Best Tax Practices for Small Business

The Internal Revenue Service has sent letters to thousands of small business owners questioning whether they underpaid their taxes last year.

Titled "Notification of Possible Income Underreporting," the letters were mailed to small employers this summer requesting that they review and confirm that they accurately reported their income on their 2012 returns.

In response to this action by the IRS, American University professors Donald Williamson and David Kautter have created a list of “Tax Best Practices for Small Businesses,” a checklist designed to help small business entrepreneurs stay up-to-date on all tax related issues, and away from the scrutiny of the IRS.

Here are just a few of the 20 listed:

·       Keep good records about who is an “employee” and who is an “independent contractor.”

·       Invest in good accounting systems – those that track your records and regularly provide updates to new IRS rules.

·       Hire a tax accountant.

·        Keep good records on how much you paid for, and the date you placed in service, all business equipment, business vehicles, etc.

·       One of the biggest traps for small business taxpayers is estimated taxes – paying them on time, calculating them correctly and knowing the safe harbors that can protect you against underpayments. Miscalculating any of these steps can be a major headache, so speak with someone, a tax accountant or enrolled agent, who knows the rules.

·       Make sure that you and your tax accountant are familiar with the tax rules, including the favorable tax credits and deductions that are unique to your business.

·       Don’t become foolishly emboldened by thinking that the IRS will have to “prove” that you have done something that doesn’t comport with the tax law. The burden of proof is always on you, not the IRS.

·       If you can’t pay the taxes you owe to the IRS, or another tax agency, contact your accountant right away. This situation won’t get better by ignoring it.

·      When someone pays you in cash, it doesn’t mean that payment is nontaxable. The IRS has state-of-the-art statistical technology and models based on spending habits and bank accounts to build a case against alleged tax cheats.

This is great advice. Taxpayer’s should engage an enrolled agent to work throughout the year with business. An enrolled agent is licensed to work throughout the audit and appeals process.

Holly Gunnette, EA has been assisting taxpayer’s and small businesses for over 30 years. Contact HGi Financial Services at (951)681-2784.