3. Taxes
In order to keep your business going in a tough economy, you have to keep up with your taxes. You also would be wise to take advantage of tax deductions and to protect yourself from future tax problems.
3.1 Get every tax deduction possible
Once you have properly incorporated your business, work with your accountant to make sure you are aware of what legitimate business expenses you should be deducting from your business income. As a business owner, you will find that many common expenses are now recognized as legitimate business expenses. Basically, if the expense incurred is part of doing business, it can be deducted. Although this sounds like a very simple rule, there are amazingly detailed and complex applications.
The Internal Revenue Service (IRS) and Canada Revenue Agency (CRA) have numerous publications on the topic of tax deductions and there are many books, websites, and articles dedicated to ensuring that you know how to take as many tax deductions as you are allowed. Take some time and become familiar with what you can and cannot deduct in your particular line of business. You may be surprised how many deduction opportunities are available.
One good book to read on US taxes is Tax This! An Insider’s Guide to Standing up to the IRS, written by the former tax attorney Scott M. Estill, and published by Self-Counsel Press.
3.2 The high cost of not paying your taxes
When businesses are stretched thin, one of the more common bills to fall behind on is the tax bill. As a small-business owner, you probably have found that there are many different types of taxes that you are now obligated to collect and pay. However, unlike your electric bill, when you get behind on your tax bills, there is no immediate consequence. The first month you don’t pay your electric bill you may get a late notice. A month or so later the electric company may threaten to turn off your electric service and just a short time after that, you will lose your electricity. For business owners, this immediate impact is very concrete. Since almost all companies need electricity to stay open, the electric bill is usually paid. Most other bills, such as rent, cable, telephone, and employee salaries are very similar. After all, how long would your employees remain with your company if they were no longer getting paid? The tax bill, however, is quite different. When taxes are unpaid the consequences are much less noticeable at first.
3.2a US tax consequences
In the US, if you are behind on your employees’ payroll taxes (i.e., money that comes out of the employees’ paychecks to pay income tax, social security, and Medicare), and have only been paying the employees their after-tax salaries, you may end up paying a penalty. This means that you never filed or paid the employees’ payroll taxes. At first, there won’t appear to be any problem. In the beginning all the Internal Revenue Service (IRS) will do is send out letters indicating that the taxes have not been filed. Unlike the electric bill, there is nothing to threaten to shut off. If you are a business owner short on cash, this may seem like an easy letter to ignore. However, if you have chosen to ignore your taxes and not file, you are creating a significant issue.
In the US, when taxes aren’t filed, the government can add a penalty to your tax bill of 5 percent every month, up to 25 percent of your bill. For example, you owe $5,000, and don’t have the money to pay. If you choose to file when you have the money six months later, you will now owe the original $5,000 plus an additional $1,250 penalty, which is 25 percent of the original bill. In addition, every month this bill accumulates interest. If the taxes have been filed, and even a small amount had been paid (e.g., only $1,000), the only penalty the business would have to pay would be a reasonable interest fee on the amount still owed.
Now let’s say that the business fails to file taxes for an extended period and ignores all the notifications received. Eventually the IRS will take notice and act aggressively. The IRS has a great deal of liberty with what it can actually do to get the money it is owed. If taxes are not paid, and if your business is not making any effort to pay, the IRS can take drastic action. The IRS can ask the taxpayer to sell or mortgage assets, take out a loan, or even take more aggressive steps. The IRS can take “enforced collection actions” such as levying bank accounts, garnishing wages, or simply seizing assets such as the money in your bank account. Further, the IRS can also file a “Notice of Federal Tax Lien” that could have a negative impact on your credit standing.[1] By now, the business will not only owe all of the taxes and penalties, but the costs for accountants and lawyers to respond to the charges can begin to pile up. Even filing bankruptcy is not protection from the IRS. In some cases, such as the payroll tax example used here, this debt would not be eliminated by bankruptcy. The government considers this money “employee” money, so your failure to file and pay is considered theft!
3.2b Resolving tax issues in the USA
If you realize that your business is already behind on taxes, there are ways to resolve a back tax issue without losing control of the situation in the US. The best way to start is to work with a reputable accountant immediately to determine your business’s debt and options. Allowing a professional accountant to examine the situation may result in better options than if you try to resolve the situation alone. Although you will have to pay for your accountant’s time, the recommendations he or she provides may save you more money than what you spent.
If you know what your business owes, and you believe that your company may be able to pay the majority of the bill, you may just want to call the Internal Revenue Service (IRS). The IRS offers ways to pay off your debt without risking your business. Some options include setting up monthly payments, or negotiating to reduce the amount of debt, also known as an Offer In Compromise (OIC) settlement. The IRS also accepts credit card payments, so it is possible to pay off your tax bill on a credit card and then pay down the credit card over a longer period of time than the IRS would typically allow.
In some cases, accountants may be able to petition on your behalf to reduce the penalties and interest due to extenuating circumstances. If you think that your business may qualify for this assistance, you may want to contact a Local Taxpayer Advocate. This is an independent organization within the IRS that reports to the National Taxpayer Advocate. Each state has at least one Local Taxpayer Advocate. These advocates are free, independent, and confidential. They typically work to assist taxpayers — both individuals and businesses —who are unable to resolve their tax issues through normal channels or who are experiencing a hardship.[2]
Be careful of businesses that claim they can help negotiate tax bills. While some of these companies are legitimate, others prey on people in trouble. They will ask for thousands of dollars up front and then be unable to reduce the debt. In general, contact your own accountant or lawyer for assistance or for a reputable referral.
Occasionally, you may be lucky enough to take advantage of amnesty programs. These programs can be either at the Federal, state, or local level. The programs usually require you to pay all of the outstanding debt that you owe, but they will waive the penalties and interest charges that you incurred by not paying on time. For some taxpayers the extra charges can amount to thousands of dollars. For instance, in February 2009, the Massachusetts Department of Revenue offered 159,000 tax delinquents amnesty if they paid their debts by April, 2009. Later that same year, Arizona passed two amnesty programs for their State and City Transaction Privilege Taxes (i.e., Sales Tax). Each of