Learn about tax issues that might be relevant for those who can’t afford a 25-person tax team. Look at three common tax issues for small businesses. The key takeaways are good record keeping and ensuring deductible business expenses are ordinary and necessary.
- Let's discuss common tax issues for small businesses. Now why our focus on small businesses? Well they're a lot of small businesses out there. For example, in 2018 the U.S. small business administration reported that there were 30.2 million small businesses in the United States. They define a small business as one with fewer than 500 employees. Now the vast majority of these small businesses have no employees at all, just the sole proprietor. just the sole proprietor. We also focus on small businesses We also focus on small businesses because large businesses can afford to hire professionals to hire professionalsto deal with tax issues.
to deal with tax issues. For example, Berkshire Hathaway, Warren Buffett's company, employs 25 women and men who prepare a 32,700 page, U.S. federal tax return, they did that in 2017, They did that in 2017, plusstate and non-US tax returns. plus state and non U.S. tax returns. We're going to talk about tax issues that might that might be relevantfor those who can't afford be relevant for those who can't afford a 25 person tax team. First, it's important that one maintain good records. Remember that the burden of proof is on you, not on the taxing authorities.
When it comes to mileage for the business use of your car or the cost of business meals, keep track of things, write things down. It might be useful to buy some simple bookkeeping software. Develop an organized system for tracking receipts, travel itineraries, boarding passes, and so forth. For example, I travel many times for business. For example, I travelmany times for business. I've learned to keep a copy of every scrap of paper that accumulates during a trip. Boarding passes, the hotel receipt, restaurant receipts, rental care receipts and so forth.
I put these in a folder when I return home at the end of a trip. Should I ever need to produce documents to support to support my business expenses, my business expenses. I have a folder for each trip. Not a very complicated system, but it works. So, issue number one, maintain good records. Second issue, don't be tempted to hide income. An easy way to get in big trouble with taxing authorities is to try to hide income. Remember, just because something is not traceable, doesn't mean it's not taxable. Some clever, small business owners do cash only deals and then never enter that income into their system.
Remember there's a term for that, it's called tax evasion. It's call tax evasion, it's a crime. It's a crime. Also remember that a citizen of the United States pays taxes on all income wherever in the world it's earned. wherever in the world it's earned. For example, I'm paid for teaching business executives For example, I'm paid forteaching business executives each year in business schools in Russia, China, and Hong Kong. The only way that the U.S. taxing authority, the IRS, knows about this income is that I voluntarily report it. Now, why do I voluntarily increase my taxes by reporting this foreign income? Well, there are three reasons.
First, our mother taught us to be ethical. First, our mother taught us to be ethical. Second, I know that the IRS has sophisticated methods of analyzing bank deposits and spending patterns to detect hidden income. And third, I know that the U.S. Treasury Department requires me to report the existence of any foreign bank accounts holding holding more than $10,000 US dollars. more than 10,000 U.S. dollars. By the way, failure to do this results results in a possible prison sentence in a possible prison sentence of up to five years of up to five yearsand a fine of $100,000. and a fine of $100,000.
So, issue number two, don't be tempted to hide income. Next, remember that deductible business expenses must be ordinary and necessary. So, don't overcompensate family member employees, don't overpay for goods or services purchased purchased from related parties, from related parties, don't deduct personal expenses as business expenses. Consider this non-hypothetical example. A few years ago, a person asked me to look over his income tax return.
This person had received a notice of an upcoming audit of an upcoming audit by the IRS. by the IRS. Oh boy. Well this person's small business had revenues of $500 had revenues of $500and expenses of $15,000. and expenses (laughs) of $15,000. His business, it turns out, was taking his friends camping. was taking his friends camping. They reimbursed some of his expenses. That's the $500 in revenue. For expenses, he wrote off the cost of his truck and all of his camping gear. Now what was wrong here? Well, this wasn't really a business, this was just friends going camping, and the IRS audit delivered that message.
And the IRS audit delivered that message. Remember, deductible business expenses must must be ordinary andnecessary to a business. be ordinary and necessary to a business.
NOTE: The information in this course applies only to the United States.
- Comparing different types of taxes
- Tax brackets and tax rates
- Income, deductions, and credits
- Tax loopholes and tax policy
- Completing Form 1040
- Filing taxes online
- Tax planning
- Corporate income taxes
- Common tax issues for small businesses
- Small business taxes