term strategic planning can help get you there. If you need help understanding the realities your financial situation, you may want to seek an advisor with a specialization in business valuation. Accountants and agents with knowledge of your field and your state’s specific tax laws can make the process a lot simpler and provide you with an extra dimension of advice that you didn’t know you needed. Know when to hire There are many times when it’s professionally advantageous to hire a business accountant or tax consultant. If the IRS is at your door, that’s a pretty good indicator that you need tax help. But other times are just as important. Good times to seek advice from a tax professional include you’re starting a business, if you’re buying or selling a business, if you’re unsure of which legal structure to use, if you need a loan, or if your business is growing fast. And, of course, if you want to save money. The truth is that it’s almost never a bad idea to have outside expertise on your side. The best tax consultants will do an initial consultation for free, so if you’re interested in knowing how you could benefit from a tax professional, the financial risk is negligible. But that doesn’t mean you should blindly pick out a professional and test their services. There are many ways to go about picking the right professional for you. It’s important to hire with an eye toward the future. Even the best tax advisors can’t change your company’s history. Maybe you can save a dollar here or there on this year’s filing, but the real value in a professional tax consultant comes from the money they can save you going forward. By setting up your business and accounting practices the right way, knowledgeable tax professionals can set your company up to get the biggest returns legally allowed and set your business on a course to grow in the smartest, most cost-effective way. Look for a partner A business tax advisor isn’t someone you call up once a year. As they help you structure correctly, plan for the future, make payroll changes and help secure loans, you’ll be seeing them regularly. So don’t think about a tax preparer as simply someone to do a quick job. Think of your tax consultant as a partner. To get the best possible value out of the partnership, you should consult him or her before many big decisions, like expanding your business, selling your old storage space, or buying a company vehicle. That means you’ll want a tax consultant who is not only knowledgeable, but also someone you can work with on a regular basis and whose advice you can trust. Look for someone who can share your vision for your company, who can help you to grow smart, and who is willing to take the time to explain their reasoning. For many small business owners, personal and professional finances are closely linked together. That can mean that your business tax consultant will have a window into your personal tax

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situation as well. So be sure that you find a consultant who can help you save money and grow on both fronts. The right tax consultant will be more than merely an employee; the right tax consultant will become a close advisor who will help you guide you through many decisions throughout the lifetime of your business. It’s not a decision that should be rushed into or taken lightly. Check the references Before you decide to meet with a tax consultant, do your due diligence and research them. You can search for online reviews and ask your friends and professional acquaintances. But it can be worthwhile to take things a step further. Be sure to check out the credentials of any contenders on your list. Make sure they aren’t passing off subpar associations as strong indicators of skill. You can also check with the IRS’s Office of Enrollment to get a list of Enrolled Agents or your state’s board of accountancy for a list of certified public accountants. If you’re going with a firm, you could go through the Better Business Bureau to ensure that you’re making a high-quality choice. Look beyond price There’s a difference between what an advisor charges and what they cost. A common tax preparer may charge upwards of $100 to prepare simple personal tax document. A great tax advisor can charge well above that, but the best advisors are worth well above their fee. Saving $20,000 per year on taxes adds up quickly. Don’t be afraid to ask about rates early on the interaction. Well-heeled professionals won’t shy away from telling you the costs of their services — and explaining what you’ll be getting for that figure. Most of the time, you get way you pay for, and experience costs. But good tax advice not only saves money, it can ease your worries about audits and keeping up with the books. Seek out compatibility When choosing a tax consultant, it’s important to find the right fit for you and your business. If you don’t feel comfortable with your tax consultant, you’re not going to get the biggest possible benefit out of the relationship. That’s why it’s important to not only search for a consultant with the right background and specialties, but also one who makes you feel comfortable. Some tax consultants have a more liberal view of deductions than others. It’s good to know that kind of thing early. You never want to be in the position of turning your taxes over to the IRS containing anything that makes you feel uncomfortable. So it’s best to have an open and honest dialogue with your tax consultant so that you’re never crossing a boundary that you didn’t want to cross. [2. Do you have any thoughts to add here about how to find the right tax adviser? ] The Impact of Newer Tax Laws

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The sweeping tax reformed passed in 2017 has garnered headlines across America, but that doesn’t mean it’s well understood. In fact, the most comprehensive tax remodeling of the last 30 years has left a lot of business owners scratching their heads. While the nuts and bolts of federal taxation has mostly stayed the same, many portions of the tax code have been updated and changed—especially when it comes to business. The get the most out of the new rules, partner with a trusted tax advisor. There’s simply too much fine print to cover in a short chapter. A tax advisor can guide you through the maze of changes and let you know if you’ll need to make any adjustments to reap the full benefits of the business-friendly aspects of the new code. Here’s a brief overview of what the new taxes mean for your business, your employees, and your future. Understanding the basic tenets can help you find where the biggest changes are happening and where your business fits in. A solid comprehension of the fundamentals can also help you ask the right questions of your tax advisor. Who’s Affected? The new tax law, officially known as the Tax Cuts and Jobs Act, reduces the tax burden of nearly every kind of business in the U.S.—but the exact size and scope of the deductions depends on several complicated factors. For big businesses, the corporation tax rate has been slashed by 40 percent. But for small businesses, the savings are more difficult to discern. Calculating your small business’ tax benefits means answering questions about the nature of your business, the total income of the business owner(s), the amount employees are paid, and how much property the business owns. Pass-Through Entities The more complicated part of the changes targets small businesses, which in the law are referred to as pass-through entities. The name refers to businesses owned by an individual or a small group whose profits are “passed through” from the company to the owners. In these cases, the business is not a C Corporation that has a full legal standing, and therefore must pay its own taxes. Sole proprietorships, general partnerships, and the like usually fit into the category of pass-through entities, as do some many S Corporations and Limited Liability Corporations that do not pay the corporate tax. The new laws were enacted to provide support for small businesses that don’t get to take advantage of the reduced corporate rate. That’s good news for most small business owners, but don’t be fooled: the rules are far from simple. The exact formula for determining the tax burden of a small business has grown increasingly knotty and complicated. While what follows give a good overview for basic understanding, the best advice to take full advantage of the changes now and to come is to consult with a professional. The many ins and outs of the new law, and its complex rules for deductions based on several variables, means that only the most knowledgeable professional will be able to make sure your business gets the full benefits of the law. The laws divide pass-through business owners into three groups based on income. Those in the lowest group are entitled to receive the full 20 percent pass-through deduction. This income bracket gets the deduction regardless of the kind of business owned. The rules are different for business owners who make above the minimum threshold. Owners in the highest income

Comment [DK1]: Isthisphrasedcorrectly?

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bracket, on the other hand, only receive pass-through deductions if they own certain types of businesses. If their company is a personal service firm—such as a lawyer, doctor or consultant—the owner receives no tax deduction whatsoever. If the business is not a professional service, it may be entitled to a very limited deduction. For owners with an income that lies between the upper and lower limits, their deductions will fall somewhere between 0-20 percent, regardless of business type. The exact rate of deduction will depend on their income level and business type. But it’s not quite that simple. The deductions for all pass-through operations, whether they qualify as a personal service firm or not, are still somewhat limited. The new deductions are restricted by the greater of two things: either 50 percent of the wages it pays to its workers or 25 percent of workers’ wages plus 2.5 percent of the value of the business’ property. Business owners can deduct only the smaller amount. The good news is that this qualification only applies to the second and third income brackets. The lowest level earners are still entitled to the full deduction. Here are a few examples to illustrate the laws in action. If a self-employed electrician and her husband, who works at a corporate job, have a combined income that stays in the lowest bracket, all the profits from electrician’s business will be eligible for a 20 percent tax deduction. If, however, the electrician’s husband earns enough to move their combined income to the second level, not all of the income from the electrician will qualify for a deduction—even if she makes the same amount as in the first example. In this case, the electrician will have to weigh their combined income against the wages paid to other employees, the exact amount of the couple’s combined earnings, and business property to calculate her deduction. Finally, if the couple together makes enough to reach the third income bracket, the electrician’s business profits will probably not qualify for any deductions, no matter where the income comes from. Corporations Among the biggest differences to the tax code is the new corporate tax, which has been cut down from its hefty 35 percent to a lean 21 percent, which is only a tad higher than the pass-through rate at its peak. The new rate is a great money-saver for corporations that are tired of shouldering an onerous tax burden, but for smaller companies it can create a new set of questions. The new laws also get rid of the corporate alternative minimum tax (or AMT). Much like the individual AMT, this corporate tax was another way for the government to ensure that corporations paid something back. But kissing the corporate AMT goodbye also means doing away with some of the tax liabilities for corporations used to factor into their AMT calculations. Things like company-owned life insurance policies and death benefits paid out were once part of a calculus to find the AMT but are not taxed under the normal corporate system. Making a Change? With the new maximum corporate tax rate at a lean 21 percent, many S Corporations owner may be considering changing the legal status of the pass-through companies into corporations in order to get a better tax break. This is a good way to cut self-employment taxes and reap the advantages a lower tax rate. Luckily, the new tax laws make it easier to convert pass-through entities to C corporations on account of these changes. Before considering making a big change, however, sit down with a professional. Along with the benefits come many drawbacks—you

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could still be a victim of double taxation, for example—and it’s always a good idea to see where your business, with its own unique set of books, will be affected. Overall, the new tax changes have created a lot of changes to the tax code, which brings with it fantastic opportunities to save more of your own money from the IRS. These changes have reframed the way American businesses approach their legal creation and tax burden. But the laws are constantly changing, and as legislators tweak the bill, you’ll always want to be on the cutting edge of the information to gain the biggest tax advantage possible. And that means using a professional. No one else will be ready to help you find bigger savings than a knowledgeable and professional tax advisor. Before you make any big decisions about your company and its taxes, be sure to talk it over with someone who knows accounting—and the law. Concerning Employees The new shifts in the tax code will also affect how businesses interact and pay their employees. As mentioned earlier, some business owners will have to calculate their tax deductions based partially on how much they pay employees, but the changes don’t stop there. While the law still allows businesses to give their employees certain extra benefits tax free, some old practices have been changed—and companies should understand how these will affect both the business and its workers. For example, in prior years, businesses provide tax-free reimbursement to employees who moved at least 50 miles to take a new job and hand out up to $20 tax free per month to employees who bicycle to the office. But these incentives are going away. While nothing stops companies from offering these sorts of benefits to employees, they will no longer be tax free deductions from the business. Other employee deductions eliminated by the new law, including those for membership dues for professional organizations, could have employees asking business owners for reimbursement instead of the government. Be prepared to provide help or guidance for employees who may suddenly find themselves with less money than they expect. In addition, the laws caused a few other changes when it comes to employees. One bright spot is that business meals remain 50 percent deductible. However, employer-owned eating facilities are now subject to a 50 percent deduction, down from 100 percent. What’s more, businesses can no longer provide transportation benefits like bus passes or provided transportation to and from work. Even the incentives given for bicycling programs have been disallowed under the tax changes. Healthcare There’s been a lot of buzz about how the new tax laws will affect healthcare. For individuals, the penalty for not holding health insurance has been zeroed out. While the rule still exists, there is no fine associated with it, rendering that law toothless. For employers, however, very little has changed. The mandate for healthcare requirements remains stable, as do the penalties for failing to comply. What’s More Difficult to Deduct While many of the changes are designed to make companies pay less money, certain areas of the new tax laws will actually increase the cost of doing business.

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Courtside seats. Giving your client a couple tickets to the big game on the company account previously carried a nice 50 percent deductible rate, but not anymore. Under the new rules, deductions for client entertainment is gone. Those changes only apply to clients, however. Holiday parties at the office for employees still qualify for a full deduction.

Interest on business loans. Prior to the new tax laws, the interest paid on business loans was usually deductible. Under the new rules, however, companies can only write off interest expenses on business loans equal to 30 percent of their adjusted taxable income. Although some exemptions exist, this rule could change your company’s relationship with debt and could make you reconsider financing options.

Net Operating Losses. In the past, if a business recorded a loss, it had the option to use those losses to either reduce any taxes paid in the past two tax years, or to reduce any future taxable income for the next 20 years. Under the new tax law, that NOL can only be carried forward, and is limited to 80 percent in any given year. How to Take Advantage of the Changes Tax law is constantly changing. As updated rules hit Main Street and theoretical ideas turn into everyday practices, unintended consequences begin to take shape and lawmakers are quick to adjust the laws in order to fix errors, close loopholes, and provide workarounds for ideas that don’t translate well to the modern economy. The recent set of laws passed, however, is a far more sweeping change than the incremental progress that the country is accustomed to. That means the best time to take advantage of the law is right now, before the biggest overlooked loopholes get sealed up and the advantages are gone for good. That’s also why it’s vital that you work with someone who knows the law. One area that became ripe for reconsideration is how a business buys new equipment, thanks to special tax incentives allowing big write offs in the first year. Prior to the new law, businesses could expense equipment up to $500,000 under Section 179 of the U.S. tax code. Under the new provisions, that number is bumped up to a $1 million deduction per year. For many small businesses that are looking to make routine purchases such as new copiers or desks, this won’t make any difference. But the occasional large-item purchase will now become completely deductible in the first year. If your company has a need for a bulldozer or other ultra-high-end purchase, this is a great deal of savings up front. Despite all the changes, it’s important to recognize what’s stayed the same. Most of the Tax Code has not changed, and much of what was set in motion will sunset in the coming years. Just as with other tax law changes, the best time to find savings is right away. But more importantly than trying to find a quick buck here and there is to consider savings over the entire lifespan of your business, and that means hiring a pro. The new tax laws are a great example of how complicated changes can and do emerge regularly from the legislator. And, don’t forget, even though the federal laws have changed in big ways, every business is still subject to state taxes as well. Chances are that those will also undergo some big changes in the upcoming years. If you want to take full advantage, partner with someone who can point you in the right direction. Reading the fine print of the U.S. Tax Code simply a bridge too far for most business owners. It pays to benefit from the knowledge of a professional.

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Your Business Entity and How It Impacts Your Taxes President Calvin Coolidge famously declared that “The business of America is business,” and, judging from the wide-ranging regulations and laws governing American business, it’s hard to argue that he was wrong. But while American companies come in many shapes and sizes, their most important distinction has nothing to do with their magnitude or services. It’s the way they’re listed on a government document. That’s because the government treats businesses differently based on their legal entity, especially when it comes to taxation. The seemingly unimportant distinction can mean the difference between big tax breaks or paying extra at the end of the year. Understanding the differences in the kinds of business entities can allow you and your tax consultant to create a plan that emphasizes savings. You never know how you might be saved thousands by your tax preparer, no matter their title. For business owners, there is more at stake than just taxes when it comes to saving money. The right tax professional can provide advice on pricing, customer retention and other items that impact a business owner’s bottom line. One small business owner described how his tax preparer saved him thousands of dollars by recommending a single line be inserted into a partner dissolution agreement. This shows how choosing the right advisor crucial to any business owner. So whether you’re thinking about starting business or have already incorporated, it’s a good idea to understand the basics about business entities and the financial repercussions that come with them. [Writing adding about times good to think about – when growing by adding staff or locations or having more income, etc.] Types of Businesses: How the IRS Draws Distinctions Two vinyl siding companies in the same country that both have seven employees and net $500,000 a year might seem identical from the outside, but despite their similarities, they may be paying very different amounts in taxes. Why? Because the IRS doesn’t concern itself with what service a business provides, but rather how it provides it. The government wants to know if the business is its own legal entity with its own rights or whether it’s merely a portion of one person’s financial life. Is the business operated by equal partners or is there a principal manager? Is it a true corporation, with shareholders and monthly meetings, or is it a partnership of a few professionals? These kinds of questions help determine how the IRS will tax the company, its owners and employees. The only way to beat the IRS is to know how it plays the game. Having an understanding of the basic business entities and their tax structures can help you and your advisor pick the right kind of legal entity for your business—one that will serve you now and in the future. Here are a few basic types of business entities and the tax features common to them.

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A Sole Proprietorship is the simplest kind of business entity to create and understand. It’s frequently used for one-person shops, such as an electrician in private practice, and is especially straightforward in the eyes of the IRS. When dealing with a Sole Proprietorship, the government does not recognize a distinction between person and business. Everything that the business owns, the person owns. The buck stops with the owner. If the business owes money to someone, the owner is responsible for paying it back. If the business makes $100,000, the owner keeps all of it. Under a sole proprietorship, the business itself is not a taxable entity. The owner is the only one who is taxed, and they pay taxes on the income, assets, and liabilities that come through the business. The biggest benefits of a creating a sole proprietorship are the ease and simplicity. There are no fees or charges related to the creation of a sole proprietorship, and there is no separate tax to pay. The owner can even deduct business losses from their personal income taxes. Many businesses start out this way, and eventually transition into different statuses as they grow and expand. The largest disadvantages associated with operating a sole proprietorship are the responsibilities that come with it. Because there is no legal distinction between owner and business, the owner is personally on the hook for any debts or liabilities incurred by the business. A General Partnership is much the same as a sole proprietorship, but with multiple business owners. All money and assets belonging to the business are passed along to the partners, and then taxed. When you enter into a general partnership, there is no separate income tax on the entity itself. Taxes are only applied to each partner at their own individual tax rates. As with sole proprietorships, general partnerships are simple to start and easy to maintain. They can be created without paying any type of incorporating fee, and owners of a general partnership can deduct net business losses from their personal income taxes. The difference comes in the diffusion of responsibility associate with the general partnership. Whereas in a sole proprietorship a single owner is responsible for all the debts and liabilities associated with the business, those responsibilities are split among all owners in a general partnership. They also must file a Return of Partnership Income form with the IRS. A Limited Partnership involves multiple owners who are designated as either general or limited partners. The general partner takes responsibility for managing the day-to-day affairs of the company, while the limited partners do not participate regular management decisions. This setup also applies to the level of liability assumed by the partners. The general partner assumes total responsibility for the company’s liabilities while the limited partners act in a more “silent” role, such as providing startup funding and sharing in the profits. A C Corporation or Regular Corporation fits the classic idea of a corporation. Created through state filing, C Corporations are legal entitles that themselves must pay corporate income tax. Any income, assets, and losses from a C Corporation are taxed at the corporate tax rate, which is different than the individual tax rate. Typically, that rate has amounted to about 35 percent, but recent laws have lowered it to around 21 percent. In addition to that tax, the shareholders of a C Corporation are taxed on the income they receive from the corporation. This income, however, is taxed at the individual tax rate. Occurrences like this are referred to as double taxation because the money is taxed once at the corporate level and then again at the

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individual level. While that sounds like a bad deal (who wants to pay taxes twice?) it can actually make good financial sense to create a C Corporation, depending on the specific tax rates and laws in your state. A Regular Corporation comes with a different set of tax rules and allowances. Because it is a separate legal entity, the owners of a C Corporation are not fully responsible for its debts and liabilities. Certain expenses and benefits can even be deducted as business expenses. Good business tax consultants can help Regular Corporations and their shareholders pay lower taxes by splitting its profits among the owners. It’s not all easy, however. The costs associated with starting a C Corporation are high, and it requires complex paperwork and bookkeeping that must be filed with the secretary of state. For example, Regular Corporations must file paperwork with the IRS every quarter. Additionally, a C corporation must follow specific state rules for governance, such as adopting bylaws, filing annual reports, and holding regular shareholder meetings. When a company incorporates as a Regular Corporation, special tax rules allow the company to mitigate their losses by carrying them forward. In simpler terms, C Corporations get to subtract their losses in one year to their gains made in later years, allowing the company to reduce its total taxable income. Typically, companies can do this for a period of seven years. For example, if your business lost $50,000 in 2015 but then made $100,000 in 2016, you could apply a portion of the 2015 losses to your net profit and pay corporate taxes on $80,000 instead of $100,000. Depending on how knowledgeable your tax consultant is and the particular laws of your state, these accounting rules can add up to big savings over several years. Such rules also provide a cushion for lean years by allowing the profitable years to pay better dividends. Another big benefit of C Corporations is their ability to sell stock to raise funds. C Corporations can sell different kinds of stock and can attract investors beyond the United States. A Limited Liability Company or LLC is a different animal altogether. For state tax purposes, companies that are registered as LLCs are separate entities than their owners. For federal tax purposes, however, LLCs are treated in the same way that general partnerships are. That is, income and assets belonging to the LLC are divided among its owners and taxed at their individual rates. While many states grant LLC owners different tax status, not all of them do. The IRS, however, does not make the same distinction that most states make. In the eyes of the federal government, the LLC operates just like a general partnership. It is also possible for LLCs to elect to be treated as a corporation, but that’s rare. With all the odd distinctions, it’s important to talk with your business tax consultant or check out your state’s tax website to find out if it makes sense to register your business as an LLC. The biggest difference between an LLC and a general partnership is its status as a separate legal entity that is distinct from its owners. When that happens, the owners accept “limited liability” over the company. The tax and professional benefits of an LLC lie in its flexibility. As the name implies, the owners of an LLC assume only partial liability for the debts of the business. This is true for all owners, no matter their level of control over the inner workings of the company. The profits and losses can also be divided among the owners in different ways than only by their ownership stake. For example, an owner with a 5 percent stake in the LLC can reap 20 percent of the profits. This can

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be a good way of paying some owners with the sweat equity of their work, even if they could not invest much at the time of inception. LLCs also have an additional advantage that C Corporations do not enjoy: they can distribute property to their partners without paying taxes on it. For example, a C Corporation that buys a car and, after some time, wants to distribute it to a partner will have to pay taxes on the car’s value. Specifically, it will pay tax on the difference between the vehicle’s assessed value and its fair market price. But the general point is that LLCs are not subject to the same corporate tax rules and can distribute property to their partners much more easily. Naturally, these benefits come with a cost. There is a fee associated with starting an LLC, making it more expensive to establish than a proprietorship. So just how limited is the limited liability promised by an LLC (and other entities like it)? As with many seemingly easy questions, the answer is: it depends. The document that incorporates a business into an LLC will spell out exactly what the owners’ liabilities are. An S Corporation is a hybrid operation. Officially set up like a regular corporation, S Corporations have special license to be taxed like an LLC by the IRS. Instead of being subject to the corporate tax, the income from S Corporations goes directly to its shareholders, who are taxed at their individual rates. This is called “pass through” taxation, and it’s a popular way that businesses can escape the double taxation that often comes with a C Corporation. The hybrid nature of the S Corporation is reflected in the tax benefits and drawbacks it offers owners. Like an LLC or general partnership, the owners of an S Corporation share the net profits and losses among themselves, which means they can offset the net business losses on their personal income taxes. And, like an LLC, the owners enjoy the added protection of partial liability for the debts and judgements that the business incurs. However, it is more expensive to establish an S Corporation than an LLC. The paperwork is also much more complex. With an S Corporation, owners enjoy the business’s profits based on their level of ownership, so someone with a 10 percent ownership stake is entitled to 10 percent of the profits — no more, no less. Much like C Corporations, S Corporations must also adopt bylaws, hold shareholders meetings, and file annual reports. While an S Corporation can have many kinds of shareholders, such as individuals, trusts, and estates, other types are not allowed. Partnerships, other corporations and foreigner investors are not allowed to become shareholders in an S Corporation. S Corporations can also sell stock like C Corporations do, but they are only allowed to sell one class of stock. They also can have no more than 100 investors, and all investors must be U.S. citizens or residents. While these drawbacks limit the S Corporation in important ways, most of them will not affect a small business—even a fast-growing one. But the paperwork can be tricky. When incorporating, every business is automatically assumed to be a C Corporation. Extra work is needed to file as an S Corporation, and many states impose ongoing fees for the special status afford to S Corporations. The designation is also easier to lose, as simple paperwork mistakes can mean losing the S Corporation status. If that happens, the company will have to pay the corporate tax. To avoid accidental double taxation, make sure that you partner with a solid tax consultant. Even at its

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reduced levels, the corporate tax rate can wreak havoc on the finances of small businesses that are not anticipating it. A Limited Liability Partnership functions like a cross between a Limited Liability Corporation and a Limited Partnership. Every partner in an LLP has the same amount of managerial responsibility, but they are not liable for the errors of the other partners. Most states that allow Limited Liability Partnerships restrict them to only certain kinds of industries, such as law firms, accounting houses, and medical practices. Many of these businesses choose to incorporate as an LLP in order to shield individual partners from others’ malpractice. A commonly used feature of an LLP is its ability to add new partners and allow established partners to leave. This is why businesses like attorneys’ offices can “make someone a partner” without a lot of fuss. Some states also require LLPs to be approved by a state licensing body.

Much like the Limited Liability Partnership, a Professional Corporation allows multiple owners in the same line of work to unite under a single business entity. They may have a single director or multiple partners. Professional Corporations also provide owners protections against malpractice of other owners and limited liability for the company’s debts. However, there are notable differences. Chief among them, Professional Corporations are usually taxed like Regular Corporations — at the corporate tax rate — while LLPs are not. Some states allow Professional Corporations to be taxed like an S Corporation. [Writer adding non-profit category.] Why Incorporate? Many entrepreneurs choose to operate their businesses as sole proprietorships or general partnerships out of a desire to keep things simple. But in exchange for that simplicity, they may be missing out on the tax advantages that can come from incorporating. It may seem like incorporating is something suited to large conglomerate operations instead of small businesses, but there are many instances in which business owners can benefit from treating their homegrown operations like the big-league players. For one thing, it can help lessen the liabilities. For another, the added paperwork that comes with incorporating can act as a safety net. That may sound strange, but it works in practice. Many sole proprietorships use their personal checkbooks and personal accounting systems to keep up with their business. Because corporations often require a second set of books — one reserved for credits and another for debits — the result is a system that includes natural checks and balances on bookkeeping. A double-checked accounting system means not only a better understanding of the business itself, such as what’s working and what’s not, but also a greatly reduced risk of an IRS audit. Every year, the government audits many more sole proprietorships than S Corporations and better accounting systems is a big reason why. Incorporating can also be a good way to present a professional front to banks and other lending outlets. If you’re a sole proprietor who wants a loan in order to expand your business, it can be difficult to demonstrate to a bank how well you’re doing if you only have personal checks and a car in your name. Businesses that are designated as corporations, however, have a trail paperwork that can paint a better financial picture for lenders to pore over and consider.

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Business owners who choose not to incorporate aren’t necessarily in for an easy, tax-wise. In addition to their regular taxes, sole proprietorship owners can be subject to the self-employment tax. This can be an especially unwelcome surprise to many entrepreneurs just starting out. The self-employment tax is bits of Social Security and Medicare payments in addition to federal and state taxes on all earning. Business owners who incorporates however, will not be personally subject to these taxes if they take draw a salary from the corporation. Downsides of Incorporating Incorporating can be a smart move for businesses of any size, but it’s not always a sure bet. While the benefits like liability protection can be crucial, incorporating often requires an additional layer of work for business owners. Though it’s true that incorporating can be done by yourself (and online, no less), it’s never a good idea to wade into corporate waters without an experienced river guide. If the man who represents himself has a fool for a client, that goes double for the business owner who incorporates alone. The increased paperwork almost necessitates hiring an outside professional. While that can be a blessing in disguise for business owners whose knack lies in other areas, such as operations or sales, and who can benefit from the wisdom of business tax consultant, it doesn’t come free. Owners looking to incorporate for the first time will face the cost of hiring an advisor, incorporating and yearly filing fees. It’s not a decision to take lightly or, usually, alone. [ 3. Do you have anything to add here about business entities? ] The Bottom Line Big business requires big decisions — but small business does, too. While it can seem overwhelming, the variety of legal businesses is actually a good thing for entrepreneurs and small business owners. The wide range of benefits and protections allows a business to choose the entity that maximizes its tax savings and allows for smart growth in the years ahead. Changing a business entity isn’t like playing the stock market: the outcomes of your moves are known ahead of time. There’s no prediction or luck at play. It all boils down to solid knowledge and a firm mastery of the laws. Armed with the right information, the only difficult part is the mastering the paperwork. There’s no reason not to take advantage of the opportunities afforded to businesses by the government. It’s the smart play as long as you know the facts. Working with an expert advisor can ensure that your business is getting the most of its legal status. Money Matters: Bills, Invoices, Paychecks How do you prepare your invoices and pay bills? How many bank accounts do you have? How do you keep track of the products or services you provide and the customers who enjoy them? These are just some of the “money matter” questions that can frustrate you, but can also be smoothed out with the help of a tax advisor. Business people come in all types. There are natural born sellers, gifted leaders, math wizzes and technology savants. But while the attributes of business can come naturally to many, the act of running a business is a skill to be learned. No one is born with a predilection for invoices and a penchant for red tape. The best minds in business learn what they can and boost their abilities with the skills of outside talent to reap the maximum amounts of benefits out of the unnatural

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process of doing business paperwork. Partnering with an experience business tax accountant can supercharge your decision-making, and allow you to focus on what comes naturally. As a primer in the basics of business, here’s a look at some fundamental aspects of money management, such as payroll taxes, business bank accounts, and proper invoicing—items all business owners from start-up to corporate should be familiar with. Managing the Money There’s no denying that any business, from a one-person shop to a multinational corporation, has to concern itself with the intricacies of finance. And while sole proprietors may ask themselves what’s the point of opening a business bank account if the IRS doesn’t draw a distinction between owner and business, there are many ways in which separating business money from personal can be a wise and healthy operation. It’s imperative that every incorporated business have its own account, but often separate accounts can be helpful for entrepreneurs, too. Not only do separate accounts help with bookkeeping, they prime a business for growth and act as a saving grace should an audit occur. After all, business and pleasure don’t always mix, but never more so than at the bank. Business Bank Accounts: Does They Make Sense? A separate business account can help owners keep track of expenses and income, which is especially valuable during tax season. Even the most meticulous small business owner can easily run afoul of ever-changing government rules and regulations about taxes, and separate bookkeeping can prevent the personal and business from mixing too far in the eyes of the IRS. The is especially true for incorporated businesses. If a personal account is used for business purposes, suddenly one of the leading advantages of incorporation evaporates. Once that happens, the business is no longer solely responsible for liability. A simple mistaken payment can open business owners up to the debts and credits incurred by the business. One tax professional tells a story of a client’s income statement having an entry labeled “child support.” It was a glaring error to the tax pro, but the client didn’t see it because he didn’t have a grasp on the difference between personal and business expenses. While that was only one line within a ream of paperwork, it could’ve led to big problems with the government. A business account can also ease some of the burdens on owners and managers, allowing them to delegate authority to others. For example, a business checking account allows multiple qualified users. More than one person can use the account to pay creditors or charge petty items to a business debit card. Separating business and personal accounts can also make it easier for businesses to retain and use the services of tax and business consultants, who can be authorized to review accounting statements. The drawback for small operations like sole proprietorships or general partnerships is the diffusion of responsibility that comes with multiple users, which can be a double-edge sword. In these cases, the business owner is responsible for all business debts, so if a user embezzles money or authorizes an extremely large purchase, the owner bears the responsibility. So add registered users intelligently and only as necessary. A business account can also be a gift to customers. Not only is it more familiar for big clients to make payments to businesses, smaller customers can benefit from the expanded capabilities of business accounts. Many banks offer business accounts the ability to accept and process credit

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cards, making payments much simpler. Although this service is usually accompanied by a fee, many banks offer low rates or other perks for small businesses, so it pays to shop around. Sometimes business accounts are cheaper to maintain than personal bank accounts. Banks often compete for small business accounts, which means that many have enticing offers such as no minimum balance requirements or checking fees. When is it Time to Get a Business Account? The benefits of business accounts are manifold, but they’re only truly useful if your business is poised to take advantage of them. So how do you know when it’s time to make the switch from personal banking to a business account? Here are a few ways to help you decide. *If you’ve grown too big. The first month that you find you have more business transactions than personal transactions going through your account, it’s time to consider opening a new one. Once you’re doing that much business, having a second account will make it far easier to manage your business. Opening a new account also adds an extra layer of personal identity protection. When you open a business account, you can establish an employer ID number—or EIN—with the IRS. You can use that number on your business account in place of your social security number. That way, if someone does manage to steal some information from one of your many business transactions, the damage to your personal finances is limited. *If you need legitimacy. It’s been said before, but it bears repeating: Image is everything. Having a professional business account lends an air of respectability to your business. That gravitas can help the reputation of your business, especially in the early stages. It’s a psychology trick, but many people feel more comfortable writing a check to a company to a person, especially when they’re paying for goods or services. Even if the end result is the same, the added legitimacy can help clients feel secure in working with you. *When you’re thinking about expanding. Opening a business account can be a great way to grow your professional relationship with one of the most important partners your company will have: The bank. A solid, time-tested relationship with a bank will come in handy when you need business loans, financing options, credit cards, experience fraud, need to travel overseas, and more. *When you are actually expanding. If your business has recently gone through a change, such as becoming a partnership or incorporated, it’s vital to open a separate business account. In any situation where another person may be handling some of the business finances, it’s wise to have a separate business account. Not only for the protection and privacy it affords your personal account, but also a way to streamline the buying and selling process. Another registered user simply makes things easier. *When you want to sell. If you’re considering selling off the business you’ve worked hard to build up, it’s a good idea to open a separate business account. In fact, even if you think you may one day sell your business, it’s still a smart move to create a separate business account. When you sell a business, you go through an intense accounting review that’s similar to an audit. Potential buyers want to know the deep financial history of the company they’re preparing to own.

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Business accounts can be a great way to bring order to chaos or set your business up for optimal success. And your accountant will love you for it. Although it’s just one piece of the overall puzzle of making a business run well, it’s a simple step that can prepare your business for a bright future. Payroll Taxes: What are they? Payroll taxes are required at the local, state, and federal levels. While the specific rules change somewhat regularly, it’s a good idea to have a firm grasp on the basic structure and thinking behind these taxes. Specific taxes included in this arena stem from the Federal Insurance Contribution Act (FICA) taxes, which are Medicare and Social Security, income taxes at the state and local levels, and the Federal Unemployment Tax Act. Some states have additional withholdings, which often include disability taxes. Taken together, these taxes comprise the base of payroll taxes. Although these taxes are paid to the government, the responsibility for that payment rests with business owners. Payrolls taxes must be withheld from employee paychecks every pay period and paid directly to the appropriate government agency (quarterly filings with proof of payment are required). Even small businesses without employees must withhold these taxes if the business is incorporated. In these cases, the owner is seen as an employee of the corporation, not as an intertwined legal entity. Some unincorporated businesses also have to pay an estimated tax on self-employment on a quarterly. You can already see why having a good business accountant can come in handy. Payroll Taxes: Understanding the basics A staggering 40-plus percent of U.S. small businesses face cash penalties every year for noncompliance with this tax—and it’s no wonder. Payroll taxes are an overly complicated, recurring nuisance for the time-conscious entrepreneur. Most of the time, small companies simply forget to file their taxes or send them in too late. While those instances aren’t business-ending calamities, they constitute a timely, unneeded legal expense that hurts your bottom line. The right business tax consultant can keep you from fumbling over unforced errors while helping you create a better system for managing these taxes while saving you money. So paid employees must be taxed, but what about consultants and contract employees—are their paychecks subject to payroll taxes as well? The short answer is no, but it’s not always easy to determine which workers are contracted consultants and which the government deems regular workers. The IRS has a three-pronged test to determine if someone you’re paying is a taxable worker (subject to taxes) or a contractor (who will pay taxes on their earnings themselves). If you can answer yes to all three tests, payroll taxes should be deducted from worker’s wages and paid to the government. The first test is the behavioral test, and it’s a question of who directs the actions of the worker. Does the business owner have substantial ability to direct the behavior of the worker? This one is nearly always a yes. Chances are, if you hire someone for any kind of job, you have the ability to tell them what to do. But it’s still an important part of the government formula.

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The second test is the financial test. It looks at what money is bankrolling the job the worker is performing. Many independent contractors bring their own equipment or buy their own supplies for a job, while employees are generally provided materials by the business. The question goes like this: Is the owner or business responsible for the great majority of the supplies for the work being performed? If your employee shows up with only a bag lunch, they’re probably a regular worker. If workers appear with their own lawn mowing equipment and get down to business, they’re probably not. The final test is the relationship test. It focuses on the connections between the worker and the business. Does the worker expect the relationship to be ongoing and of indeterminate end? If the worker and business have an understanding for only a limited amount of time or a specific project, the worker is probably seen as a contractor by the IRS. However, if the worker is expected to provide work for an unlimited timeframe, the IRS is more likely to see them as a taxable worker. The three tests are designed to make it simple to sort out how to pay payroll taxes, but even with the guidelines, it’s not always crystal clear. If someone agrees to come in once a week to clean bathrooms with provided products, do they qualify as a contractor or an employee? It can be a tough call. The best way to determine whether your workers are subject to the deductions or not is to partner with an experienced tax professional. After all, it only takes one misstep for your business to be on the hook for a hefty fine. Other Payments Not all payments to employees are subject to payroll taxes, however. The IRS deems that taxable earnings include salaries, wages, gifts, and bonuses. Reimbursements for meals or travel expenses are not included in the list and are classified as non-taxable. These loopholes are great news for employees and businesses, but to take advantage of them, you must follow the IRS’s very strict rules about how reimbursements must be handled. Otherwise, you may spend more on the fines (and hours lost to paperwork) than you would have saved initially. There are two rules for reimbursement payments to be qualified as non-taxable. Fist, the expenses must be business-related. You can’t write off any old dinner or a family vacation. The nature of the travel, dinner, or event must have a specific business purpose. Secondly, the expense must be accounted for within 60 days of its occurrence. You can’t retroactively decide that your dinner three months ago fits the bill. Further, while cash advances preceding a travel or dinner expense are allowable, they cannot be made more than 30 days prior to the expense occurring and employees must return any excess cash within 120 days. Got all that? Good. Because the IRS expects you to know it and live it. Calculating Payroll Taxes After it’s determined which workers and wages are subject to payroll taxes and when, the real work starts. Calculating the correct withholding amount for all workers and wages is a bureaucratic affair, full of rules, tables, forms and densely written legalese. The length of red tape required can trip up even the most nimble business owners, so it’s best to work with a professional whose expertise in these matters can save time and headaches. Keep in mind that payroll taxes not have effects outside the paycheck. Because there’s an employer burden on employee income, the trust cost of hiring an employee is far above the wage you’re paying—even more if there are benefits involved. From a strictly tax perspective,

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however, hiring an employee at a yearly salary of $50,000 will cost the business another $5,000 or so in payroll taxes. This is important to keep in mind as your business grows. Not only will you need office space or equipment for new hires, but you’ll also need to allocate more money for your tax burden. Federal and State Income Taxes While the U.S. government requires that income taxes be withheld from every employee’s paychecks, the taxes—just like the employees themselves—are not created equally. The government draws tax distinctions based on how much employees earn, how often they are paid, their marital status, and their personal exemptions. To accurately calculate federal income payroll taxes, you’ll need all this information on every employee and a glance at the IRS tax tables. The two tables needed are the wage bracket table and the percentage table (Publications 15 and 15-A in IRS speak). As a business owner, it is your responsibility to look at the two sets of tables and determine which one is appropriate for your business. Most states follow similar rules to the federal government, and some don’t require residents to pay income taxes at all. To find tax tables for you state, visit your state’s tax website or call the Small Business Administration. FICA Taxes Technically, employers and employees split the cost of FICA taxes, which contribute to Medicare and Social Security. The government taxes employers at 6.2 percent of for Social Security and 1.45 for Medicare, and taxes employees as a slightly lower margin. Combined, 15.3 percent goes to the feds. People who are self-employed are required to pay 13.3 percent of their income. Importantly, the amount of income allowed to be taxed for Social Security changes regularly (always upward of $100,000) so be sure to check the IRS guidelines if you’re taking home more than that—you may be entitled to a tax break. These taxes need to be paid monthly or semi-monthly. FUTA Taxes Unlike the other federal taxes, the burden of unemployment taxes rests solely on businesses. They are required to be pay quarterly, but only apply to businesses that pay more than $1,500 in wages a quarter and have at least one employee working for 20 weeks out of the year. The FUTA tax rate is 6 percent and applies to the first $7,000 paid to each employee. Some states also require unemployment taxes, but the good news is that if you paid wages subject to a state unemployment tax, you may receive a federal credit of over 5 percent. FUTA taxes are paid quarterly. Once all the taxes are sorted out, the business doesn’t end. Not only must the tax withholding be managed every pay period, but a year-end accounting of the process must be turned over the authorities. And, by January 31 ever year, employers must give their workers a W-2 reflecting income and tax amounts for the year. Paying people is a complicated business. Partnering with a professional can simplify the process and keep the headaches at bay. Keeping Track

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Paperwork may the least fun part of running a business, but it’s probably the most important. An organized system to keep track of payments, invoices, expenditures and payroll can often mean the difference between a business that learns to adapt and grow, and one that circles the drain. Poorly managed paperwork means not knowing who’s paid you and who you owe, and usually a mad dash of scrambling at tax season. Instead of dying by a thousand papercuts at the end of every month, quarter or year, it’s better to institute a program that helps you keep track of your numbers as you go about the rest of your life. Here are a few tips to your paperwork simplified and manageable: [Formatting note] Find the Right Software The digital revolution has blessed the world with no shortage of software solutions designed to better your business. And while many contain bells and whistles galore, the most important component of any management system is how likely you are to use it. Talk with your accountant, friends and business partners to find out what they use or recommend, then try something out. Your best bet is to know your own preference for organization and customization. Even the most powerful bookkeeping software won’t be useful if you find it too complicated to use. The days of file cabinets are long gone. Today’s business is done digitally. So find your perfect program and spend time learning to use it well. It will drastically cut down on your workload—and your headaches. Do It Daily Every day that you receive or send goods or services is a day you need to spend doing paperwork. Avoid the temptation of putting off filling out your invoices or processing accounts receivable for another day. Doing 30 minutes a night of paperwork keeps numbers and names fresh in your head, and makes incomplete datasets easier to spot. If this means carving out a dedicated half-hour every day for paperwork, so be it. Make a standing note on a calendar. Daily work will keep your head in the game and naturally lead you to institute a system of organization that works for you. Embrace the Cloud Even the best software won’t save you from a lightning strike, computer virus, power outage or warehouse fire. In this day and age, your data needs to be backed up—and that means uses the cloud. Cloud storage options abound from many of the world’s biggest software companies. Find one that is right for you, that backs up automatically, and that can be scaled as your needs grow. Misclassifying workers is maybe the most common audit issue, but it’s far from the only misstep that can trigger the attentions of the IRS. Another likely culprit concerns payroll records. Payroll records are required for businesses with at least one employee and include things like W-2s, time sheets and expense accounts. A good rule of thumb is that the IRS expects employers to keep payroll records for at least four years—so let the cloud do it for you. There’s nothing worse than the feeling of losing all your computer work. It’s terrifying. A small charge for cloud data storage is an easy price to pay for peace of mind. What It Comes Down To

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Business owners are responsible for a lot. Aside from making enough money to put food on the table, the list includes: calculating payroll taxes and paying them on time; ensuring that employee withholding amounts are processed with every payroll; and providing yearly documentation to the tax authorities. No matter the size of your business, compliance can be difficult to achieve. Understanding the basic features of tax and money is a great way to get ahead, and a true advertisement for professional tax consulting services. With all this to keep track of, it’s clear that IRS compliance won’t just happen for your business. It takes careful planning and dedicated, yearlong work. But compliance itself is a pretty small goal. If you want to not only stay legal, but also save money, it’s time to get serious about your paperwork and hire someone who can help you get ahead. Employees, Overhead & Their Impact on Your Business Finances Employees, Overhead & Their Impact on Your Business Finances If there’s more than “just you” in your business, things become more complex. It’s the same with expenses related to your operation, especially insurance, facilities and overhead. Do a deep dive into these areas to find cost savings and tax benefits. Employees Employees are the lifeblood of any business and, usually, its top expense. Beyond the salaries or wages paid to workers, business owners must also calculate the amount they’ll spend in payroll taxes, benefits, and added insurance for each and every new staff member who comes aboard. There’s an old adage in business that says every employee costs their salary plus 20 percent. That number grows if, for example, you plan to invest in your employees’ development by sending them to continuing education conferences to enrich their knowledge and expand their business’ expertise. Before you decide to hire someone, even a part-time worker, be sure to sit down with a professional and add up all the extras an employee will cost in added insurance, potential benefits, training, work space and more. It’s a difficult mathematical problem to solve because some employees’ salaries can be written off as overhead expense (more on that later) while others cannot. In addition to wages, salaries and bonuses paid to employee, businesses can deduct educational expenses, travel-related expenses, sick and vacation pay and disability benefits. To make sure you don’t get surprised at how much an employee will actually cost your business, be sure to talk with a tax consultant about your options. In some cases, it may make sense to hire a worker to help you create the products or services you sell, in other situations the tax breaks given for hiring a secretarial worker to handle administrative duties may make more financial sense. Use an expert to make sure you’re weighing your options correctly. Business Insurance One of the built-in costs of doing good business is having good insurance. Not only does it protect you if catastrophes occur, insurance coverage also provides a mental relief by easing your worries and helping keep you compliant with government regulations. Sometimes, owning proper insurance can even lower the costs of doing certain kinds of business or make you eligible to work with certain clients, like government or educational organizations. In most cases,

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business insurance also comes with significant tax breaks. So the cost of insuring your business may end up being less than you think. Here’s a look at some common types of business insurance and what they’re all about. 1. General Liability Insurance General liability insurance is the cornerstone of business coverage and is practically required for every kind of company from a one-person shop to a multinational conglomeration. It’s important because the coverage protect your business from claims of accidents, injuries, and negligence—things that can happen to even the most careful workers. Most policies cover bodily injuries, product mishaps, personal injuries, damages to property, and even legal representation in the event that you need it. For those reasons alone, it’s essential for entrepreneurs in every line of work. And, luckily, it’s not too expensive. While the price can range from around $50 a month to thousands, most small businesses will pay prices in the mid double digits. Costs rise as employees and business size increases, but the single most determining factor of the cost of general liability insurance is your industry. If your business deals with other people’s property on a regular basis, such as a house cleaning company or an appliance repair store, or if your operations require dangerous materials, like construction firms do, you’re going to pay more. The right amount of general liability insurance is up to you. While you certainly don’t want to overpay, you need to be protected if the worst occurs. Your business tax advisor can help guide you toward the right kind of plan for your business based on industry standards and your unique needs. General liability insurance also reassures your clients that they’re in good hands and that if something goes wrong, even accidentally, they won’t be left holding the bill.

2. Professional Liability Insurance This is another kind of liability coverage, but it’s often just as important (and in some cases, legally required). Professional liability is known as “errors and omissions” coverage in the insurance industry because it protects the business owner from professional mishaps that happen during service provided to customers. Doctors are usually legally required to hold professional liability coverage because it protects against malpractice lawsuits in addition to covering most accidents, omissions and negligence that can occur in a medical office. Other professional industries, like law, also require practitioners to hold this kind of policy. However, it’s often strongly recommended for any kind of professional service provider—from real estate agents to IT consultants. Why? Because it’s a safety net for a time when lawsuits abound. Customers with little legal standing other than an aggrieved feeling sue professionals all the time. For example, if an IT consultant recommends a computer system that shuts down during an important function, they can be sued for professional misconduct. Professional liability insurance is a safeguard against these kinds of claims, and a necessity for many business owners. So what’s the difference between general liability and professional liability insurance? While they both offer coverage against accidental practices, the two kinds of insurance actually hold different functions for business owners. General liability insures against claims of bodily or personal injury and property damage. It defrays the cost of the legal fees, settlements and damages that arise from scenarios in which someone or something is damaged as a result of your business. Professional liability insurance insures against negligent acts as they pertain to

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professional services provided by your business. For example, if your chosen profession has certain standards or codes of conduct that are expected by all practicing members then an alleged violation of those rules will be covered by professional liability insurance. As a rule of thumb, professional liability usually pertains to financial claims while general liability pertains to physical claims.

In many cases, you’ll need both kinds of policies to safeguard your business from high-dollar lawsuits. Especially if your business is partially open to the public, the cost-benefit analysis of having insurance usually trumps going without coverage. Even if the claims against you are bogus, the process drains vital resources like time and money away from you and your work. 3. Property Insurance Whether you’re renting, leasing or outright owning the space where you work, property insurance is a good idea. If a thunderstorm short-circuits your computer and fries your database, a burglar runs off with your new printer, or some angst hooligans destroy your signage, property insurance makes sure that you don’t lose an arm and leg making replacements. Be aware, however, that cataclysmic events like floods and earthquakes are not always covered by property insurance policies (especially in areas where such events are more likely to occur). For businesses that do not own their space, renter’s insurance will function in much the same way.

4. Workers’ Compensation Insurance If you have employees, you need workers’ compensation insurance. This kind of insurance covers payments that need to be made when an employee is injured or dies because of their work with your business. It helps defray the cost of medical treatment, disability and death benefits. Even if your operation is small and focused on relatively safe operations, workers’ comp. insurance can be a lifesaver. Medical costs have soared in recent years and show no sign of slowing. Paying out of pocket to cover a legitimate injury, even a small one, can quickly lead to bankruptcy. A better plan is to find a workers’ compensation policy that fits your needs and your budget. The less likely you are to need to use it, the less expensive it will be. So look into quotes or even a bundled package with an insurance provider.

5. Business Interruption Insurance Most standard insurance policies will cover the cost of damaged materials, like your inventory, equipment or office space, but not the loss of profits you suffer while you’re waiting for the replacements. That’s where business interruption insurance comes in. It will cover the losses you incur for being out of business, based on your own business records, should you have to vacate your workspace due to it being temporarily unusable from an unforeseen event like a fire or storm. The level of compensation you’ll have will depend on the kind of records you keep and the amount of coverage you buy. Business interruption insurance can cover all kinds of business, but its pricing will depend on your industry. Because it’s easier for an electrician to operate at a new site than a restaurant, the eatery will pay more to ensure good coverage. But even at a high price, the cost can be worth it—especially when it means the difference between continuing your business and declaring bankruptcy. A print shop manager recalls losing the entire paper stock inventory due to an off-season snowstorm that flooded his warehouse. Business interruption insurance made it possible for him

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to cover the cost of temporary storage and relocation while the mess got cleaned up. If it weren’t for his careful planning and better-safe-than-sorry attitude, he says, his entire business would’ve been underwater—literally.

6. Data Breach Insurance Increasingly, businesses are becoming targets for small-time hackers looking to easily score personal information such as Social Security numbers and credit card details. If your business keeps any non-public information on employees or customers (and what business doesn’t?) it can be a smart idea to protect yourself against the scourge of cyberattacks. It may seem like a longshot that your small business would be targeted by Internet thieves, but the truth is that hackers don’t always go after the big guys. It’s a lot easier to hop on a local Wi-Fi connection and find a way through a pre-fab data system than to risk going up against a larger company that likely commands a more sophisticated cybersecurity apparatus. But it’s not just digital dilemmas that are covered by data breach insurance. Because so much work is still done and delivered on paper, data breach coverage applies to information that is stolen either electronically or via paper records. 7. Directors and Officers Insurance D&O insurance is essential for corporations and nonprofits. Really, any company that has a board of directors or trustees can help ensure that they can hire the best and brightest people by providing an extra layer of protection should they face legal attacks in the course of carrying out their jobs. The truth is that people who serve as officers or directors on any board face significant legal exposure, facing accusations that they’ve breached their duty to stakeholders, for example. It’s not unusual for an aggrieved party to file a suit against a company and its CEO. And this kind of insurance ensures that your business and its executive can still function while facing the threat of a court case. 8. Automobile Insurance There are two kinds of automobile insurance that can be beneficial for businesses. The first is commercial automobile insurance. Just like the kind for your personal vehicle, commercial auto insurance protects a business’s car in the case of accidents, hit-and-runs, damages and more. It’s a legal necessity for company-owned vehicles. But business owners should also be aware of non-owned automobile liability insurance if their employees sometimes use their own cars for work purposes. This kind of insurance protects the company if the employee’s own insurance is inadequate or does not cover an incident that happens while the car is being used in service of the business. 9. Business Owner’s Policy or Umbrella Insurance Business Owner’s Policy refers to a bundled set of insurance coverage that often includes some or most of the types on this list. Many insurance firms have preset Business Owner Policies, but the best deal is to work with an agent to design your own coverage. Usually these bundled policies have some sort of price discount, but that doesn’t mean you should pay for coverage you don’t need or won’t need for a few years. Business insurance is an integral part of running any kind of modern company. Especially today, where frivolous lawsuits abound, and businesses often have targets on their back for scammers

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who assume that they can get more money easily by suing a company instead of a person. But even the straight and narrow path can bring unavoidable legal entanglements, thanks to accidents, errors and misunderstandings, so the smart move is always to be fully prepared for what may come. And that means staying insured. A small business owner in Athens, Georgia, tells the story of feeling particularly cash-strapped during the a financial downturn and looked around for new ways to cut her costs. Among other ideas, she entertained the notion of lessening her renter’s insurance to save a few dollars over the course of a year. The morning of her meeting with the insurance broker, she stopped by her store for some records and discovered that a burst pipe from the shop upstairs had flooded the back room of her vintage shop, which she used as an office. Needless to say, her meeting with the insurance agent went much differently than she expected. Thanks to the coverage that she and the upstairs tenant held, she quickly got money to fix the electronics that suffered water damage, replace the carpet and re-do the ceiling. Even though it was no fault of her own, the financial damage could’ve forced her to shut down, she said. Sometimes, it’s hard to see the benefits of insurance until it’s needed. To get a good handle on what coverage is right for you, talk with tax consultant. They can point you in the right direction and ensure that your insurance premiums can be deducted from your taxable income. Insurance Deductions Although insurance policies can add up to a hefty chunk of change, the IRS classifies most business coverage options as partially deductible. In fact, depending on the size of your company, the number of employees and the type of business you run, the deductions can be quite large. Commonly deductible business insurance types of workman’s compensation insurance, medical coverage for employees, many types of liability coverage, and certain disaster relief policies. Because the tax breaks offered on insurance have enormous potential for savings, it is vital that you talk with a business account to make certain that you’re getting the absolutely best deals and taking advantage of every deduction the law allows. Insurance coverage is important, but there’s no reason for it to cost your business more than it needs to. Business Facilities There is a lot to consider when thinking about opening up a retail store or office space. Considerations about foot traffic, neighborhood fit, rent prices, and prospects for growth all factor into making one of the biggest decisions that will define your company for the foreseeable future. Before you can pick out an appropriate space, you’ll have to know your needs. For a new business venture, this may be difficult but for a growing or already-established business, the lines should be more familiar. The biggest factor will always be space. How much room does your business need? What kinds of subdivisions can you use to carve the interior into a place that fits the needs of your company—office space, floor space, warehouse space, etc. Also, consider the neighborhood prestige of your office space. For better or worse, location matters. Do you need foot traffic for your business? If so, how well will your clientele fit in with the clientele of nearby shops? What about a professional setting? Are you able to offer close

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parking for clients? Will they resent going far out of town to see you—or is your neighborhood conveniently located near a major traffic artery? Make sure the location of your business matches its needs. A high-end fashion boutique next to a gas station may not make much sense, but a record shop next to a coffee house could boost both businesses. Wherever you decide to locate your business, it’s primary goal should be to bolster your bottom line, instead of detract from it. A revenue-increasing locale is one that allows clients or customers to easily find your business and enjoy their time there. The space should present the kind of image that your business provides. A flower shop owner explained that he got into the industry because being around flowers made him feel calm, and he wanted to provide the same feeling to customers. He located his business near the end of a street with minimal passing car traffic and painted the interior in soothing greens and blues. The plants were stocked up front behind thick glass windows, and he kept the reminders of the “business part” (computers and printers) tucked away in the back. The projection of calmness was important for his business and fit congruently with his personality. He credits these decisions to helping his shop thrive. So make sure you think about how your facilities can project a similar feeling or idea. Does your company strive for efficiency, comfort, luxury, excitement? Your facilities can reflect and project that feeling and image to customers. It’s also important to keep in mind that your business may grow, the neighborhood may change and your rent may spike. Buying property can be a smart long-term investment but may not make sense for a new startup venture, no matter how much funding you’ve accrued. A quick study of demographic trends, your city’s five- or 10-year growth plans, and a talk with commercial realtors can help you make an informed decision about the direction of certain neighborhoods and property tax trends. [formatting note] Overhead Overhead is a built-in expense for business owners, and it may seem like it’s always going to be a drag on your bottom line. Luckily, however, there are many cases in which overhead expenses actually qualify for tax breaks. What qualifies as overhead? In the eyes of the IRS, overhead expenses refer to business expenditures that cannot be directly tied to the production of goods or services for sale. What does that mean? Labor and raw materials don’t fit the bill because they are directly related to creating products. Rent and utilities, however, are not directly tied to production and are therefore qualified as overhead. Other tangential expenses, like insurance and debt payments, also fit into this category because their relationship with goods production is a step or two removed. Even costs like marketing and signage can qualify as overhead expenses. Here are the biggest areas to look for savings on overhead: *Utility payments and rent

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Any rental and utility bills are tax deductible, but only if they’re strictly for business use. If your business has its own space that is used for nothing else, all gas, electricity, water, heating and rent payments can be deducted from your taxes. However, if the business occupies a space within your home, the law allows only partial deductions. Rent is usually only deductible for the year in which it’s paid, so if you pay in advance for next year’s rent, the amount you pay will only be partially deductible. Talk with a tax professional to ensure that you’re calculating the right amount owed—and not forgetting to take deductions where you can. *Debt In the majority of cases, any and all interest paid on debts can be deducted from business taxes. This applies when the business has a legalized creditor-debtor relationship with a lending party, such as a bank, and is legally on the hook for repayment of the debt. This kind of debt often takes the form of mortgages, car loans, business loans and lines of credit. This is why so many businesses go into debt to finance new growth or make large purchases. Because payments on debt are tax deductible, a business can leverage a large amount of funding for a small price. Even though business debt comes with interest, it can be worth the cost of paying the extra fees for the ability to finance a newer space or better equipment. *Asset depreciation Big purchases, like cars or heavy machinery, tend to lose their value over time. A new car may cost $50,000 but be worth only $46,000 within a year. That $4,000 depreciation isn’t just a lost cost for businesses, however, because the IRS allows businesses to write off those thousands as a depreciation. For depreciation to be valid, some time must have passed from the purchase (so usually big-ticket items can’t have a write off amount in the first year they’re bought.) Depreciation is an accounting tool that estimates the value loss of an item based on its assumed years of usefulness. If you can expect to get 10 years out of a machine, every year it depreciates by 10 percent. For many businesses, even small ones, these savings are huge at tax time, and they’re often not leveraged as effectively as they can be. There’s no sense in letting money just sit on the table. To properly estimate, calculate, log and deduct asset depreciations, talk with your tax consultant. You may be able to get more money than you think for aging work equipment. *Managerial and Support Salaries While direct labor costs are directly associated with product creation, wages and payments to other employees can be considered overhead. This classification includes managers, secretarial workers, IT support staff and janitorial laborers. *Marketing and Advertising Newspaper buys, targeted ads, digital displays and billboard signage are all considered overhead by the government. The money you spend to promote your business, even if it’s through sponsorship deals with business events, can be counted as deductible on your taxes. If it’s true that marketing is the best investment you can make in your business, the tax advantages are a big reason why. While many overhead costs can be deducted from your business’s taxable income, not every dime you spend will come back to you. Often only a percentage of overhead expenses are

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allowed to be deducted. The best way to figure it out is to partner with a tax professional who can guide help you accurately calculate what you owe in depreciation and find ways to save on overhead costs you may have missed. Bringing It All Together A good tax consultant can help all year long, by making sure you know the true tax cost of hiring new employees, upgrading facilities, marketing your business and buying property. As your business grows, so do your responsibilities. Responsible owners not only provide for the welfare of their employees and foster their growth, they do it in a way that makes solid financial sense. There’s no sense in missing out on deductions for insurance, employee training, and overhead expenses. Paying more doesn’t mean your business gets more government service. It just means you’ve overdone your fair share. Partner with a professional tax consultant for regular checkups to make sure all aspects of your business are running as efficiently and cost-effectively as possible. Growth Is Good: What to Know & Actions to Take Legendary hotelier and businessman Conrad Hilton once said, “Success seems to be connected with action. Successful people keep moving. They make mistakes, but they don't quit.” In other words, what’s done is done—what’s to come can lay the foundation for real focus and energy. Many tax advisors look to work with growing businesses or find ways to take a business that’s stagnant and get it moving forward again. No matter where you are in the life cycle of your business, there is always a lot to consider—and a lot of work to do. Whether you’re just starting a new venture, ready to grow or expand your business, or thinking about selling your operation, here are some ways to tap into the expertise of your advisor. Starting Out Strong The beginning of a business isn’t always pretty, but with some basic knowledge and a little foresight, your company’s first year can provide a stable foundation for future growth. The first year of any new venture is always a learning experience. Future doctors learn more words in the first year in medical school than at any other point in life besides childhood. Babies’ brains grow more in their first year of life than at other time. College freshmen are most likely to drop out of school. And about half of all new companies don’t make it out of their first 12 months. Of course, the challenges that plague first-year entrepreneurs don’t come from a misunderstanding of their products or services. No, most ventures that don’t make it out of their inaugural year fail because of a lack of expertise in the basics, the nuts and bolts of running a business. The assassins of industry are product pricing, tax assessment, bookkeeping, organization. Successful business owners aren’t super humans with a host of know-how and amazing productivity skills. They are normal people who understand the importance of the small things and knowing when they need advice or a helping hand from a professional. Here are a few ideas on starting your business out on the right foot.

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[Formatting note] Bookkeeping The most important kind of knowledge is self-knowledge, and that’s doubly true for a business. If you don’t know how much money you have, you might as well be broke (and you soon will be). That’s why bookkeeping is the cornerstone of good business practice. Scientists have found papyrus records from ancient Egypt and knotted ropes from the Aztecs of South America showing primitive bookkeeping practices. Bookkeeping was present at the dawn of capitalism and its role is even more important today. It’s what tracks your progress, allows you to identify trends and set goals, measures your benchmarks and provides a record of your work for tax purposes. Solid bookkeeping also makes life easier. It can help secure business loans, bring new partners on board, and identify opportunities for deductions. Here are a few tips to start off your bookkeeping efforts on the right foot. [Formatting note]

Pick a system. Bookkeeping practices are divided into two camps: single-entry systems and double-entry systems. Neither method is necessarily better, and both have their benefits. The important thing is to pick one and stick with it. Single-entry bookkeeping is a simpler and more efficient way to account for your transactions. It’s mostly used by small organizations such as sole proprietorships or general partnerships with few workers, but some larger companies also find that they can save money or time with it. In single-entry systems, each transaction is recorded once—as either an input or an output. When a product is sold, the sale is logged in the business journal, and that’s it. This simplicity is appealing for entrepreneurs who do their own bookkeeping as well as for firms who provide only one kind of product or service. Double-entry bookkeeping, by contrast, is twice the work but produces a more complete picture of financial details. In double-entry, each transaction is entered into the journal two times—once as a debit and again as a credit. For example, when a guitar shop sells a new instrument a customer, the sale will be entered as a credit to the cash account and as a debit to the guitar account. If they sell a pack of strings, the journal should reflect a cash credit and a debit from the string account. Taken together, the two entries should always add up to zero. Most large-volume or complex shops use a double-entry bookkeeping to get a deeper understanding of many parts of their business at once. For businesses with diversified products or services, double-entry bookkeeping allows a peek into which aspects of the business are soaring and which are struggling. It’s a more complicated system, but it can be worth investing the effort into learning how to use a double-entry method if you’re interested in having a robust understanding of the economics of your business.

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A tax consultant can be a good guide in helping you choose a system. Because they understand where deductions for your field will be found, they can advise you on the best way to track those areas.

Pick an accounting method. Although they sound similar, accounting is actually different from bookkeeping. Bookkeeping is the science of recording transactions, while accounting is the art of interpreting them. There are two kinds of accounting methods to consider. In a cash system, transactions are not recorded unless money is exchanged. An accrual system, by contrast, records income as soon as a customer is billed—not when they’ve paid. A cash-based system is easier to maintain. It’s attractive to many small businesses because it provides a realistic picture of the actual income a business has at any given time. It also ensures that businesses only pay taxes on what they have in the bank, which can be good for many startups and new ventures. Accrual systems, on the other hand, deal with the projected finances a business has. Despite the added complexity of this system, it’s more commonly used. While it cannot tell you how much cash is available to your business right now, it’s better at showing an accurate account of your expenses and income over a period time. It allows owners to get a fuller view of their operations and makes estimating long-term trends easier. A professional tax advisor can help you select which system will work better for your business. While both will give you an accurate understanding of your business, there are real, consequential differences between the two methods. For example, if you use a cash-based accounting system, you will only pay taxes on money that you’ve actually received. If you do work for a client in December, but they don’t pay you until January, your taxes for the previous year won’t reflect that job in cash-based system. An accrual system would place the tax burden on the prior year. Before you pick a method of accounting for your business, be sure to talk with a tax advisor to better understand the ramifications it may have on your bottom line.

A business lives and dies by its paperwork. Setting up smart strategies at the outset can provide the scaffolding on which you can hang all your future successes. Even if organizational skills aren’t your strong suit, stepping out on the right foot will save you lots of hassle—and money—down the road. Pricing This is one of the hardest needles for entrepreneurs to thread. While everyone wants to make money, most new businesses have a tendency to undercharge for their work. It’s an easy pit to fall into. When you’re starting it, it’s easy to think that you need the business of every possible customer to stay afloat—to say nothing of growing. Entrepreneurs often see low-cost pricing as a way to attract new clients or distinguish themselves in the market. But the reality is that undercharging for products or services isn’t a smart strategy. Your products or services need to be priced at an amount that allows you to earn a profit large enough to continue to grow your business while not preventing you from making sales or losing customers.

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Here are a few tips to get you thinking about pricing in a more helpful way. *The lower your price, the less value it has in the mind of a customer. Often, new businesses think about this the opposite way. After all, if the product or service you’re offering is worthwhile, a lower price should signal a good deal, right? That’s only true when someone is sure of your quality. For customers who don’t have that kind of expertise, low price functions as an indicator that your product isn’t worth more. A jewelry store tells the story of trying to get rid of excess inventory. She had a few turquoise necklaces and bracelets that weren’t selling. Before leaving for vacation, she left a note for her office manager to reduce the price on those pieces yet again, hoping she would come back to an empty box. However, the manager misread her note and marked up the product by over 100 percent. When the owner returned, all the pieces had been sold. The higher price signaled a greater value to her customers. *Clients who buy on price don’t stick around. Competing on cost is a good idea for big box stores and chain retailers who can make small profit margins work through economies of scale. For small businesses, however, that’s not a reasonable strategy. Customers rely on small business to meet their needs in other ways, through high-quality service and availability. Instead of trying to convince clients of your low prices, convince them of your high quality. *Marinate on your prices. If you haven’t discussed price with a client, it may be a good idea to write out an invoice and wait a few to send it. When you come back a few days later, you may be surprised by a feeling that you should be charging more. Often new business owners can find that their work is worth a good bit more than they’re asking for—but it’s a realization that can come too late. The initial shock of charging someone can feel strange and uncomfortable, especially when the cost seems high (whether it’s a good deal or not). Don’t give into a fleeting feeling. Do yourself a favor and take time to think over your pricing. Setting a Price The bad news is that there is no simple way to determine the “right price.” That’s a figment of the imagination. In the real world, businesses are left to guess at a price their customers would be willing to pay. There’s some science to the formula to setting the right price, but it’s also an art. While there are dangers to underpricing, overpricing is an equally hurtful a practice. You don’t want to get a reputation for outlandish costs, it will hurt business in the long run. Beyond listening to customer feedback like, “That’s too much.” Or “What a deal!” there are few markers you can use to help you determine how to set prices. *Your costs. Any price you set needs to include the total cost of paying workers (and yourself), contributing to paying down your overhead costs, and the raw materials needed to create the product. Adding up the amount you spend on workers (including a bump for benefits and tax liabilities they cost you) and materials should give you a pricing floor. Charging below that will put you out of business. Charging a flat rate above your costs, like 20 percent, can be a quick and easy establish a baseline. *Examining the competition. Aside from waiting for the invisible hand of the free market to materialize with an invoice, the best way to ballpark your price range is to benchmark the

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competition. Knowing what customers will expect to be charged is a terrific way to begin to think about setting a price. Think of this figure as the opening of a negotiation. *Know your value. The service you provide to customers may cost them money, but it also saves them the price of doing it themselves. Understand the value of your offerings. Your hard work and expertise makes some aspect of business or pleasure better for your customers. If you know how much your specialized knowledge or efforts save your customers, you’ll have an advantage in setting prices that fetch healthy profits and produce happy customers. *Examine your results. Your prices are not carved in stone, and it’s often necessary to adjust what you charge based on customer feedback, market jolts, or special opportunities. If you’re spending 90 hours a week working and turning away new business, chances are you’re charging too little. But if you’re having trouble funneling customer interest into purchases, you may need to lower your asking rate. Ultimately, the best price is one that both you and your client can live with. Talking with a tax consultant can help a first-time business owner sort out their questions. It’s easier to set prices when you know approximately how much you’ll be paying in taxes. It’s easier to stick with bookkeeping practices when you know they can save you money. These little things can pay big dividends, especially in the beginning years of a business, when money is tight. The Growth Years The best part of a business’s lifecycle isn’t the shaky beginning, but the exciting middle-aged growth years. Once a company understands itself and knows its place within the market, new opportunities start to blossom. With a good reputation, satisfied customer base, and solid understanding of business basics, business owners can begin scouting new ways to put their talents and profits to use. Here are a few ideas for businesses to consider during their boom years. [formatting note] Marketing Apart from building a strong network, marketing is one of the best ways to increase your customer base and build brand awareness. Thanks to the digital revolution, the era of Mad Men is over. Today, small business owners have more tools than ever before at their fingertips. A growing business, especially one venturing into new markets, can get great mileage out of marketing—as long as it does right. The best marketing tells a specific message to a specific audience. So before you embark on any campaign, ask yourself who you want to reach and what you want to say. That sounds simple, but a surprising number of ad dollars are spent on vague notions that tout glittering generalities to folks who aren’t interested. Leveraging digital ads is an easy way to target specific demographics without spending a fortune. Social media advertising has become surgical in its ability to target users in certain areas, of certain ages, and with exact avowed interests. While the rates of conversion may be lower than other forms of advertising, social media campaigns are

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great ways to build awareness for special events or opportunities. Most social sites also provide excellent ad tracking tools that allow you to see how well each ad performs with what audience and at what time of day. This kind of feedback can help you hone your pitches as you move forward, without wasting effort on campaigns that don’t pay dividends. Another great use of marketing is coupons. Mountains of research shows that customers will go out of their way to use a coupon, so offering discounts via local media, direct mail, or digital methods like Groupon can be invaluable for reaching new customers. They’re also a good tool to increase returns sales. Offering new customers a discount on their purchase is a time-tested method of generating repeat business. Beyond Networking Build a good network is always at the top of every how-to-succeed guide, and for good reason. A network is simply an invaluable tool in today’s business world. Nothing else comes close. But shaking a few hands isn’t always enough. Sometimes you need introductions beyond what you’ve found yourself. You need referrals. Here are a few ways to help you get there. *Join up. Becoming part of commerce-minded organizations like the chamber of commerce and better business bureau can help you plug into the commercial heartbeat of your area. Because the topic of these meetings is always business-oriented, it’s never uncouth to discuss partnerships, interests, mutual appreciation, or the market. *Talk with your people. Every professional you work with, from your tax consultant to equipment supplier, is a potential source for fresh ideas and people. Take time to get to know the people whose services you use or whose products you buy. Good business people often attract each other, and a reference from an industrious entrepreneur always means more. *Get LinkedIn. The e-networking site is the business card of the digital era. It’s a platform where everyone, from Fortune 500 CEOs to recent college graduates, goes to see and be seen. If you’re not comfortable creating a profile for yourself and your business, look into classes. Many business schools and organizations offer courses on how to utilize the next-generation networking site to its fullest potential. Raising Prices A growing business needs capital. And while business loans or investments can help get you there, one of the strongest tools in your shed should always be pricing. Every market is a bit flexible where prices are concerned, allowing businesses a certain amount of leeway to test new prices for their products and services. But nothing is a sure thing. Watch the competition. If your competitors are raising their prices, chances are you should too. Higher prices are a signal that the market can support a price increase in your niche. Don’t do it all at once. Raising prices should be a tiptoe, not a stomping ground. Raise your prices bit by bit, and not across every aspect of your business at once. A big jump in prices can shock your customers and lead them to look elsewhere. It’s better to keep your clients by raising prices one at a time. A landscaper tells a story about how he avoided customer complaints by

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leaving the price of his most popular service, lawn mowing, alone and raising what he charged for his secondary offerings. When things go wrong In any business, there will be fat years and there will be lean years. But mistakes, errors, and missteps can happen any time and for a host of reasons. Sometimes, business owners forget to file taxes one year, then compound the mistake by hiding from the IRS for another year or two. Sometimes, owners calculate their taxes incorrectly and face penalizations. Sometimes bookkeeping mistakes lead to unhappy financial situations. It’s not unusual for even the most respected businesses and owners to find themselves in hot water once or twice during their careers. There’s a lot to keep up with, and so many ways to mess things up. Luckily, there are resources to help. The important thing to remember when you discover that your business is in trouble is not to panic. There’s always time to think through solutions. It’s better to step back from the situation and see it from the outside, usually with the help of a professional who can provide perspective. One tax coach tells the story of an entrepreneur who found himself facing an audit and didn’t know what to do. “The IRS wanted to make a substantial adjustment to his income. It turns out that he had some previous tax trouble, so he had taken his operating capital out of the bank and was making cash deposits every two weeks to cover payroll. When he would get paid by client, he’d take the money back of his bank account because he was scared of a levy,” the consultant said. “The IRS picked up on those transactions and assessed him with an additional $400,000 of unreported income, but it was really the same $20,000 he put into the bank 20 times. He didn’t have any clear records to disprove their position, and he felt stuck.” It seemed like an impossible position. In trying to save himself from the IRS, the business owner had accidentally gotten into a worse situation without any way to get out. Luckily, his consultant was able to step in. “We took all of his bank statement, check stubs, and documentation and we created a full general ledger to show the reality of those transactions. We argued against the IRS for the adjustment, and we ended up saving him over $100,000 in taxes,” the consultant said. “By reconstructing a year of records that were not clear to begin with, but we were able to identify what was clear and document that tax return and really were successful in that audit.” Saving $100,000 is great—but not getting into a position like that is even better. At the first sign of uneasiness or worry, contact a tax professional. Sometimes the best way to handle things going wrong is to spot troublesome numbers early on and get ahead of the issue. Tax professionals can help you do just that. Moving On: Selling Your Business Selling a company is a big deal, both emotionally and in terms of work. If you’ve decided that it’s time to step down from running your own shop or if that time might be coming soon, there are a few things you’ll want to do beforehand.

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*Know when it’s time. Always keep one eye on the horizon three of four years down the line. If you can’t picture yourself keeping up with new technology, globalization, increased regulations or stiffer competition, it may be a sign that you should sell. But just because you’re ready doesn’t mean the market is. There’s a world of difference between selling when the market is right and when it’s not. If you have a loose timeline for the big day, you’ll be able to strike when the iron’s hottest and make the most money from the transition. *Is your business ready? If you’ve built a successful business that employs multiple employees and has great relationships with vendors across your area, you may think it’s an easy sell. But you’re forgetting one thing: you. If the business can’t function without you, it’s not much good to anybody else. Diversification is important in a business, so if your business is overly reliant on one customer or if you have to shut everything down to take a vacation, that could signal trouble for a buyer. Instead, make sure that you have employees who know how to handle things in your absence, and that any potential buyer can be comfortable with the longevity of the operation once you leave. *Build a team. The selling process doesn’t happen in a vacuum. There are mountains of papers to sign, ledgers to look over, meetings to take, and assurances to give. It’s too much to do alone. Before you’re thinking about talking with potential buyers, have some trusted professional look over your financial information. An accountant, lawyer and business broker are probably necessary at some point during the process, so get them on board early. Professionals can spot any problem areas early on in the process, saving you embarrassment and maybe thousands of dollars. They can also help you find the right kind of buyers for your business. Good advisors can help you valuate your business and put together an attractive offering memorandum that attracts serious buyers. They can also help put you in the best possible position before negotiations happen, which can be a huge advantage to your bottom line. *Know yourself. Are you willing to stay on part-time? Are you going to retire? These are questions that can affect the sale of your business—and your tax situation. Before you make any firm decisions, it’s a good idea to talk things over with a tax advisor who can point out potential tax benefits and pitfalls of taking retirement, moving to part-time, and earning a big payday from selling a business. Why We Work The difference between a solidly run business that generates increasing profits year after year and one that collapses like a poorly cooked soufflé isn’t always easy to spot. History is full of great ideas that never reached their full potential. That’s why we work. We want to make business better. It’s what we do. Our goal is to save clients’ money on their taxes by helping them prepare their documents and business practices the right way. There’s no sense in giving your hard-earned money away. The IRS doesn’t give extra credit for paying 15 percent more than your neighbor. It just collects your check. Our goal is for that check to be as small as legally possible. But that’s not all we do.

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There’s more to tax consulting that paying taxes. Thanks to a massive complicated and ever-changing tax code, there is virtually no aspect of running a business that isn’t touched by the IRS. From how a company pays rent to how it charges customers, a thorough understand of tax law can help any business save money on nearly everything. Having extra money doesn’t just feel good, it makes real differences. Whether it’s through expanding the business into new markets or opening up now stores to paying employees a better wage for their hard work or helping build toward an early retirement, smart tax planning can change lives. Whatever your goals are, a little more money can help you get there quicker. We hope you enjoyed learning how our business can help your business—and your life.