A tax is a compulsory payment for which no specific benefit is received in return.
–United States Treasury
As I work on structuring the core business my mind is always wandering towards either taxes or liabilities. Fortunately I’ve got a few entrepreneurial mentors and have found a few great books to help as well. Different business entities are taxed different ways. Picking the right combination of liability protection and tax rates will help anyone get a leg up while struggling in the early years.
Unless you’re starting a tax accounting service, you’re probably not, nor ever will be, a tax expert. That’s actually a great place to start learning – you just need to be familiar with the basic tax rules that apply to most small businesses. Getting crafty with deductions and exemptions are where someone like a lawyer can help you get to the next level. This blog is not about that, but I’ll share the basics I’ve learned.
What this isn’t
This is only a general guideline – at best. I’m not a tax lawyer or even an accountant. Please post up a comment if you have information that is counter to what I’ve posted so that we can all learn. Also remember that tax laws are constantly changing, it’s your responsibility to remain informed of current tax law.
The IRS has a “Tax Guide for Small Business” (Publication 334) that is a pretty good reference. They also have a help number, but they are not liable for incorrect information given over the phone. Only their publications may be considered correct. If you still want their help via phone, you can call them at 800-829-4933.
Lastly, keep in mind that you get taxed from all angles – federal, state and local laws all apply. Your state’s comptroller’s website should fill in any other tax law gaps.
What this is
Most of the federal tax laws do exactly what you think they do – they ensure the government gets what it (and we who have voted them in!) say is theirs. Fortunately for us, there are also quite a few ways to get a break from those rules – deductions and exemptions. Tax laws are so vague and gray to us non-lawyers that we often miss opportunities. For example:
there shall be excluded amounts received by a partner pursuant to a written plan of the partnership, which meets such requirements as are prescribed by the Secretary, and which provides for payments on account of retirement, on a periodic basis, to partners generally or to a class or classes of partners, such payments to continue at least until such partner’s death, if—
If you understood that little jewel from the U.S. Code Title 26 Subtitle A Chapter 2 Section 1402(a)(10) then you’re in an elite crowd. For the rest of us, a plain language book can help. My go-to standard is the 13th Edition of Small Time Operator by Bernard B. Kamoroff, C.P.A. You can get it from Amazon.
The book doesn’t stop at taxes, it walks you through a ton of topics. The thing I like the most is that it just gives you answers. No fluff, no very basic stuff that you can get from your cousin’s friend, just great info.
So, I’ll walk you through in the coming weeks my thoughts on tax structures, deductions and any other strategies I find. My closing thoughts are that you can’t, and shouldn’t, try to beat the IRS. Pay your taxes and be glad you get the opportunity to start a business at all.