We continue our tax Q&A with 6 other frequently asked questions about accounting and tax from small business owners and entrepreneurs.
Q6: How should I prepare for tax season?
This is a fundamental change that we’re spearheading. Every other CPA firm believes tax season happens between January and April, but we believe the 2021 tax season happens every single day throughout 2020. It’s not because we’re overworked, but because we leverage technology we developed ourselves to automate tax season.
Oftentimes, CPAs are too busy to talk to you or get back to your emails. They’re not interactive with your books or your life while it happens, but after the fact a year later. By allowing us to connect your books with our system in real-time, we can be interactive with you throughout the year. If things come up in your books that are extraordinary like large, fixed asset purchases or unusual items that will affect your tax liability, we are notified real-time without you having to tell us because our accounting software tells us. This allows you to be prepared for “tax season” day in and day out with less work than you would’ve ever had before.
Q7: How do I file my small business taxes?
When you start out as a business, you obtain a federal employer identification number. You'll be asked during the application phase how you want to be treated for tax purposes. If you have an LLC, there are a couple of questions I’d want to ask as your CPA. Is this a single-member LLC that is disregarded for tax purposes? Is this an LLC electing to be a partnership which, if so, we’ll need all the information for the partners as well as any entities that may be a partner in those. Another LLC question is, are you electing to be treated as a corporation? If so, is that a C-Corp or an S-Corp? Was the election properly, entirely made by your previous accountant? Does it make sense to be an S-Corp or a C-Corp? If you’re an S-Corp, are you paying yourself a reasonable salary? These are all questions that may overwhelm someone starting their own business who wants to prepare their own tax return. Doing so incorrectly will raise red flags for you later. The last thing you want to be doing if you’re trying to run your own business and grow your company is have to look backwards with an IRS agent and second-guess everything you’ve done. This is where we come into play. We walk with you with your accounting records and your tax but armed with tax expertise to be able to resolve issues before they happen. We would communicate any issues with you and be interactive with our planning throughout the year. We’re able to do these things through our in-house technology.
Q8: What can cause the IRS to audit my business?
One of the things an IRS auditor has told us in the past is that we audit self-prepared tax returns. The complexities around tax return preparation have become quite a challenge, especially because the rules change all the time. For example, in 2021, we with the PPP, the ERC, and the different tax considerations for federal purposes. Additionally, sometimes if you're living in a state that doesn't conform to the federal rules, they will have their own rules on how they treat different things and you need to be on top of that, too, to be able to prepare your tax return. So self-prepared is one of the things IRS looks for.
Also, schedule C’s. These are your sole proprietors. Sole proprietors are on the IRS’ hotlist which is why we typically advise you to do an S-Corp or a partnership if you’re starting a business.
Q9: Do I need to create invoices?
If you’re a small business and you collect sales tax then yes, you need invoices. That will be the number one thing that will be audited in the future. It’s more of a sales tax compliance that surrounds the collection of invoices of sales tax, so if you sell anything, any new tangible personal property, you need to make sure that you have invoices readily available. If you’re on a marketplace like Etsy, that should be sufficient enough.
If you are a subscription model like we are where you charge on a monthly basis from an annualized fee, then you don’t need to create an invoice and send it out to them each month. Your engagement letter and credit card authorization is the support you’ll need. If you bill by the hour or are a professional service firm, you will have to create invoices and send them out to customers. All in all, the answer is, “It depends.”
Q10: What are my sales tax liabilities?
This is a loaded question. There's a court case in Wayfair that really shook up the sales tax world, which made things are a lot more complex for those who charge sales tax.
Additionally, there are 1000s of different jurisdictions within the US that will charge sales tax and have different, what we call, Nexus thresholds.
As a small business, you will have to face sales tax, sooner or later. And each state has its own rules which makes things a lot more complicated when you start serving clients outside of your jurisdiction or you ship out tangible goods to different parts of the country, or even to the world, depending on the company. The timing of your payments can either be monthly, quarterly or annually. There are numerous considerations to think about, especially when it comes to multi-state considerations. For this, please consult a tax advisor.
Q11: How can I receive payments on time?
There are multiple ways you could establish receiving payments on time, but one platform that proves to be extremely useful for easy payments is Honeybook. Honeybook offers online payments services where you can create invoices, clients can make payments, and you can create and send contracts. The best part about Honeybook’s online payment option is clients can set up auto-payment, so they’ll never miss the due date, and you’ll always receive your payments on time. You would never have to worry about on-time payments again if you set up Honeybook and your customers used these convenient features.
Published on Mar 21 @ 9:40 AM CDT