We are coming to the end of the time period for availability of ARRA (Recovery Act) loans for small businesses; the SBA says these loans are "in transition."  This means that the program ends officially at the end of this month, but there may still be some loans available or loans may become available as businesses drop out of the program.  The SBA says:

as of November 23, 2009 SBA is providing for a transition period where applications for new loans may be submitted either: (1) as Recovery Act loans, which will mean being placed in a queue to await the potential availability of Recovery Act funding or may not be funded at all; or (2) as non-Recovery Act loans, which will be funded as soon as approved, but which will not be eligible for fee relief under section 501 or the increased guaranty under section 502 of the Recovery Act.

Check the Queue Page
To check on the availability of Recovery Act loans, go to the "Recovery Queue" page on the SBA website.  Today, for example, your chances of getting a Recovery Act loan are "moderate," whatever that means.

Which Loan Type Should You Choose?
It is difficult to tell whether any Recovery Act loan guarantees will become  available.  If you apply for a Recovery Act loan, you will be put into a queue to wait for a possible opening.  But you can't get a traditional loan guarantee from this queue, so you might want to just go for a traditional loan guarantee.  It depends on your willingness to wait for a possible Recovery Act loan or just get the traditional loan.   Talk to your lender for more information, or, better yet, go directly to your local SBA office for the most up-to-date information on these special loans.

For More Information
Recovery Act Loans/Emergency Loans

I am a big fan of financial adviser Dave Ramsey, and I watch his show on Fox Business. The other day, several viewers told Dave that they were accumulating money from their work - cake baking, photography, and teaching piano. That's great, but I didn't hear any of these people acknowledging that this income is from a small business and that they were paying taxes on the income from the business.

Take the Money, Pay the Taxes
If you take money from other people for your products or services, you are in business. That means you must pay the taxes on that income. You can't just take the money and deposit it in your savings account. At the minimum, you must pay:

• Income tax (federal, state, local) on your net income on the business, after all legitimate business expenses have been deducted
• Sales tax on sales in your state
• Property taxes on any property owned by your business, and, of course
• Self-employment taxes (Social Security/Medicare) on your net income.

The Good News: Business Expenses are Deductible
Yes, you can deduct any legitimate expenses associated with your business, including home business expenses. You can deduct costs for many expenses, advertising, brochures, travel to sell your products, and for work done by independent contractors or employees. Just be sure these expenses are legitimate.

Sole Proprietor by Default
If you have not designated a specific legal form for your business (a limited liability company or corporation, for example), you are a sole proprietor.  You must file income taxes on Schedule C as part of your personal tax return.

So, if you are working at home or elsewhere and you will end the year with positive net income, talk to your tax adviser and register with taxing authorities. Then start paying all your business taxes when they are due.

For More Information
All the Taxes Your Business Must Pay

Home Business Tax Deductions

How a Sole Proprietor Pays Income Tax

Does your business provide special benefits or "perks" to executives?  Do you know if these benefits are deductible?  Do you know if they are considered taxable compensation to the employee?  I reviewed a list of these benefits from the IRS and put together a brief outline to give you an idea of which of these benefits you can deduct and which you must include on the employee tax returns.

General Rule for Evaluating Executive Benefits
In general, if you can show a specific ordinary and necessary business purpose for the benefit, or if you give the benefit to all employees, it is likely that you can deduct it.  But the IRS narrowly limits the terms "ordinary and necessary," so you shouldn't try to get too creative with it.  Also, most benefits are taxable as income to employees, even executives.  When in doubt, assume it is taxable, or check with your tax adviser.

Some Sample Executive Benefits

Boxes at sporting events: Only the cost of a typical seat at the event can be deducted. If the box is purchased for benefit of an executive, its cost is taxable to the person.  You can deduct other costs (catering, for example) as entertainment, subject to limits on this expense.

Club memberships/dues. These memberships are never deductible, unless the specific business purpose can be shown.  For example, if you want executives to join a trade organization associated with your business, that might be deductible.  Golf, airline, and country club memberships are not deductible.

Company credit cards.  If you give executives a credit card which they can use for personal expenses, those expenses are not deductible to your business, and they are taxable to the employee.

Life insurance for spouse/dependents. There is no business purpose for this insurance, so you cannot deduct the cost, and it is considered taxable income to the employee.

Travel with an Executive. Some executives like their spouses (and children) to accompany them on trips, but unless you can prove a business purpose for the travel expenses of a spouse/dependent/other individual, you can't deduct these as business expenses.

Financial Planning/Wealth Management Services vs. Retirement Planning. If you provide services to executives to help them with manage their wealth, this is not a deductible expense to you and the cost is probably taxable to the employee.  On the other hand, if you have a qualified retirement plan for employees, you can deduct the cost of bringing in retirement planners, as long as they talk to everyone, not just the executives.

You get the idea.  Business purpose=deductible to you as a business expense.  And most of these benefits must be included in the income of the executive.

Disclaimer: I am not an attorney or CPA and I am not giving tax advice. This article is intended to give you an overview of this subject so you can do more research or talk to your tax adviser.

For More Information
More on Executive Non-cash Benefits

IRS Information on Executive Non-cash Benefits

This is another in my continuing saga of "It's Not Nice to Fool the IRS."  If health reform ever becomes law, several provisions in the bill could affect you as a small business owner.  One of these relates to making employers pay for health insurance for all employees (or paying a fine), for employers with more than 25 employees.  I am sure many small business owners will try to keep the number of employees down to fewer than 25 so as to fall under the radar on this.  But be careful how you classify workers just to get around this provision.

Employee? Independent Contractor?
You can't just call a worker an "independent contractor" to avoid having that person counted as one of your 25 employees.  The IRS and state employment agencies can audit you, determine that your workers are employees, not independent contractors, and impose fines and penalties on you.  By the way, the IRS assumes that workers are employees unless you can show that they are independent.

It's All About Control and Relationship
The way the IRS looks at independent contractor vs. employee issues relates to the degree of control you have over these individuals.  The IRS considers several kinds of control and the nature of the relationship:

• Financial control - whether you have a right to control the financial and business aspects of a worker's job
• Behavioral control - whether you have a right to control the work being done, through training, instruction, and other means
• Relationship - how the worker and the employer perceive the relationship.

Contracts are Not Controlling
Don't assume that because you have a contract with a worker, that makes him or her an independent contractor.  Yes, the IRS looks at the contract, but the other factors may outweigh the document.

What you CAN do
You can hire outside contractors for services that are not essential to your business.  For example, you could hire maintenance workers or a cleaning service, or you could turn your IT functions over to an outside service.  These are perfectly legitimate kinds of independent contractors, and note that they are often other businesses, not just individuals.  Just be careful to avoid the control issues mentioned above.

If you are starting to think about the "25 employee" limit to avoid the health care issue, just be sure you are making the decision of what to call a worker based on the true nature of the work.  If you aren't sure what to do, you can contact an employment attorney or you can ask the IRS for a determination (on IRS Form SS-8).

For More Information:
The IRS on Employees vs. Independent Contractors
What's the Difference Between an Employee and an Independent Contractor?