ASR Blog

Where Work Ends and Taxes Begin

This is a nutty time of year for everyone. If you've sold a house, collected an inheritance, even won a television from a church raffle, you've got some extra legwork ahead of you as the tax filing deadline approaches. But, what if you're self-employed? Yeah, then you really have your work cut out for you.

If you're a strict record keeper and you've logged your miles in the car, written on the backs of your receipts and documented all expenses--you win. But most of us didn't, and we're sitting here scratching our heads and wondering the following: On the way to a meeting with a client we stopped at the comic book store (for a non-work related excursion). How many of those miles get logged for work and how many don't? In other words, where does work begin and personal stuff end?

Kathleen Ryan O'Connor at FORTUNE Small Business asked tax experts that same thing. And, overall, here's the answer: "There's two ways to look at it," says Grafton Willey, former chair of the National Small Business Association. "There's the technically correct way, and the practical way."

In other words, chill. Log the miles you drove for the business meeting and be done with it. As for computer and business equipment and supplies, there's no way to truly keep records on the amount of time you spent using it for personal reasons as opposed to business reasons. The best approach is to estimate how often you use it for business (say, 60 percent of the time) and deduct accordingly.

Paul Stappas, founder of Bookkeeping Administration Management, agrees: "For example, if the office comprises 12% of your home, then you can deduct 12% of the house expenses, including mortgage interest, house cleaning, repairs, home insurance, etc."

So, there you go. Nothing to worry about. Now, back to filing...

The Small Business Vote

This year is a crucial one for U.S. politics--and bringing small-business issues to the forefront of the elections. Inc.com has an article about a new joint campaign from the Smaller Manufacturers Council Business Councils and the National Small Business Association. The partnership, ''Small Business: 70 Million Strong…and Voting'' will focus more attention on the small business market and raise awareness of small-business issues.

Small businesses employ more than half of the U.S. private workforce and have generated 93.5 percent of the country's net new jobs over the past 15 years, Inc.com reported.

''We want to let people know that the small-business community is a force to be reckoned with,'' said Lee C. Taddonio, the president of SMC Business Councils, according to Inc.com.

~Kimberly Maul

Illegal Immigrants... Striking It Rich

Illegal immigration is a hot topic this year, and it's not just politics. With the economy wheezing along, many Americans are concerned about where the jobs are going and who's taking the jobs we have. But, according to an interesting article in The Washington Post, we may need to quickly change our perception of illegal immigrants and how they affect our economy as a whole.

The common perception of an illegal immigrant? Manual laborers taking low-wage jobs or asking low wages for tasks (construction, farm work) an American citizen might charge more for; hence, the focus on the U.S./Mexican border as an uncontrollable immigration leak. But there are other kinds of illegal immigrants in the U.S. According to The Post:

"There are up to 20,000 illegal immigrants earning upward of $100,000 a year as entrepreneurs, and their existence challenges the stereotype that illegal immigrants are a drain on the U.S. economy."

One 38-year-old Colombian man--a computer programmer who overstayed his visa--founded a Web development company in Miami that specializes in e-commerce. The company employs American citizens, pays taxes and has developed a new platform that could revolutionize the business. However, he will soon be deported under current immigration laws, meaning this new technology will leave the country along with precious jobs.

The U.S. runs a Green Card program for investors, but those immigrants already in the country illegally do not count. In fact, if you're caught in this country and deported, there's a 10-year waiting period to re-enter. And opponents of illegal immigration see no gray area.

"We need to send a strong message to people who would like to come to the U.S. that disrespect for our laws will not lead to prosperity," said William Gheen, president of Americans for Legal Immigration.

But, should we really deport honest businessmen who bring new innovations and high-paying jobs to our country? Maybe we have to. Maybe we can't ever cross that line where we say rich investors can stay but poor laborers have to go.

Taxes: Don't Pay More Than You Have To

It takes a lot of creative thinking to run a small business. And when it comes to taxes, well, you have to really get creative. Not only do many small business owners pay more tax than they have to, but some budding entrepreneurs even delay the launch of their dream enterprise based on a fear of tax liability. I've heard it a hundred times: "I'd love to start my own business or LLC but I hear the government takes half your profits."

While I'm not about to put my hand in the fire for the I.R.S., I will say that the tax system is set up for your business to succeed, not fail.

Gary Barzel at FastUpFront has some great advice on tax planning for your small business. Namely, don't wait until the end of the year to start calculating and paying taxes. And, best advice of all, hire a professional to help you sort through your income, expenses, deductions, etc.

While you're at it, Matt Alderton's article at the ProNet Small Business Resource Center on how to organize your tax documents will make your accountant's job easier and bring you peace of mind.

State of the Union Skirts Small Businesses

Last night was President George W. Bush's last State of the Union address as president of the United States. Regardless of your political leanings, it was a welcome occasion. If you like the guy, you were probably anxious to hear his plans for going out with a bang. If you don't like the guy — and let's be honest, not many folks do these days — you were probably giddy with happiness knowing that this was his last Prime Time TV hurrah.

Either way, you have to admit that W. was pretty feisty last night. He said some smart things, and he said some stupid things, too. Of all the things that he said in his 60-some minutes at the podium, however, I was most interested in what he said about small business — which wasn't much.

Indeed, President Bush nodded to small businesses just three times last night. For those of you who missed it, here's a quick recap of his very brief acknowledgments:

• Regarding tax relief, he said: "Last week, my administration reached agreement with Speaker Pelosi and Republican Leader Boehner on a robust growth package that includes tax relief for individuals and families and incentives for business investment [...] Congress must pass it as soon as possible."

• Regarding health care, he said: "Congress must also expand health savings accounts, create Association Health Plans for small businesses, promote health information technology and confront the epidemic of junk medical lawsuits."

• Finally, regarding energy, he said: "To build a future of energy security, we must trust in the creative genius of American researchers and entrepreneurs and empower them to pioneer a new generation of clean energy technology."

Call me a cynic, but I wasn't impressed. After all, more than 99 percent of American businesses are small, according to the Small Business Administration's Office of Advocacy, which also points out that in our weakening economy, small businesses with fewer than 500 employees are responsible for all — yes, all — of the country's net new jobs.

With such collective importance, I think we small businesses deserve a little more than a few vague nods. It really makes you wonder: Why isn't the government doing more to make small business part of its economic and social agenda?

It ought to be. With that in mind, Mr. Bush, here's my rebuttal to last night's small business talking points:

• Regarding tax relief: While incentives for business investment are welcome, what small businesses really need in the way of tax relief is a self-employment credit. Under the current tax code, entrepreneurs are penalized for being small, as they must pay both the employer and employee portion of their payroll taxes. It's a financial burden that many small businesses struggle to shoulder. If you want to stimulate spending via tax relief, you should re-examine self-employment tax, which in its current form functions as a true disincentive to entrepreneurship and small business spending.

• Regarding health care: We need accessible, affordable health care — and Association Health Plans are not the answer. Sure, they sound nice — as part of an association group, you can negotiate lower health insurance premiums for individual members — but the reality is that AHPs still fall short of coverage that's available in the group insurance market. Indeed, AHPs aren't subject to the same consumer rights and protections as group plans. While group plans are required to charge members the same premium and to keep premiums stable from year to year, AHPs can charge different members and employees dramatically different rates, and they can raise those rates substantially from year to year. What's more, AHPs aren't subject to state regulations that require insurers to cover certain conditions and diseases. Bottom line: Small businesses deserve the same coverage that other Americans enjoy.

• Regarding energy: Entrepreneurs do, indeed, have a lot to offer the country in terms of technology. It's not enough, though, to say that we must "trust" and "empower" those entrepreneurs. We must also give them incentives and protections within the marketplace. More than empty words, we need explicit actions in order to encourage entrepreneurial innovation.

I sincerely hope that as we move toward the general election this fall we hear more about small business issues. They're important, and so are the people to whom they matter.

Is the Stimulus Package Too Little, Too Late?

While pretty much everyone can get excited about the new economic stimulus package hammered out by President Bush and Congress this week, small businesses have something to smile about, too.

The $150 billion package, which includes tax rebates for the lower and middle class, also includes temporary tax breaks for businesses. According to a New York Times article on the deal:

"...companies would be given a 50 percent bonus deduction on new equipment that would normally be depreciated over many years. The incentive, which would cost $42.3 billion in 2008, is intended to encourage spending. The package would also double the limit on expenses, to $250,000 from $125,000, that small business can write off as a deduction from annual income, with a total cap of $800,000. That is expected to cost $1 billion in 2008."

If this nice development caught you by surprise, you're not alone. The President apparently wanted to unveil the agreement during his January 28 State of the Union address, but worsening economic news pushed up the timetable.

Also, of course, there was some partisan wrangling. According to the AP, "a Republican-written provision to allow businesses suffering losses now to reclaim taxes previously paid was dropped.”

For the most part, however, the Executive and Legislative sides are in accord. House Republican Leader John Boehner of Ohio said these breaks "will give businesses incentives to create and build new jobs in our country."

But is this a matter of too little, too late? These promised tax rebate checks are not expected to be released before May, at which point we'll be almost halfway through 2008, when most economic experts believe we'll already be in better shape.

Also, the business tax cuts could lead a majority of states to lose billions in tax revenue because of linkages between federal and state tax codes. Robert Greenstein, executive director of the said that means states will cut services and/or raise taxes and "act as a drag on the economy."

Senate Asks, 'How Small Is Small Biz?'

There's an interesting debate heating up on the Senate floor right now. It's just simmering at the moment, but it could come up to a rolling boil any day now. It involves perhaps the most fundamental question facing federal government when it comes to small business issues, advocacy and programs: How small is small business?

The question comes tied to a bill called the Small Business Venture Capital Act, which is currently up for consideration in the U.S. Senate. Its chief sponsor, Sen. John Kerry (D-Mass.), chairman of the Senate's small business committee, is hoping to bring it up for a vote during the Senate's brief December session. According to a recent article by Fortune Small Business, the bill mirrors a measure that was passed by the House in September that's called the Small Business Investment Expansion Act — with one important exception. Here's the deal:

• Like the House bill, the Senate's version seeks to amend and expand the Small Business Investment Act of 1958 in order to reauthorize that bill's venture capital program through FY2010.

• Under both bills, venture capital-backed start-ups would enjoy access to federal research and development grants, which are doled out to small businesses by the SBA.

• While the House bill includes controversial language that would broaden the definition of small business to include VC-backed companies, the Senate bill does not. The result? If the Senate bill passes, lawmakers could soon be embroiled in a battle over the definition of "small business."

This is actually a pretty big issue. And unfortunately, it's not cut and dry. After all, just because a small business has received some venture capital doesn't mean that it should be forbidden from accessing the country's awesome small business programs. Or does it?

There are folks on both sides of the tug-of-war rope. Venture capitalists argue that some companies, particularly biotech firms with high R&D costs, deserve federal money at the same time that they need VC money. Others, however — including President Bush — have warned that broadening access to small business programs could translate into fewer opportunities for Mom and Pops; if investor-backed companies can count as "small" for the purpose of getting free federal money, they worry that big businesses could begin launching "small" affiliates that would compete with legitimate small businesses for funding.

What kind of funding are we talking about? Well, directly impacted is the SBA's Small Business Investment Company (SBIC) program, which gives equity funding to entrepreneurial companies. Longer term, though, the debate could impact a variety of government programs for small businesses; check out the SBA's Financial Assistance page to get a grasp on the size of that universe (and, while you're at it, to introduce yourself to some new programs that you should be taking advantage of!).

We'll be keeping our eye on the Senate bill this month. Whether it passes or not, though, it gives all of us in the land of small business some gristle to chew on. While you're chewing, consider sharing your thoughts with us here, on The Shop Floor. We're wondering:

• Should VC-backed companies be able to access small business programs?
• Are you accessing these programs?
• How important is government support to the small business community?
• If VC-backing will help you get government assistance, will you be more or less inclined to seek it out?

Stay tuned for more on this one, folks. Our universe might be about to get a whole lot larger, and a heckuva lot more competitive ...

ID Theft Spawns Business Opportunities

According to a study by the research firm Gartner, in 2006 the average financial loss in a case of identity theft was $3,257. Whether that number seems high or low to you, don't forget the lost time calling credit agencies, banks and other organizations to sort through the mess.

How valuable would it be to find a service that prevents this kind of thing from ever happening in the first place? A new article in The New York Times looks into the new crop of businesses that can help monitor your credit. For about $10 per month, several companies like Debix, LifeLock and TrustedId claim they can help consumers to protect themselves from the major inconvenience of identity theft.

“We take a miserable and painfully confusing process and make it as easy as we can, given the constraints the credit agencies put on us,” said Scott Mitic, chief executive of TrustedID, a company that sets fraud alerts and freezes credit lines on request.

Debix, which claims to have signed more than 200,000 members, will call you when someone opens a line of credit in your name.

Thanks to these businesses, maybe Identity Theft will become a thing of the past.

Time to Get an Accountant ...

I've done my own taxes since I was 16 years old. I hate numbers and I'm terrible at math, but every year I hunker down and I figure it all out. I make myself. It was easy enough when I was a student. I loved the 1040EZ. I'm a fan of anything that can accomplish in a one-page form what typically takes an entire stack of paper to do.

Things got a little harder, though, when I finally had to abandon my good ol' EZ for a straight 1040. But still, I managed. I didn't even jump the do-it-yourself ship several years ago when I had to start doing a Schedule C for my freelance business income. Thanks to TurboTax, I came, I calculated and I conquered.

This year, though, things are different. My business used to be a strictly nights-and-weekends affair. I was paying plenty of taxes in my 9 to 5, after all, and I wasn't making enough on the side to really complicate my relationship with the IRS. This year, however, I'm finally a full-time business owner, and my bank account is bubbling over with green-colored happiness because not a single cent of my income has been taxed — yet.

Come January, though, I expect to be flooded with 1099s, 1098s — 1090-everythings, really. It's not going to be pretty. I've been paying quarterly taxes, but I don't trust myself. It's all too confusing for my left brain to figure out. So, finally, I raised my white flag yesterday in economic surrender. I met with an accountant.

I know. An accountant is a crucial partner in all business ventures. I've told folks that many times. But now, I plan to practice what I preach. I'm a believer. My new accountant was fantastic. In just 30 minutes she helped me figure out my estimated quarterly tax payments — don't forget, the next deadline is Sept. 15 — gave me a quick lesson in deductions and bookkeeping, and briefed me on the pros and cons of incorporating my business prior to next year's tax season.

Last week, I was terrified by my taxes. This week, I feel much better.

Check out my article here on choosing a small business accountant. I should have taken my own advice sooner.