Suzanne Weathers: Consider tax implications early in business startups
Compliance analysis should occur before incorporationAugust 17th, 2017
There are so many things to consider when starting a business that it can boggle the mind.
Having started out in private practice myself just over a year ago—walking away from a position after 10 years—I understand the vacillation between both excitement and fear in the same hour (possibly at the same moment) once I actually decided to just do it. The decision led to countless other decisions contributing to my business becoming a reality.
Along the way, I was fortunate to discover I didn’t need to be the expert of everything. Spokane is a generous community with a collaborative spirit and the genuine interest to see business succeed.
Taxes are my thing. I’m the girl that gets excited when I get to explain depreciation. Ask my husband how quickly a conversation can turn to taxes.
As an enrolled agent working in the tax debt and resolution field, I have had the opportunity to consult with new business owners on some of the pitfalls of not having a tax strategy in place. I work to reduce and negotiate more favorable outcomes when clients come to me having gotten into difficulties with the IRS.
But debt resolution is only one part of the solution; there has to be a plan to succeed beyond paying or reducing the debt. Sometimes, the conversation has to include whether it’s realistic to continue the business, and the best move might be to close the doors.
Naturally, when I speak to someone considering a new business, without fail I tune into the tax needs they may have, with a new perspective as an actual business owner now.
Surprisingly, although there is a general understanding of how serious tax compliance is, I find there is little time given to how taxes will be managed in the overall business plan. From the moment consideration is being given to the legal structure of your company, there also should be a discussion of tax compliance.
How will you both leverage and comply with the tax code? Investing some time talking to both a legal and a tax professional at that point of the business planning—prior to what could be a complex decision—will be time well spent.
Representing clients who have nonpayment of payroll taxes, I have found it is especially hard for the business to recover without a structured and disciplined repayment plan, while continuing to meet current payroll obligations. If you plan to employ staff, you will need to both understand your tax filing obligations and how to allocate your payroll costs.
When you’re opening a company bank account, you should include opening a second account designated for payroll commitments. Transfer all withheld funds plus business owner’s payroll obligations into this second bank account beginning with your first payroll and continue this discipline for every subsequent pay period.
You can’t look at the account as an emergency fund nor use it as any security for debt acquisition. Finally, pay all payroll taxes and submit and informational filings on time. Penalties can multiply quickly. They can include a 10 percent failure-to-deposit penalty, 3 percent compounding interest, and a 5 percent per month failure-to-file penalty for each month late, up to five months.
If you begin that practice at the beginning of your business ownership, you will have mastered one of the most important tools for success.
I believe there are times I need to hire other professionals. Bringing in experts in their fields leaves me free to be the expert in mine. However, we have to do due diligence when choosing a professional. How would I advise you to choose a tax professional?
First, there are various types of tax professionals, including certified public accountants, enrolled agents, and attorneys. All three are licensed with varying requirements regarding continuing education to remain licensed. Oversight of all three is provided by varying federal or state departments plus professional organizations, and each can represent you before the IRS. They each will have a differing level of skill or have a specific area of tax code they work within. For example, only 3 percent of enrolled agents actively choose to represent clients before the IRS.
The IRS maintains a directory of federal tax return preparers with credentials and select qualifications. Anyone with a preparer tax identification number can prepare a tax return for a client. However, tax return preparers have differing levels of skills, education, and expertise.
A searchable directory is intended to help with your choice by providing a listing of preparers in your area who hold professional credentials recognized by the IRS or who hold an annual filing season program record of completion.
Keep in mind, you will entrust him or her with your most personal information. They will know about your marriage, your income, your children, your date of birth, and Social Security number, as well as the details of your financial and business life. You have to be comfortable with how will they protect that information.
Finally, when looking for a tax professional you will need someone to provided tax information and prepare your varied returns, and there are certain things you should expect. You should expect your tax professional to be knowledgeable of the tax code, you should expect them to know how the tax code will impact your business financially, and you should verify they can provide services to manage your payroll needs or work with those who do provide them for you.
You should expect your tax professional to be able to advocate for you and, if necessary, support their preparations before the IRS. Ask what are their guarantees if they make a mistake or penalties have to be paid due to their late preparation? Are you aware taxpayers are responsible for all the information on their various tax and informational returns? That’s true no matter who prepares the return.
Taxpayers should choose their tax professionals wisely, with good reason. Whether for your personal or your business taxes, this could be one of your most important professional advocates.
If you are thinking of starting a business or if you are already in business but want a little more information, consider attending “Starting a Business 101” lunch-and-learn from 11:30 a.m. to 1 p.m. Aug. 22. In addition to my presentation to calm your fears about business taxes, Christal Lam, of Spokane Business Attorneys, will address the basics of starting a business and building it the right way so you stay out of trouble. Kristen Schneider, of KMS Capital Solutions, will share information about qualifying for a loan and what lenders look at when deciding whether to lend. Mary McDirmid, of Mass Mutual, can help you understand your financial situation and plan for your future and your employees’ future.
To register, go to https://www.eventbrite.com/e/small-business-101-tickets-36598584351. Space is limited to 30.
Suzanne Weathers is the owner of Weathers & Associates Consulting, of Spokane.