Tax Help

Business Start Up

If you are starting a business you will have to choose a legal structure. The most common forms are Sole Proprietorship, Partnership, Limited Liability Company (LLC) and Corporation (“s” or “c”). Your choice has legal and tax implications and you should consult with an attorney and an accountant. Your primary legal consideration is the liability exposure inherent in your business activity and the legal structure that can best shield personal assets. Tax considerations include the complexity of the tax form, treatment of the owner as an employee vs. being self employed, excess business profits, and funding sources (for example a venture capital firm). Legal structures are not “one size fits all”.

Quarterly Estimated Tax Payments

“Danger, Danger, Danger Will Robinson”. Business earnings (profit) will generate corresponding federal and state tax liabilities. Generally there is no withholding from your earnings so you must set aside some of your profit to pay your tax liabilities on a quarterly basis, hence the title “quarterly estimated tax payments”. Failing to make quarterly payments may result in an unpleasant tax bill and/or penalties at the end of the year.

Sales Tax

Are you required to collect NJ Sales Tax (6% or 3% in UEZ) on the products or services that you sell? Don’t guess. Call the NJ Division of Taxation at 609-292-6400 or visit their web site www.state.nj.us/treasury/. The state, at your request, will provide a written response to your sales tax inquiry. You remit sales tax to the state on either a monthly or quarterly basis (depending on amounts collected), and the state is no longer accepting paper sales tax returns. Collecting sales tax on out of state sales depends on whether you have a presence in that state or not.

Employer/Payroll Responsibilities

The scope of this article does not permit a valuable summary of your responsibilities as an employer. You must understand the difference between employees and independent contractors, and be aware of your responsibilities in either case. I am an advocate of using payroll companies to assist you in these responsibilities.

Deductible Expenses

You can generally deduct expenses incurred to operate your business. There are a few specific expense categories that warrant specific mention.

Auto Expenses

There are 2 methods (Standard Mileage Rate or Actual Expenses) for taking a deduction for business use of an automobile. In 2005 the standard rate is 40.5 cents per mile for the first 8 months and 48.5 cents per mile for the last 4 months. In 2006 the standard mileage rate is 44.5 cents per mile. In each individual case one method might generate a greater deduction than the other.

Insurance

The amount you pay for health insurance premiums for yourself (as a business owner) and employees is a deductible business expense. Amounts that you pay for other business insurances (such as liability, business property, workers compensation) are generally deductible as well.

Tax Deferrals

Many of you as employees have had the option of contributing to a 401(k) plan at work. The benefit of these plans is that your contribution is not currently taxable (deferred). Similarly, as a business owner you can defer a portion of your earnings (SEP, SIMPLE, other). Many business owners forget that they too should be saving for retirement.

Depreciation/Section 179 Deduction

The accounting/tax definition of depreciation is “allocation of cost”, as in “I bought a new computer for $2000, and I will allocate the cost of the computer over its 5 year life”, thereby getting a $400 deduction in each of the 5 years. The exception to the depreciation allocation is the Section 179 election, which allows you to deduct, in the year of purchase, up to $ 105,000 (2005) of qualified purchased property.

Home Office

You may qualify to take a deduction for business use of a home office. In order to qualify the space must be used “regularly” and “exclusively” for the business (some exceptions apply to day care businesses in the home). If you qualify you must complete form 8829 to determine the percentage of square footage used for the business. If you qualify you may deduct that percentage of expenses to operate your home, such as real estate taxes, insurance, repairs and maintenance, utilities and depreciation.

Travel, Meals and Entertainment

Some of you think that now that you have a business, you can deduct the cost of each and every meal that you eat. Sounds good, but this is not the case. Deductible meal and entertainment expenses include amounts you pay while traveling on business overnight as well as meals related to some business purpose. In order to be deductible the meal must be directly related to the active conduct of your business. The amounts you incur for qualified business meal and entertainment expenses are reduced by 50%.

You are permitted to deduct 100% of travel costs that qualify as business expenses. Common deductible expenses for traveling away from your tax home include lodging, air, bus and rail fare, tips, laundry/dry cleaning, local transportation, rental cars, taxis and fax service and internet connections. Be aware that if your travel is combination of business and personal activity you can only deduct the percentage of the travel expense that was for business activity.

Constraints in the length of this article allowed me only to identify business tax issues, and not complete a detailed discussion. It is worth repeating that you should discuss these issues with your accountant so you are both in compliance with tax rules and you take legitimate steps to minimize your tax liabilities.

Gary Rago is the regional director of the Rutgers-Camden Small Business Development Center.