Paying Your Use Tax… the Party’s Over

April 12th, 2011 by Doug Boswell No comments »

If you own a California business that has made in excess of $100,000 in gross receipts in the last calendar year, you are required to pay use tax. This makes you what is called a qualified purchaser, and you are required by Section 6225 of the Revenue and Taxation Code to register with the Board of Equalization (BOE) to whom you must pay the use tax.

Actually, the state government has automatically registered every business in California that grosses $100,000 or more and given them an account number and password. The use tax, which has been around since 1935, is the tax that applies when you purchase some tangible merchandise like supplies or equipment for your business from another state where California sales tax is not charged. Most such merchandise purchased, ranging from books to millions of dollars worth of equipment, are not reported and thus not taxed. Sales tax is the tax that is paid on purchases made within California. Both of these taxes are calculated based at the same rates. For California, Publication 71 lists the various rates applied to each county and city.

But the process of collecting the use tax has not been without problems. For one thing, when this went into effect in 2010, all qualified purchasers were required to file their BOC-401-DS Use Tax returns  for the previous three years even if they had no purchases to report. There were complaints that the approximately 180,000 qualified purchasers were not given enough time to compile their records from three years back since the letters from the BOE informing them of their automatic registration only started going out as of March 1st of that year. What’s more, it was, and still is, virtually impossible for most business owners to track whether every website from which they purchased merchandise as far back as 2007 paid California taxes. But since you’ve been tracking those items ever since, you now know exactly what your use tax obligation is for each item, right?

But there are still plenty of headaches left. The use tax must be filed each year by April 15 and no extensions are allowed, even if the qualified purchaser files an income tax extension. Additionally, the use tax filing can only be done online. What can further inconvenience and complicate the matter is that some of the information required in filing the use tax is the same as that for filing income tax.

Failure to comply with paying the use tax results in a 10% penalty plus interest consistent with the law. The BOE has the authority to waive the penalty, and has typically done so for the retroactive years, but does not have the authority to change the deadline. That can only be accomplished by a change in legislation. Even your tax preparer is not spared. They are fined $50 for each client they fail to ask about purchases made outside California, unless they check every invoice, because credit card statements do not give this information.

It gets better. Let’s assume that instead of purchasing a book you bought a computer monitor and were not charged sales tax. You register for use tax, duly pay the use tax, but the Board of Equalization asks you, “Have you registered to pay the eWaste fees?”

A couple of years ago California added a fee; some would call it a tax, on sales of LCD and cathode ray tube devices (generally, computer monitors, flat screens and laptops). This program, administered by the BOE, is separate from sales and use tax.

So what would your response be to the BOE? Perhaps you’d say, “OK, how can I pay the fee on my use tax return?” Well, you can’t. The program is separate and has separate registration and reporting. So if you are impacted by this, you must register separately, and make your payment separately from the use tax payments.

Adding to the joy is the thought that once you register for the eWaste program, you must file a form every year even if you never again have to pay an eWaste fee. It’s yet another registration number to keep track of, and more paperwork to handle.

So the next time you see a great deal on the Internet for something you need for your business, think again about loading up your shopping cart, and consider the true cost, especially if it’s a computer. Oh, and by the way, the use tax applies to your non-business purchases as well. Sweet.

 

Disclaimer: All of the items above are for information only, and are not meant as tax advice. Please consult your own tax advisor to see how each item impacts your own situation.

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8 Tips for Establishing Business Credit

March 11th, 2011 by Doug Boswell No comments »

As a smart entrepreneur you will want to establish your company’s credit as separate from your own. Realize that your personal assets might be on the line if your business uses your personal credit. You want to be able to distinguish your personal credit from your company’s business credit. It will take some extra effort, but you’ll have a stronger business in the long run. The following eight topics are crucial to giving your company its own credit identity.

1. Separating your personal credit from your business credit protects your personal finances if the business fails, but it also protects the business just in case there are problems with your personal credit. Ideally you will want to incorporate your business or form an LLC to establish business credit without a personal credit check. Sole proprietors and partnerships by definition are personally liable for the business, so if separate business credit is your goal you’ll want to avoid those options.

2. Establish your business’ identity. You’ll need a Federal Employer Identification Number (EIN) for your business as well as separate bank accounts that are under the legal name of your business. Make sure you have all necessary licenses and permits and designate a separate phone line solely for your business. All these things give your business more clout when creditors are reviewing your business potential.

3. Pick a bank and stay there. Loyalty counts in the credit markets. Try to keep your capital in the bank and earning as much as possible. 

4. Open business credit files with the credit reporting agencies that are designed for businesses such as Dun & Bradstreet and Experian. They report on business credit similarly to the way companies track your personal credit. Once you have credit established for your business, you can report your payment history to these agencies to build your credit score. Proactively call to set up your file with a D&B Representative. When applying for business credit, submit your D&B report with your credit application.

5. Obtain business credit cards that are not personally linked to you. Your bank is a good place to start looking for a business credit card.

6. Contact a few vendors and suppliers that report to D&B and ask them to extend a small amount of credit to your business. Vendors that report to D&B build your business’ credit. Vendors that don’t report to D&B don’t build your business’ credit. Pay your bills on time and you’ll soon have solid relationships. If a vendor won’t give you net 30 days terms, then pre-pay your first couple of orders and ask for credit again. You’ll probably get it.

7. Borrow against an asset that your business owns, then make your payments on time.

8. Don’t spend beyond your means. Don’t run up lines of credit that you can’t hope to pay. It will not only destroy your credit, but also your business.  Spend wisely but regularly, and try to keep costs low.  By spending and paying in a timely manner, you’ll develop good business relationships and begin to see your credit score rise, which will ensure that if the time comes when you do need more money to keep your business going, you’ll not only have access to it, but you’ll get better terms.

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Using Independent Contractors

February 24th, 2011 by Doug Boswell No comments »

Independent contractors are workers who provide their services, usually on a short-term or part-time basis. They work with multiple clients, operate out of their own workplace, have their own tools and equipment, and may have a business license or a company name.

Generally, it makes sense to consider going with an independent contractor when you don’t have enough steady work to justify a permanent position. There are three main reasons companies hire independent contractors instead of employees.

1. The task requires specialized skills that are not available in your existing staff.
2. The task is short-term, and will only take a few weeks or months to complete.
3. The workload fluctuates, so is not consistent enough to warrant creating a permanent staff position 

Unfortunately, many companies consider using an independent contractor instead of an employee because it is less expensive. Although an independent contractor can be about 20 to 30% less expensive than an employee, if this worker is determined later to be a misclassified employee, that savings will rapidly disappear.

Business owners may not realize their decision to classify a worker as an independent contractor can get them into serious trouble with the IRS, and possibly the state. Employers pay federal and state unemployment tax and worker’s compensation insurance, plus a matching share of Social Security and Medicare. In addition, employers must collect and deposit income taxes withheld, and are required to file quarterly and annual payroll tax reports. That’s a lot of work and a lot of reporting.  It’s tempting to treat workers as independent contractors to save both time and money.  The use of independent contractors, or vendors, will spare the company all these costs with only a simple 1099 form to file at the end of the year.

What will it cost you if you get caught misclassifying employees? Back taxes can add up to 40% of the independent contractor’s payment. Consider the social security tax, federal and state income tax, and the unemployment insurance you will now have to pay. And if it is determined that your vendor is actually an employee, the Tax Man will want that money from you even if the independent contractor already paid their proper taxes on the payments you made to them.

Penalties and interest will probably also apply. The IRS has broad latitude to assess penalties depending on whether a business acted with reasonable care or purposeful disregard for tax requirements. The penalties could even cause you to lose your business.

The IRS looks at three main factors to determine the relationship between a business and a worker. Behavioral Control, Financial Control and the Type of Relationship. How the worker can be classified depends on the answers to a series of questions.

Behavioral Control
Does the business control, or have the right to control, what and how the worker does their job? Do they provide instructions or training? A general rule is that a paying business has the right to control or direct the result of the work done by an independent contractor, but not the means and methods used to accomplish that result.

Financial Control
If the payer controls the business aspects of the worker’s job, then the worker is probably an employee.

Does the worker have un-reimbursed expenses? Can the worker make business decisions that would affect their profit or loss? This “risk of loss” is a key defining component of a business and not of an employee. But if the worker were paid regardless of whether the work is completed, then that would indicate an employee. Owning tools, equipment, supplies, a computer, and such, represent business expenses that an employee doesn’t normally have, and so are consistent with independent contractor status. If the paying business provides the tools, supplies, etc. needed to perform the job, then the worker is probably an employee.

How is the worker paid? Generally, employees are paid by the hour and receive pay on a specific pay-period basis.  If the worker were paid by the job when the work is completed, that would indicate an independent contractor. However, some professions do charge clients in advance and/or an hourly rate for their services, such as lawyers, bookkeepers, or accountants, so that does not automatically determine employee or independent contractor status.

Is the worker available to provide services other clients? When a worker spends 40 hours per week at one company, the IRS views the worker as an employee. A good test of a worker’s independent contract status is if they have multiple clients. The more the better.

Type of Relationship
Is there a written contract?  Are there any employee benefits, such as a pension plan, insurance, vacation pay, etc? Will the relationship continue over the long term? Is the work performed a key aspect of the business?

When considering the use of an independent contractor, evaluate all the above factors. If any of these criteria point toward the worker being an employee, then that is the classification you should most likely use. If you decide that the worker is indeed an independent contractor, realize that should you be audited, the IRS will make their determination independent of your reasoning and may still classify them as an employee, making you liable for back taxes, interest and penalties. And then your Workers Comp carrier will start in on you. It will get expensive very fast.

Still, you can maximize your chances of prevailing by making certain that your vendor is indeed a true business entity and deserving of the independent contractor status.

You should always have a proper written and signed independent contractor agreement that defines all the relationships and the duration of the work, and lists the responsibilities of each party to pay certain taxes and insurance. Of course a contract alone will not be a determining factor, but it will be a positive factor.

An independent contractor should also have all the licensing and business registrations required to provide their services. They should at least have a business license and have filed a Fictitious Business Name Statement. If they were incorporated, that would provide the best possible evidence to prove the validity of the independent contractor status (unless you have set them up as a corporation yourself). Remember, an independent contractor must be determined to not only be a business, but to be a separate business entity.

Here is a sample checklist of documents you should require from an independent contractor:

– Signed contract
– Signed W-9 form
– Copy of Fictitious Business Name Statement
– Information on how business is structured (sole proprietorship, partnership, corporation, or LLC)
– Business address and phone number
– Unemployment insurance number and Employer Identification Number (if contractor has employees)
– Copies of professional or business licenses
– Contact information for other clients
– Samples of marketing materials (ads, website info, Yellow Pages listing, etc.)
– Business card, professional stationary, invoice form, etc.
– Copies of insurance certificates

If You’re Still Uncertain About a Worker’s Status
Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. If you do ask for an IRS determination, keep in mind that it may take five or six months for them to respond.

You can find out more about the determination of a worker’s status as an independent contractor or an employee at the IRS website.

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The Basics of Writing a Business Plan

January 6th, 2011 by Doug Boswell No comments »

While there are no strict rules for writing a business plan there are some business plan writing guidelines that you can follow that will ensure your business possesses a professional and effective plan. The amount of information and level of detail included will depend on the intended audience. For external audiences such as investors, lenders and government agencies your plan will be much more detailed and in-depth. For internal audiences such as upper management or board of directors the information can be less detail oriented and more goal focused. In either case all information should be factual with evidentiary back-up. To be effective, you should include the following sections and headings:

Executive Summary:
Sometimes this is the only information that potential investors read so it is essential to give a summary that highlights key aspects of the plan, including the goals and objectives. Usually this section will cover no more than 2 pages.

Description of the Business:
Start-up plans, history and legal establishment of your business.

Operations:
Outline the specifics of your business. Include facility requirements and equipment as well as any outsourced operations.

Management Team and Employees:
Include information on key employees and managers including skills and salary. This section should also include recruitment strategies and salary forecasts.

Product or Service:
Include detailed descriptions of products and services, patents and customer base.

Market Research and Economic Assessment:
Include information on who your customers are and how to reach them. Also include information on the economic environment, market conditions, competitors and supply and demand issues. Analyze the different competitors as well as their products, and especially what you will offer that they do not.

Selling the Product or Service:
Specify the sales process. This will be dependent on the type of business to be established. Will customers be attracted by advertising and promotion alone, or will it require salespeople to obtain business? Is the nature of the business that it will need inside or outside salespeople, or both? Will the owner or partners be the salespeople? Will salespeople need to be hired, or will the sales function be contracted out to a marketing representative company?

Financial Plan:
Do a complete assessment of all the financial elements in your business. Include a balance sheet, profit and loss statement, cash flow, break-even analysis, assumptions, business ratios, and any other pertinent financial reports.

Strategy and Implementation:
Include specific goals and dates as well as management responsibilities. It is also very important to include the potential business risks and the actions that can be taken in each scenario. This will show that you have done your due diligence by thoroughly researching and analyzing the upside as well as the downside of the business. It may also enable external and internal stakeholders as well as investors to feel secure in knowing exactly what the back up plans may be if something were to go wrong.

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Minimize the Tax Filing Ordeal

December 27th, 2010 by Doug Boswell No comments »

I know from speaking to other small business owners that virtually all of them are concerned about taxes. But the real issue is typically about all of the filing requirements, the things you have to do to keep in compliance with the revenue collection practices of various governmental entities.

There are so many tax related activities required for small business that the IRS publishes a small business tax calendar every year. It’s a really useful tool that is normally released during the fourth quarter of the year. If you want to make sure you don’t miss any deadlines, you can subscribe to the tax calendar in your Outlook calendar.

So here are some of the key tax related obstacles facing small business owners, where they go wrong, and what they should do about it.

Key Obstacles for Small Business
The biggest obstacles for small business owners are knowledge and understanding, because tax law is constantly changing. Most small business owners have no time or desire to keep up with these changes.

The variety of taxes a small business faces often is a shock to start-ups. In addition to the well-known federal income tax, businesses also face various types of state and local taxes, including income, franchise and/or sales taxes. If you have employees, you must deal with payroll taxes, including not just payments but information filings to the government and your employees. Many businesses also face specific excise taxes. And even the type of business entity you’ve chosen, such as sole proprietor, partnership, LLC, or corporation, affects your taxes. Too often a small business overlooks or misfiles some of these tax responsibilities.

That’s why so many small business owners take the wrong steps when it comes to taxes.

Common Tax Mistakes Small Business Owners Make
The most common mistakes are not keeping good records, not planning for the payment of taxes, and not setting aside the funds to pay the taxes owed.

They also need to be conscious about classifying workers properly. Classifying workers as independent contractors when they should be employees could get you in serious trouble. Make sure you follow the IRS guidelines fully to save potential fines and penalties.

Do-It-Yourself or Hire a Professional?
There are plenty of software packages that will help walk you through the steps, so it’s very tempting to be a “do it yourselfer” when it comes to filing taxes. However, you would serve your business better by focusing on what you do best and hiring a professional who specializes in small business to have them do what they do best, prepare your taxes.

A professional knows the ins and outs of applying allowable deductions and can help you not only file properly, but will make sure you get the deductions you deserve along with identifying things you can do to reduce your taxes for the following year.

And remember, small business taxes aren’t just a do it once, set it and forget it activity. A tax professional can help you manage all the changes in tax compliance, and to meet the ever-present deadlines.

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