Chances are you got into owning your own small business the same way I did. I was working for another accounting firm whose clients liked me and really hated my boss. And because I knew how to do accounting and tax, I started my own business and never looked back. I have been in business for more than thirty years. I have seen my share of clients go out of business. But I have also seen my share of clients succeed at self employment. I have one client who has been with me since the beginning in 1982. She is special.
There are many reasons people start their own business. Unemployment is one reason. Early retirement and a weak employment market has forced many people who never dreamed of owning their own business into self employment. However, the principal reason people seem to start their own business is because they know how to do it. Thus the accountant starts a tax business, the carpenter starts a construction firm, or the cook opens a restaurant.
We all seem to suffering from the same misbelief. Knowing how to do what your business does is the key to success. When in fact nothing can be farther from the truth. In fact some small business consultants preach that the fact that you do know how to do it is the least important factor in making a small business successful and profitable.
How do I know that?
According to the United States Census figures 85 percent of small business start ups will fail in the first year. And 50 percent of the survivors will fail after the fifth year. Even after ten years 33 percent of the small businesses will fail after The numbers are stunning. If you have lasted more than five years, congratulations you are a survivor. And if you have been in business for more than ten years you are a masochist. Just kidding.
Granted this survey included many small businesses that really are not what I would consider startups. Many are people looking to supplement their income from what I call network or multi level marketing companies. You know what I mean. They are designed to sell products through a party. Amway, Avon, Mary Kay, Herbalife and the like come to mind. Traditionally the turnover of new “small business owners” can equal 100 percent for some of these companies. At one time Amway focused more on the tax benefits of being a small business owner than on the profit from selling its products. This focus raised the wrath of the IRS caused many audits and almost decimated their selling force back the1980’s.
During the next few months I will be writing to you about the things that I believe these long lasting small businesses are doing to survive.
One thing that seems to be universal to success is following the rules. Not paying attention to the details will really come to haunt you in the future. Back in July 2012 I wrote:
“If you want to claim the benefits of a corporation, you've got to actually use the corporation for business, not just pass funds through the corporate bank account. In one case the Tax Court disregarded the taxpayer's corporation, finding it to be a sham. The corporation observed none of the formalities of a corporate entity such as shareholder meetings, issuing stock certificates, invoices were not made out in the corporate name, etc. The Tax Court attributed all the income to the taxpayer. There can be non tax consequences too. To be sure you don't make the same mistake, we suggest you should talk to us your trusted tax adviser. We have available at no charge to active clients, all the boilerplate templates you need to keep your corporation in compliance. All you have to do is ask.
Following up on last months suggestion that you should be taking a look at your recordkeeping, I found the case John H. Schoppe (T.C. Memo. 2012-153) in which the Tax Court found the taxpayer's records were inadequate to substantiate claimed deductions. The taxpayer kept track of his daily expenses on a calendar, but with only vague notations of the amounts and payees. Auto mileage records did not include the business purpose. At trial, the calendars were not offered into evidence and witnesses the taxpayer claimed could substantiate commissions paid, were not called. The Court also noted it had no reasonable basis for applying the Cohan rule. The Court sided with the IRS in disallowing the deductions. What is the best way to beat the IRS? Keep good ironclad records.”
I learned something. I recently represented a client who being audited by the Illinois Department of Labor in a wage/overtime dispute. If you are paying a salary to an employee that it is under $450.00 per week, you are required by law to have that employee keep time records. Even if that employee is not being paid by the hour. And this has been the law for more than 14 years.
For the next few months I will be focusing on the upcoming implementation of Obamacare.
This month I am passing on an excerpt from CNN Money article about the subject authored by Jose Paglieri that makes the point that most small businesses will be not be affected by the law’s mandate to cover their employees....
It's been uttered by every opponent of health care reform: Obamacare will kill small businesses.
But the new law's rules don't apply to the vast majority of small businesses. The employer mandate, which forces firms to start providing insurance in 2014, pertains only to companies with at least 50 full-time workers. That's a tiny fraction of small businesses.
As of 2010, there were roughly 5.7 million small employers, defined as those with fewer than 500 workers. Some 97% of them have fewer than 50 employees. That means Obamacare's employer mandate applies only to 3% of America's small businesses.
That's about 200,000 companies.
The critics aren't convinced: "Small businesses don't have staff with the time and expertise to deal with the new system. It's a huge drain on these smaller firms," wrote U.S. Rep. Sam Graves (R-Mo.), House Small Business Committee chair, in a recent editorial for The Washington Times.
Why so much focus on so few firms? A Graves spokesman said the affected businesses include fast-growing "gazelle" firms, the startups that contribute a disproportionate amount of the nation's new jobs.
"The more money these companies have to spend complying with health care mandates, the less they have to hire and expand," the spokesman said.
Those costs aren't anything to laugh at. If they don't provide insurance, businesses with 50-plus workers face $40,000 in penalties and $2,000 for each additional full-time employee.
However, nearly all of those businesses already do provide insurance: 96% of those with 50-plus workers currently offer health plans anyway, according to government data.
That most businesses affected by the mandate already provide insurance doesn't necessarily mean their insurance is good enough or sufficiently cheap under new Obamacare rules. That's the counterpoint made by U.S. Senator John Barrasso, a Republican from Wyoming.
"The mandates are for a lot more coverage than the average person would want, need or can afford. The business is going to have to spend time, money and have to figure that out," Barrasso said.
For example, firms might be providing insurance that Obamacare deems unaffordable -- that is, if it costs more than 9.5% of a worker's income. But there are signs that most plans out there qualify under Obamacare's other requirement. More than 99% of those in work-sponsored plans have insurance that meets most Obamacare coverage standards, according to last year's study by NORC at the University of Chicago.
Putting it all together, the data shows that only a tiny sliver of the nation's small businesses face the new rules -- and even fewer face any changes. Of the country's 6.5 million workplaces, only 1% must actually start providing insurance next year.
And this just in...
“Today, the IRS is an institution in crisis. In my view, however, the real crisis is not the one generating headlines. The real crisis facing the IRS – and therefore taxpayers – is a radically transformed mission coupled with inadequate funding to accomplish that mission. As a consequence of this crisis, the IRS gives limited consideration to taxpayer rights or fundamental tax administration principles as it struggles to get its job done.”
- Nina Olson, National Taxpayer Advocate writing in her June 30, 2013 report to Congress about the IRS.
I guess I was too optimistic about getting our re-designed small business website including a podcast will be up and going this month. We are still working on it and hopefully sometime in July it will be up and running. Cross your fingers.
The Illinois Department of Revenue has mandated that tax preparers now must electronically file and electronically pay virtually all payroll and sales tax returns starting July 1, 2013. This means that everyone who is now paying by check and filing paper returns will no longer have that opportunity. Considering the continued issues the Department has had processing returns these days it may not be a bad thing.
The IRS Nationwide Tax Forums for tax preparers are back with a new format....last year they were geared toward the now found illegal registered tax preparer designation program and since I already carry a Treasury Card and was not affected by the program I chose to skip...they have pretty much mandated that your tax guy attend. I chose the New Orleans location and will be attending in August. Not exactly the best month to visit New Orleans but it is the sacrifice I will have to make. The seminar overlaps with the sales tax due date so we will be asking your cooperation in getting your information to us a little sooner than before. Thank you.
Our staffed office hours have changed. We are open weekdays with a much earlier closing time this based more on work flow than the clock. We are still available to meet with you evenings and weekends. The only thing we ask is that you call us for an appointment.
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