Tax Compliance 101 for Small Businesses

Running a small business is a huge undertaking. Owners must oversee every aspect of the operation including: networking, sales, administrative operations, servicing, and fiscal management as well as all other necessary tasks. Come tax time, the IRS shouldn't have to be the bad guy. Both you and the IRS can be on the same page.

Keep Timely, Complete and Accurate Records

When operating a small business, it's imperative to record everything associated with your day-to-day operations. Your records should be a thorough accounting of all income and expenditures. The IRS recommends that you retain financial data for a minimum of seven years. Microsoft Excel spreadsheets serve as an adequate means of record-keeping. It's important for small businesses to record income and expense entries promptly. It is recommended to the business owner that this be done on a weekly basis. It's also important to record travel and business trip expenses as they are deductible. Also, don't forget about cash expenditures . these often go unrecorded and are ultimately forgotten. Try to maintain associated receipts, as well. Not having an actual receipt that can give you details about charges and cash payments can result in incorrectly reported earnings and present problems, should an audit arise.

File All Necessary IRS Forms

The IRS needs to review completed copies of all forms obtained through their agency. Read and follow the instructions carefully as you complete this exercise. Be sure to provide all the information the IRS is seeking.

The IRS defines a calendar year as we do: 12 consecutive months beginning on January 1st and concluding on December 31st.

A fiscal tax is defined as any 12 consecutive months, ending on the last day of the 12th month as long as that 12th month is not December.

Any 52-53 week tax year is defined as a fiscal tax year. However in such cases, the conclusion of the fiscal year is not required to be on the last day of the month. This situation is not a reason to maintain your records yearly. You should continue to keep weekly records and file the appropriate quarterly or yearly tax reports.

The IRS And Your Income

Your accountant's expertise is one way to ensure that your figures are an exact match to those that appear on your annual 1099M or W2 forms. An accurate Schedule K1 is also important. The Schedule K1 represents a tax document used to report the incomes, losses and/or dividends of any business's partners or of an "S" Corporation's shareholders. Actually, it is not a financial profile of an entire group. A Schedule K-1 document must be prepared for each individual partner or shareholder. In cases of "S" Corporations, IRS Form 1120S must also be completed, while IRS Form 1065 is required for a partnership. It's an undeniable fact that a disproportionate number of cash based businesses tend to be audited. Therefore, if you are a cash based entity, anything above $10,000 must be listed on IRS Form 8300. Any expenses associated with homes, cars, dinners and/or vacations should be valid.

Be Accurate When Assessing An Independent Contractor

Well defined contracts are always important from a legal perspective. Small businesses should also maintain a signed contract for all freelance workers. This recommendation comes directly from the National Association of Accountants. Each worker who does not appear on your payroll, should have proof of a signed contract and the issuance of an annual IRS Form 1099. Freelancers should know that they are required to report any income exceeding $600 per annum.

Never Combine Personal Deductions With Business Deductions

Ideally, Lawyers, Accountants and the IRS will recommend that any purchases (computers, printers, cameras, desks, chairs, even paper products) you have written-off as part of your business expenses, be photographed. If you own a "business vehicle", you should record the mileage used for business purposes. It's fine to take the family along on a business trip, as long as you only deduct the expenses associated with doing business.

Using Ratio Analysis

Often defined as the foundation of fundamental analysis, Ratio Analysis represents a quantitative breakdown of the data listed on the business's financial statements. Based on line items in documents such as: Income Statements, Balance Sheets, and Cash Flow Statements, the ratio of one item, or a combination of items to another item or a combination of items are then computed. Comparing one business to another similar business(s) is an acceptable way to substantiate information, support credibility, identify trends, and indicate stability over the years. Ratio Analysis is always helpful to manage and ensure your compliance.

This article has provided information to assist small businesses to develop sound fiscal recording and reporting systems. We hope you have found it helpful.


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Sandra Riker, PSJ Business Solutions Sandra Riker is the Founder and Chief Accountant for PSJ Business Solutions. PSJ Business Solutions provides accounting and bookkeeping services to clients throughout the United States. At PSJ Business Solutions our primary goal is "Accounting For Your Best Interest". http://www.psjbusinesssolutions.com