Mistakes Small Business Owners Make That Can Cost Them…DOH…The Sequel

O.K., I lied. Two weeks ago, when I did the first part of this discussion, I said that I’d post part 2 the following week. I’m a week late, but I’ve had other things on my mind, like tax season, and keeping my clients happy. I think I have a good excuse.

Anyhow, if you recall, a couple of weeks ago, I started talking about ways that small business owners can get themselves into hot water, and how to avoid it. The following are a few more things…

1-Filing tax returns late: When tax returns are filed late, penalties and interest will be computed on any tax due. This is applicable for payroll tax returns, sales tax, income tax, pretty much any tax that can be levied. Don’t be under the wrong idea that filing an extension for any tax return will keep you safe. An extension only gives you more time to file the return itself; it’s not an extension of time to pay any tax. The late filing penalty will cost you 4 ½% per month, late payment is ½% per month, and interest is 3%. Additionally, pass-through entities (S corporations, partnerships, LLCs), while paying no tax of their own, can be assessed a penalty of $195 for each late filed K-1.

“DOH!” Just take care of filing all of your tax returns on time, and you can avoid all of these charges. It’s so easy!

2- Penalties: While I’m discussing the above, let me tell you about other penalties that you can owe, when you deviate from the straight and narrow. To name a few-failure to deposit taxes, negligence, substantial understatement, accuracy related, failure to have JayTheCPA prepare your return…April Fool’s, just kidding about the last one!

“DOH!” The point I do want to make here is that you really don’t want to mess around with tax preparation, or fall behind in tax filings. The additional charges can add up really quickly, and all of them are completely avoidable, by taking care of things timely.

3-Home office deduction: Over the years I’ve had many clients tell me that they don’t want to claim a home office deduction for their business, because they think it’s a red flag for an audit. It’s not necessarily a red flag but the rules for claiming a home office deduction are specific, in particular the rule that the area in your house/apartment must be used “regularly and exclusively” for business. What this means is that if you’ve got a desk set up in the den, which your family also uses to watch TV, or you work at the dining room table, where the family also takes meals and entertains, that’s not regular and exclusive use.

“DOH!” If your work space fits into IRS’s requirements, not only will your home office deduction save you on income tax, but it’ll save you on self-employment tax too, which is currently about 13 percent. It’s a completely legitimate deduction that should be taken, when applicable.

4-Not using a CPA: It’s my blog, and I’m allowed just a little bit of self-promotion, right? Let me start this with a statement; I don’t know much about I.T., printing, banking, law, or medicine. Or lots of other things, for that matter. I’m not qualified to do any of those. How about you; what qualifies you to be a bookkeeper/accountant/CPA/tax preparer? Probably not much, which is why you should have a CPA as part of your professional team.

“DOH!” You can pay a CPA more later, to clean up the mess that you made with your taxes or your books, or you can pay less now to have a qualified bookkeeper help you with the books, and a CPA help you with the returns. You can try to use Google to research things yourself, but do you really have the time? Can you keep up to date with tax laws? Kids, don’t try this at home!

I hope you’ve found this and the prior installment of “DOH!” moments helpful. Please pass this information along to somebody who might benefit by these sage words of wisdom, so you don’t wind up looking like this little guy, after you’ve been spanked by IRS with penalties!

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Online Sales, Nexus, and Sales Tax

For those of you who are thinking I missed a typo, no, I didn’t mean to write “Lexus”. I meant nexus, and get used to hearing that word, as it’s something you’re going to hear more about in the near future.

In the last week I read two separate articles about online sales and sales tax. As one article says, budget shortfalls for the states total about $103 billion nationwide. As you can imagine, the states are looking for any way that they can increase their revenue, and one source is sales tax. It’s projected that online sales for 2011 will be about $46 billion, and for fiscal 2012, web sales will cost the states about $11.3 billion in sales tax. That’s a lot of lost revenue!

Needless to say, the traditional ‘brick and mortar’ stores can’t compete against online sales in the sales tax arena, because of one word, nexus. A real basic definition of nexus is a retailer having a physical presence in the state where a buyer lives. If you drive to your local Wal-Mart, you’ll be charged sales tax on your purchases, because Wal-Mart has nexus, a physical presence in your state. If you go online and buy a Kindle from Amazon, you won’t be charged sales tax on your purchase, unless Amazon has nexus in your state (a physical warehouse/distribution center, for example).

Congress and various states have recently gotten into the online sales tax battle with Amazon and other online sellers. Last week, one senator introduced legislation that would require internet-only retailers to add sales tax to their invoices, just as brick and mortar stores do now. One House Representative plans to introduce a similar measure. At issue is a 1992 U.S. Supreme Court ruling which said that online retailers only had to charge sales tax if nexus was present. States are claiming that with all the affiliate programs that Amazon runs, nexus is being created for Amazon in every state where one of their affiliates is located.

Obviously this is an issue with far reaching consequences for businesses both big and small, whether online or brick and mortar, and could mean billions of dollars to the states. Keep your eyes on the news to see how it eventually plays out. If you’re a business making retail sales online, be very careful about who you need to charge sales tax to. And for the consumer, did you know that if you make purchases online and don’t pay sales tax, you’re supposed to claim the tax and pay it on your state income tax return? I can’t speak about all fifty states, but in Virginia, you should be reporting the sales tax on line 21 of Schedule ADJ.

Do you think that sales tax should be charged on internet sales? Leave a comment, and also, let’s hear how many people have reported and paid sales tax on their income tax return.