If you are an owner of a small business, you are familiar with how your business is taxed at the end of the year. However, many small business owners are unfamiliar with the nuances of the United States Tax Code and ultimately wind up exposing themselves to dangerous, unnecessary tax liabilities.
Because the IRS is taking a more aggressive stance against small business tax violations, it’s important for all business owners to understand their obligations under the Tax Code and what they can do to avoid interference by the IRS.
Small Business Deductions
Many business owners are unaware of the many facets of the Tax Code and how that influences their business. This tends to cause significant problems for entrepreneurs down the line, as deductible costs can heavily determine how much you are taxed at the end of the year.
Many deductible expenses occur in the startup phase. Startup costs include any expenses that your business incurs before you are able to make your first sale. For example, purchasing computers and/or equipment or renting office space would qualify as startup costs.
It’s important to remember that you will ultimately be taxed on your profit, or your money remaining after you’ve made your small business deductions. So it is essential that you properly account for any and all costs of starting your business and determine what costs are eligible for deduction.
If you are unsure of which costs qualify for a small business deduction, you can seek the guidance of a CPA or a qualified tax attorney.
Medical Expense Reimbursements
It is not uncommon for spouses to work together on startup ventures. However, small business owners may experience issues when they are paying spouses or family members without claiming them as employees.
There are a number of consequences for failing to classify employees, but one of the primary issues is the fact that you, as a business owner, are missing out on a significant medical expense deduction through something known as a Medical Expense Reimbursement Plan (MERP). By utilizing a MERP, small business owners can pay tax-free for employees’ medical expenses that are not covered by insurance, such as office visit co-pays.
If a small business owner fails to classify a spouse or family member as en employee, it can thwart their ability to set up a MERP. It can also compromise their ability to deduct medical expenses that are otherwise non-deductible.
On the other hand, if you set up a spouse as an employee within your business, you can deduct medical expenses for both of you, as well as your children, under a qualified MERP. The ability to deduct your family’s medical expenses, such as health insurance premiums, can prove incredibly beneficial, especially when small business owners are left to pay their own medical costs.
That’s why it’s important to maintain a proper paper trail and treat any family members like employees. They don’t need to be employed full time, but there must be strong evidence to verify their employment.
Choosing the Wrong Business Structure
Another key tax issue facing small business owners relates to the structure of their business. Unfortunately, many businesses make significant errors when filing for a business structure – a mistake that can prove incredibly detrimental once taxes are assessed.
For example, a small business owner may mistakenly file as a C Corporation, which can lead to double taxation for the company.
Similarly, an entrepreneur may set up a simple LLC without realizing that this type of business is considered to be a disregarded entity according to the Internal Revenue Service (IRS). Quite simply, this structure offers business owners limited insulation from tax liabilities and legal exposure.
While an LLC is not the wrong choice for most businesses, it’s important that the business is set up correctly, as it minimizes audit exposure and maximizes tax savings for the owner.
If you or someone you know are dealing with small business tax issues, it’s in your best interest to seek the guidance of a tax attorney. Only an attorney specializing in the Tax Code and small business matters can provide the insights you need to ensure your meeting your tax obligations.
Small Business Tax Attorneys in Texas
In Tyler and the surrounding areas in Texas, the highly-skilled legal team at the Scammahorn Law Firm, PC provide counsel on a variety of tax-related matters, including issues involving small businesses.
Our firm can work with you to identify tax pitfalls common to small businesses and ensure that you are taking the necessary steps to honor the Tax Code. Should an issue with the IRS arise, we are also equipped to help you find a solution that yields a favorable end result.