Each week as Smallbizlady, I conduct interviews with small business experts on my weekly Twitter talk show #SmallBizChat. This is excerpted from my #SmallBizChat interviewwith Eva Rosenberg, the TaxMama® @TaxMama is passionate about helping your business pay the least taxes legally possible.She’s the author
the award-winning book Small Business Taxes Made Easy, as an practicing enrolled
agent, and a nationally syndicated writer, she helps business owners stay abreast
of the latest changes in tax news. Check her website at http://www.taxmama.com
SmallBizlady: What is one of the most important things small business
owners overlook in their businesses?
TaxMama®: They don’t take
the time to find out what licenses their business needs on all three levels — Federal,
state and locally. Often, this catches up with you later, when you suddenly find
yourself hit with penalties you should never have incurred.
For instance, in Los Angeles, if you register your business with the city, there is no
license fee, as long as your business grosses less than $100, 000. But if your business
qualifies, but doesn’t register, you will pay penalties and interest of over $100.
Or people do work in different, nearby areas without getting licensed. For instance,
in the Los Angeles area (let’s use L.A. as a base, since I am here — the same rules
and logic will apply in your area.) a personal trainer will work with private clients
at their homes in Beverly Hills, Westwood, West Hollywood and Santa Monica.
Although she may only be working in a 5-8 mile radius, she is working in 4 distinct
cities. She will need licenses in each city, because she is performing work INSIDE
those cities.
SmallBizlady: What else do small business owners overlook in their
businesses?
TaxMama®: They don’t set up an advisory board. I talk about the concept in Chapter 1 of Small Business Taxes Made
Easy. But, perhaps I don’t explain it well. The Board doesn’t need to be a formal
board. You don’t necessarily need to pay Board members. And you don’t need to
have formal meetings. Though it would be good to have everyone meet, in person, at
least once a year.
This can be an informal group of solid contacts — your tax pro, your attorney,
your insurance agent, your banker and a few other key people. These people
can help open the door to both clients and vendors. They can help you find the
best resources, at insider prices — because they have contacts. When you get
referrals from respected members of the community, it’s easier to close a sale to a
prospective client. It’s easier to get a line of credit from a supplier. It’s easier to get
good prices from a vendor. You might even learn about special deals or services
others don’t know about.
Heck, they might even find you investors — or offer to do so themselves, if they are
impressed with your business.
Best of all, they can bring your business to profitable status more quickly. If you
haven’t done this yet, it’s never too late to set up your own informal advisory board.
SmallBizlady: You mention tax professionals. And you are an Enrolled
Agent. Could you explain what that is?
TaxMama®: Enrolled Agents,
or EAs, are the best-kept secret in the tax industry. We have been around since the
Civil War, when the U.S. Treasury Department created this designation to prevent
people from filing phony claims for reimbursements after the war. These days,
Enrolled Agents are authorized to represent taxpayers before the Internal Revenue
Service in all tax matters.
- You can become an EA two ways — the easy way is to work for IRS for 5
or more years in certain positions. The hard way is to pass a set of very rigorous IRS
examinations. I teach the course to help tax pros do that at www.irsexams.com (incidentally, this is a TERRIFIC
profession for women — I’ll tell you more about this in a minute.) - When it comes to tax matters, EAs can do everything that CPAs can do —
and, believe it or not, often we can do it better. - Why? Because all of an Enrolled Agent’s continuing education must be
tax related. We must absolutely be up-to-date on all tax issues. We have special
training in tax issues. CPAs must also take continuing education courses. But there is
no requirement that any of their education must be on taxation or tax matters.
SmallBizlady: What is so special about Enrolled Agents?
TaxMama®: Enrolled Agents
are specifically license to represent taxpayers who have tax problems, like audits,
tax debts, IRS errors, spousal disputes, and other night terrors. Many CPAs don’t
even know how to do tax representation. Their strengths lie in helping you with
complex accounting matters — or with complex tax planning issues.
I was shocked when I looked at someone’s IRS audit recently. He’s working with his
CPA, who missed a crucial response deadline — and just cost my friend his right to go
to Tax Court. The CPA didn’t even know he had done that.
SmallBizlady: Getting back to business, what’s another thing small
businesses tend not to do?
TaxMama®: People start a
business with an idea. Or someone asks them to do something and starts to pay
them. Things start rolling on their own…and there’s no planning. Often, you’re
making some money, or a lot of money, before you even realize it.
You suddenly look up and, uh oh! I’m in business! I haven’t made any plans. I haven’t
thought anything through. And I haven’t set aside any money to pay the taxes on my
business. A couple of years ago, I set up some special training for the top Internet
Marketers — you know, the guys making a million dollars or so online. Several of
them had this problem. When they first started to succeed, they made their first
couple of hundred thousand dollars — and spent it all — leaving NOTHING with which
to pay the taxes.
You never want to have that problem.
So…learn the rules about making estimated tax payments — and make them on time.
SmallBizlady: What are the rules for Estimated Tax Payments — and how
can we simplify this?
TaxMama®: These days, IRS
wants us to make the payments electronically. So open up a free account at www.EFTPS.gov . It will link to your bank
account and take a couple of days to set up.
BTW, ladies you DO have a separate bank account right for the business, right? If
you’re in business, you must. If you haven’t done it, do it first.
Let’s set aside the complications in the rules. OK. Bottom line?
1) If you’re going to owe $1,000 or more by April — make estimated payments.
Period. Pay $250 per quarter. The first payment is due on April 15th.
(OK, this year, it’s the 17th because the 15th is on a
weekend.)
2) Set aside about 1/3 of all your profits in a savings account, so you can pay your
taxes each quarter. If you end up not needing that much for taxes, at least you’ll have
money saved to put into your retirement account.
SmallBizlady: You told me that you have a pet peeve about small business
owners. Come on, what is it?
TaxMama®: Shall I tell you what almost makes me cry?
People who come to me with their questions AFTER they’ve already done whatever
it is they’re asking about. By the time they get to me, they’ve already done
something so wrong, it’s really expensive to fix.
Oh, they can mean well. For instance, this sweet fellow, Joe, brought his best friend
to consult with me about his new business. Joe was so proud of himself. To help his
friend, he had gone and arranged to buy him an LLC because he heard on the radio
that LLCs are good things to have.
Well, as it happens, in California, there is an annual $800 fee for LLCs. And California
also charges a Gross Receipts tax based on the business’ sales — even if the business
runs at a loss. In California, LLCs are often a bad idea. It’s much cheaper to simply
buy a business liability insurance policy, if you’re concerned about protecting your
assets. And if you don’t have any assets — you don’t need an LLC or insurance.
Not only did he waste about $400 of his own money, it was going to cost even more
to undo the LLC his friend didn’t need.
SmallBizlady: Speaking of LLCs, what is the best legal structure for a new
business?
TaxMama®: I wish I could give you a pat sound-bite. But there is NO one best choice.
Your business structure will depend on what you want to get out of the business. Do
you need benefits? Like health insurance, child care, retirement, etc. Do you already
have all that at a job or a spouse’s job?
Do you plan to take the business public in a few years? Do you want to build dynasty
and pass the business to your children and grandchildren?
Do you need investors to help grow the business? Or will you be using your own
money or loans? Each need is served by a different structure.
If you haven’t done any planning, don’t set up any structures. Just start out as a sole
proprietorship and see how the business does. It’s cheaper, easier to untangle later
— and it has fewer strict recordkeeping and minute-keeping demands.
SmallBizlady: What is the best thing about being in business, instead of
having a job?
TaxMama®: It’s your time. It’s your decisions. Just the other day, someone told me he had some students (children)
who were generally rude and whiny. He really, really didn’t enjoy teaching these
undisciplined children. Even though their presence provided $1,000 per month,
since it was HIS business, he was free to send them on their way.
I love having the freedom to have clients I really enjoy being with. I love being hire
to people to work with me or for me, who are like sunshine to have around. I don’t
have to put up with negative, stressful, or inconsiderate co-workers or customers.
That’s one of the big advantages of working for yourself.
SmallBizlady: How can you go about surrounding yourself with great
clients?
TaxMama®: This is one of the
advantages of doing a business plan. (Chapter 2 in Small Business Taxes Made Easy)
Sit and visualize how you would like to spend your business days. Who do you want
to spend your days with? What kind of customers; what kind of staff?
Once you know who you want to surround yourself with, you can find a way to
target exactly those kinds of people. And you can do this in any profession. Let’s say
you love being around horses and people who love horses.
Join organizations, turf clubs, etc. that cater to horse people. Get to know them.
Volunteer for projects, events, committees. These are the people who will become
your friends and contacts. If you’re a dentist — they need dentists. If you’re a tax
professional, they need tax pros who are experts at dealing with breeding, racing
and ranching audits. Whatever it is you do, you can provide a service or product to
the horsey set.
SmallBizlady: Your clients seem to do well, even in recessions. Why is that?
TaxMama®: I try to help my
clients keep an eye on the market and changing conditions.
Two of my clients, brothers, were in the garment industry, selling custom designed
fabrics. Several years ago, I told them both — you need to find a new business, or go
to China. The Chinese will be undercutting your prices. And many of their customers
would be going out of business.
They heeded my advice. Let’s call them Bill and Ben. Bill looked at other business
options, like real estate. Ben went to China and researched the market and vendors
there. Ben came back and said he would start getting his fabrics manufactured in
China. I gave him some warnings about what to watch out for in the workmanship
and the production. So, he did exactly that. His business grew faster than it ever had.
Incidentally, Ben told me that some of his customers DID start going under. But he
had such a good relationship with their accounts payable departments, that the
ladies there made sure he was paid before they went out of business or filed for
bankruptcy.
Let’s look at another case. I had become good online friends with Jacqueline
Freeman. Her husband was apparently well-known for his therapeutic work
with show horses or racehorses. He loved what he was doing. Jacqueline told me
the work is so physical, that as he got older, it gets to be harder on his body. So I
suggested that he turn his skills into a school — and it worked! http://equinenaturalmovement.com/
See, you not only get to do what you love, but you need to adapt as times and
markets, and skills change.
SmallBizlady: How about giving a few tax cutting tips?
TaxMama®: How exciting.
Cutting taxes!
If you’ve been following the Republican campaigns, you’ve seen a lot of nastiness.
And sometimes, a little stupidity. There was a critical story in the news about Newt Gingrich because his S Corp
paid him a salary of about $420,000, on profits of about $2.4 million. The article
talks about him evading self-employment (Medicare) taxes of about $60,000. What
Gingrich did was not only legal, his salary was certainly high enough not to attract
an IRS audit.
The whole point of having an S Corp is to avoid paying payroll taxes on ALL
your earnings. You use the S Corp to have a modest, but reasonable wage — and
to pass the rest of the income through to you without the extra 15.3% worth of
Social Security and Medicare taxes (or just save the 2.9% of Medicare, if your
wages are above the FICA limits).
I do a little comparison of Romney’s and Gingrich’s tax returns for the tax pro community at www.iShade.com . But one thing I didn’t touch
on is — some of Romney’s income is surely from his Bain investments. That
company is designed to invest in businesses. There’s a special provision
in the tax code that allows you to exclude all or part of the gain when
you sell the stocks of Qualified Small Businesses (QSBS). In fact, there’s another provision that lets you roll over the profits if your business is a Specialized Small Business Investment Company (SSBIC). I didn’t
dig into Romney’s 200-page tax return deeply enough to track down the untaxed
income from such rollovers or exclusions. But, it’s quite possible, due to the nature
of his investments, in his blind trusts, you will find such untaxed income.
Well, isn’t that the whole point of tax planning? To use the tax laws to your
advantage.
With the right planning, you can set up your own corporation to qualify for this
QSBS treatment. Then, if you do well and sell your stock, you can avoid paying taxes
on some or all the gains. And if you fail — there’s a special treatment for the losses,
too!
Just imagine, the first people who bought or received FaceBook stock — their
original stock probably qualifies for the QSBS exclusions. And how much is their IPO price?
That could be your company 6 years from now!
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