With the IRS auditing more small businesses, it?s more important than ever to understand the tax and legal consequences of day-to-day business decisions. According to a Syracuse University Study, the IRS will continue to audit small companies in greater and greater numbers. Companies with $10 million to $50 million in assets are 29% more likely to be investigated; meanwhile, companies with more than $250 million in assets are almost 40% less likely to be audited than in the years before 2007.
Here are five year-end tips to help small businesses avoid a tax audit, maximize tax savings, and get extra liability protection all year-round.
1. Incorporate on January 1.
It?s always a good time to incorporate because of potential tax savings and liability protection, but the New Year may be the best time. With a filing date of January 1, you?ll save time when filing a tax return for that year, because the business doesn?t need to file two separate tax returns for the unincorporated entity and one for the new C-Corp, S-Corp, or LLC.
2. Consider both tax savings and liability protection when choosing your business structure.
If you want to incorporate on January 1, start thinking about your business structure now. There are many factors to consider when choosing between an C-Corp, S-Corp, or an LLC, and while many business owners decide to incorporate based on potential tax savings, it?s also important to consider liability protection. Make sure you speak to an attorney, and not just a CPA -- you may find that opinions different depending on who you talk to. With all the facts you?ll be better equipped to make the right decision for your business and reap the benefits all year long.
3. Be aware of the personal liabilities incurred by individuals you choose to place in positions of authority.
The issue of tax fund recovery penalties is a little-known danger to your business and employees. If your business has failed to pay what it owes to the IRS, this money is held by you, in trust, for the government. In fact, the government will hold any and all parties in positions of authority within the business personally liable and accountable for the repayment of the funds. Individuals in positions of responsibility, whether it is the business owner, or the signatory, are personally liable for both the unpaid taxes, and the penalties associated with non-payment. So, before you decide to put your children, spouse, or other employees in these positions, make sure you understand the unintended consequences that may arise as a result of this action. ?Most people would like their children to take over the family business, but try and balance their education in the business with protecting them from some of the liabilities,? added tax attorney James Pratt, from Rolling Hills Estates, California.
4. Before you hire a new worker, choose carefully between classifying the individual as an employee or an independent contractor to avoid an audit.
Worker classification (employee vs independent contractor) will be a hot topic for the IRS this coming year. Companies sometimes try to have it both ways -- sending a big red flag to the IRS. A common situation is when a company treats employees as independent contractors in practice (not paying payroll taxes on the workers), but then also claims tax deductions as if the workers were employees. To prevent this situation, think about the role you want the new worker to fulfil and then put the appropriate relationship in writing with an Independent Contractor Agreement or an Employment Agreement. Then, stick with it, from paying payroll taxes (if applicable) through to the tax credits you claim. Also, it?s best to look at the long term tax consequences of worker classification from the outset, and an attorney?s advice can be extremely helpful for getting the tax savings you deserve while staying in the good grace of the IRS.
5. Keep track of your expenditures over the next year and prepare for rising costs as itemized tax deductions are reduced.
The Joint Taxation Committee has recommended cuts to charitable deductions, mortgage interest deductions and state and local tax deductions. The likely effect of this is higher costs for business and a significant fall-out for the mortgage real-estate and non-profit sector. This, of all years, is one where forward-planning is going to be crucial. |
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