Jul 232014
 

IRS Summertime Tax Tip# 2014-09

Inside This Issue

 

Five Basic Tax Tips for New Businesses

If you start a business, one key to success is to know about your federal tax obligations. You may need to know not only about income taxes but also about payroll taxes. Here are five basic tax tips that can help get your business off to a good start.

1. Business Structure.  As you start out, you’ll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Company. You’ll report your business activity using the IRS forms which are right for your business type.

2. Business Taxes.  There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.

3. Employer Identification Number.  You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.

4. Accounting Method.  An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.

5. Employee Health Care.  The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

Get all the tax basics of starting a business on IRS.gov at the Small Business and Self-Employed Tax Center.
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May 092014
 
Time to sell your business

Time to Sell

One of the things I often run across are business owners that don’t know the true value of their business. I suspect part of that is because they have been focusing on the business and keeping the reported income as low as possible to reduce their tax exposure. The mind set of its not worth very much can take over since little is reported.

The typical “Main Street” business owner runs his/her business in a way that generates the most income while paying the least taxes. It makes sense to me and to most others, but can present a problem with attempting to create value for a buyer.

A buyer is not looking for a small bottom line at the time of purchase. A buyer is looking for the most income producing business they can at the least amount of cash outlay. Not only do they want to see profit, they want to see consistent profit and they would like to see an upward trend. This is part of the magic that good business brokers specialize in.

The following are just a few ways to realize the full value of a business:

Recasting Financials:  A good business broker is trained in the art of recasting financials to reflect what the financials would be if they were reported to reflect that actual profit of the business. This involves rolling out owner benefits that are not essential to the running of the business. Think automobiles, trips, club memberships over paid family members and the list goes on. Expenses that where extraordinary and not part of the normal day to day operation would also be rolled out. All of these changes are done with full disclosure and notations that explain the reasoning behind them. They do not replace the actual financials; they supplement them.

Identifying Untapped Potential:.A good business broker is often an experienced entrepreneur and can identify market segments, marketing methods, synergies, strategic partnerships and business methods that the current owner has not. This can be a function of lack of capital or desire to grow the business because of the extra responsibilities and work or capital that may be involve. Things like eCommerce, a better POS system to reduce lost inventory and improved re-ordering. Or let’s say you are a contractor that can’t bid on certain projects because you lack something that a competitor has and they lack something you have. Combined you both open new markets. Another scenario might be the potential to serve a wholesale market while still serving a retail market thus increasing buying power and reducing cost, this would also be untapped potential.

Changes in City Planning: If there are plans on the city drawing boards that will bring more relevant traffic to the business….that is future earnings potential. This future earnings picture is what is responsible for driving the stock market. Smart brokers know how to value this potential increase in sales and present it to perspective buyers.

The above items might help you think of other ways you can increase the value of a business whether you are a buyer or a seller.

Please feel free to use the comment section for discussion between owners, buyers and brokers.

If you want to see articles on a particular topic, just let me know.

If you have questions, don’t hesitate to post or email me. I respond to all emails.

Richard Roberts rroberts@tworld.com
Senior Business Intermediary & Franchise Advisor
Transworld Business Advisors of NWA