Taxes for Entrepreneurs: Your First Tax Season

Taxes for Entrepreneurs: Your First Tax Season


It’s no coincidence that taxes are due around Easter each year. Anyone who’s ever needed an answer to a tax question will be familiar with the rabbit hole that they call the IRS Website.

If, like tens of thousands of individuals, you started a business last year, this year might be the first time you’ve ever needed to file business taxes. You might think that they’re just like individual taxes, but you’d be wrong. Business taxes are the Complete Works of Shakespeare. Your individual taxes are the Cliff Notes of “Where’s Waldo?”

Call the Internal Revenue Service, and they’ll direct you to their website to answer your questions. You should review its checklist for starting a business. But for the non-CPA, non-tax attorneys out there, the Web site can more confusing than an average episode of “Lost.”

This article isn’t going to talk about those differences. Instead, we’re going to discuss what can trip you up and precipitate an IRS audit, how valuable a good CPA can be, what to do if you screw up (or worse, lie) on your business taxes and bring the Feds to your door and, finally, what you need to do for your employees.

The IRS has 14 PDF files in their “Recommended Reading for Small Businesses” section, totaling over 600 pages. It recommends that you read them all. We think you should, too, but if you don’t read anything else, read at least the following:

P1635 – Understanding EIN
P1779 – Contractor or Employee?
P587 – Business Use of Your Home
P583 – Starting a Business and Keeping Records
P334 – Tax Guide for Small Businesses
P505 – Tax Withholding and Estimated Tax
P535 – Business Expenses
P15 – Employers’ Tax Guide  

If you are starting a business and you can’t be bothered to read about how to do your (and your employees’) taxes right, you’re not going to be in business very long. So read them. All of them. Sorry.

The first, and most valuable, piece of tax advice is this: Find a CPA you trust.

Overwhelmingly, small-business owners advise using a CPA. Have one audit your accounts, listen to his or her recommendations, and plan your business accordingly.

Good CPAs will probably save you as much money as they cost – from making sure you get all your deductions in a row at tax time, to alerting you to cash-flow crunches, to keeping you off the IRS audit radar, their advice will help you limit your exposure to the risk of being audited.

How much does an audit cost? Diane Kennedy, author of Smart Business, Stupid Business, says, “you can count on paying $5,500 in extra taxes. And that’s before you count penalties and interest and accounting and legal fees,” which Kennedy says make the real cost closer to $8,000. Kennedy also says that the chances of being audited are 1 in 3 for sole proprietorships, but only 1 in 100 for S corporations.

Large corporations can much more easily afford to fight an audit. The National Small Business Association claims that “the IRS is preying on those least able to defend their businesses, and giving large corporations a pass. In 2007, IRS audits of the nation’s largest corporations plunged to its lowest level in the past 20 years.” The NSBA also say that the IRS learned that “a far easier way to raise tax revenue is to target small-business owners who may not have the resources to defend themselves.”

So you’re probably wondering what someone like you might do to keep the IRS from knocking on your door, asking for all your receipts.

Forbes Investopedia has a list of 10 things that will trigger a red flag or audit:

1. Large Charitable Deductions
2. Large Business Expenses
3. Inaccurate W-2 or 1099 Reporting
4. Excessive Itemized Deductions
5. Concealment of Cash Receipts
6. Tax-Shelter Losses
7. Informant reporting you to the IRS
8. Prior Tax Problems or Audits
9. Complex Business Transactions
10. Complex Investment Transactions

Avoid these, and you should reduce the chance of being audited. You can never eliminate that chance, because a perfect tax return will be suspicious, too (who files perfect taxes?) has its own ten ways to avoid an audit – we figure that most small businesses don’t have big accounts in the Caymans or Switzerland, and that if you’re reading this you haven’t run into significant tax problems in the past.