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Note: Some of these responses may be specific to
Colorado new business startups. Also, this is not an alternative to good
legal and accounting advice. We recommend that you talk these issues over
with an attorney and an accountant.
What form of business
should I operate?
Can I
have independent contractors instead of employees?
What new business startup expenses can I deduct?
The
bookkeeping software that I purchased has numerous charts of accounts. Can I
choose one of those?
Can I have my corporation
reimburse me for business expenses that I have paid for?
What type of
system should I use to keep track of such business expenses?
How should I organize business bills to be paid?
What
business taxes would my business be liable for?
When are taxes due for a sole proprietorship?
How
much should each estimated tax payment be?
When are sales taxes due?
When are Federal payroll tax payments due?
When
are Colorado payroll taxes due?
What about Federal
unemployment taxes?
Why
can't I deduct my (passive) losses
What form of business
should I operate?
This question should be
discussed with a CPA and/or an attorney. We have created an
Entity Choice summary that
should help you get started.
Can I have independent
contractors instead of employees? Having
employees causes a paperwork headache. This burden may be even harder on new
business start ups than existing businesses. Having said that, is someone
works for you. If he is an employee, you better treat him as an independent
contractor, you could be looking at penalties and interested, in addition to
back taxes. The IRS has put out 19 points
to help determine whether someone should be treated as an independent
contractor versus an employee.
What
new business startup expenses can I deduct?
If you don't ever start the business, you don't get to deduct anything!
If you do start the business, you can deduct up to $5,000
of new business start up costs. Any amounts over $5,000 would be deducted
over 15 years. These would be expenditures investigating the creation,
acquisition or establishment of an active trade or business. These
expenditures could include incorporation fees, legal fees, the cost of
preparing a partnership agreement or an operating agreement, accounting
setup fees, expenditures investigating new markets, office rents paid before
the business starts, etc.
The bookkeeping software that I
purchased has numerous charts of accounts. Can I choose one of those?
That is not a bad place to start.
We have some other recommended accounts
that should be added to the "canned" chart of accounts. While we are at
it, Quickbooks is so easy to use that it gives you an opportunity to shoot
yourself in the foot. One modification that you should consider to
Quickbooks is to require the use of account numbers.
Can I have my corporation
reimburse me for business expenses that I have paid for?
You can if you have an "accountable plan" and use that
plan. An accountable plan is either oral or written. I recommend that it be
written. The plan should include a statement that the company must reimburse
ordinary and necessary expenditures made by an individual in behalf of the
company.
What type of system should I use to
keep track of such business expenses? You
could use a computer spread sheet. My recommendation for most start up
businesses:
- Put the receipts in an envelope or folder.
- When you want to reimburse yourself, pull the
receipts out of the folder.
- Separate the receipts by category, such as,
postage, office supplies, entertainment, etc.
- Total the receipts by category.
- Enter the totals into your bookkeeping accounts
payable system. You will be the vendor. List each category separately as
an account.
How
should I organize business bills to be paid?
If you are using a good
small business accounting system like Peachtree or Quickbooks, you have a
solid accounts payable (bill paying) system. These systems are designed to
enter bills as they are received. The accounts payable (A/P) system will
compute when the bill should be paid.
If you were running a
large business A/P system, you would check every day what bills are due on
this day. That way you would pay each bill right before it became past due.
For a startup business with only 10 to 20 bills per month, this is a major
waste of time.
Start up business
should arrange to pay bills two or three times a month. I recommend paying
bills on the 1st and 16th of each month. This way you
would print checks twice a month rather than every day.
Here is the system:
- When a bill comes in
the mail, put the due date in the upper right corner of the invoice. For
example, if the invoice was due in June, you would either put 6/1 or 6/16
on it. Put the invoices into a manila folder.
- When you have about
three or more new invoices in the manila folder, enter them into your A/P
system. Put a check in the upper right of the invoice to indicate that it
has been entered into the A/P system. Put the invoices back into the
manila folder.
- On the 1st
total all invoices in the manila folder that are due on the 1st.
Print out the checks to pay the invoices. Make sure the total of the
checks equals the total of the invoices.
- Mail the checks.
- File or scan the
paid invoices.
- Printout or create a
PDF file with the listing of checks paid today. File this report.
- Repeat the same
process on the 16th of the month.
Be flexible! If a very
large invoice is due on the 20th of the month, pay that on the 20th,
not the 16th!
When are taxes due for a
sole proprietorship?
In general, a sole
proprietorship pays income and self – employment taxes in quarterly
estimates. The due dates for the estimates are April 15, June 15, September
15, and January 15 of the next year. This payment schedule holds true for
individual taxpayers that don’t pay a sufficient amount of tax through
withholding.
How much should each
estimated tax payment be?
That depends! If your
income is lower than last year or your income is quite high, you should make
tax projections to determine how much should be paid each quarter.
Otherwise, pay in the prior year’s taxes as this year’s estimates. What
isn’t paid through estimates will be due on April 15th of the
next year.
I recommend setting up
a money market account strictly for taxes. Whenever you receive taxable
income, put some of it away in that money market account. When you need to
pay taxes, it should come out of that money market account. If you follow
this procedure, you will not get caught short and you will earn some
interest income! A tax professional can give you guidelines on how much to
put away.
When are sales taxes due?
In general, Colorado
sales tax is paid in the month following the end of the quarter if the sales
tax collected is less than $300 per month. Thus, sales
tax collected from January through March will be paid in April.
If the sales tax
collected is $300 or more a month, sales tax will be paid monthly.
If the
business has problems paying the sales tax when due, the business should put
the collected sales taxes into a money market account until the tax is due.
When are Federal payroll tax
payments due?
For most startup
businesses, these tax deposits are due the 15th day of the next
month. Thus, Federal payroll taxes for January’s payroll would be due on
February 15.
There are exceptions to
this if unpaid payroll taxes exceeds $50,000. If this might be the case,
check with your tax professional.
My recommendation is
to never ever make a late payroll tax payment. Just because the payment is
not due until the 15th of next month, my recommendation is to make the
payroll tax payment the same day that you pay the payroll.
When are Colorado payroll
taxes due?
For most startup
businesses, Colorado payroll taxes and the related payroll tax return are
due in the month a following the end of the quarter. Thus, Colorado payroll
taxes for the first quarter of the year are due in April. This holds true
for Colorado unemployment taxes (SUTA) as well.
What about Federal unemployment taxes?
Federal unemployment
tax (FUTA) is due when the unpaid Federal unemployment tax exceeds $500.
The FUTA tax return,
Form 940, is due, generally, in January of the following year.
What business taxes would my business
be liable for?
-
If your business
sells something that is subject to sales tax, you will need to collect and
pay sales tax.
-
If your business has
a payroll, you will need to pay payroll taxes. These taxes include state
and Federal income taxes, Social Security and Medicare taxes, state and
Federal unemployment insurance taxes. Depending on your location, you
might have local or city taxes.
-
In addition to
taxes, you will probably have a legal requirement to have workmans
compensation insurance.
Why
can't I deduct my (passive) losses
Not all losses are deductible. If your business is considered a passive
activity, you probably will not be able to deduct a loss. Thus, in most
cases, you don't want to have a passive activity if it is going to have a
loss. To avoid the passive activity loss problem, you want to "materially
participate" in that activity. In general, to materially participate, you
want to do one of the following:
-
Spend more than 500
hours in that business.
-
No one else spends
time working in your business.
-
You spend more than
100 hours in your business, and no one spends more time in the business.
-
You spend no more than
100 hours in the business, but you spend more than 500 hours in all your
business put together.
-
You have materially
participated in 5 out of the last 10 years before this year.
-
You are in a service
business and have materially participated in 3 years before this year.
-
You didn't qualify
from any of the above situations, but you think you can prove that you
materially participate. [Don't count on this one working!]
The above is an
oversimplification! If your business is operating at a loss, consult your
CPA!
If you have questions about this, do not hesitate to contact us
at 720-493-4804. |