Is your business under water? If you are considering bankruptcy, you may be wondering how you can get out of bankruptcy. It's easier than you think.
Emerging from bankruptcy (sounds a little like coming out of hibernation) is possible, but it depends on the type of bankruptcy filing. A liquidation filing (Chapter 7) means that the business assets are sold and the business is closed, while a reorganization (Chapter 11) means that the business can keep operating under the watchful eye of a trustee.The Tavern on the Green bankruptcy was of the Chapter 11 variety.
Interesting fact: According to the U.S. Bankruptcy Court, chapter 7 filings are by far the most common type. In 2013, for example, there were 728,833 business Chapter 7 filings and only 8,980 business Chapter 11 filings.
The short answer to the question of how to emerge from business bankruptcy is that you just follow the process laid out by the court and you end up with a discharge, meaning that everything has been done, all available assets have been sold and all creditors paid off as much as possible. Then, the Court issues a discharge and all other debts are wiped out.
Even in a liquidation bankruptcy it may be possible to re-start the business or sell the business name and let someone else restart.
Read more: How to Come Back from a Business Bankruptcy
Image: Henrik Sorensen/Iconica/Getty Images
Knowing which business expenses are deductible and which are not can help you make sound financial decisions. I'm not saying every financial decision should be make based on its tax benefits, but taxes are certainly a point to be considered. With that in mid, here are some business expenses you CANNOT deduct (with help from Small Business Trends):
1. Business Loan Principal. You can deduct the interest on a loan but not the amount borrowed. But, if you use the loan to buy equipment or vehicles, or other capital improvements, you can depreciate the cost, by deducting the expense over the useful life of the item.
2. Fines, penalties, taxes, interest on overdue taxes. None of these are deductible as business expenses.
3. Political contributions and dues to social clubs or organizations. You can deduct contributions to IRS-approved charities, and you can deduct business-related organization costs, like professional organizations or the chamber of commerce.
4. Commuting costs. Driving back and forth to your business isn't a legitimate business expense.
5. Home office space, unless you can prove that you used this space both REGULARLY and EXCLUSIVELY for business purposes. Read more about deducting home office expenses.
6. Expensive business gifts. You can't give anyone - employees, customers, vendors - gifts that exceed $25 to any one individual during any tax year. The only exception is low cost items like pens, penlights, mugs, and plastic bags. The items must cost $4 or less and be produced in bulk.
A reminder: You can't deduct an expense if you didn't spend the money. AND you can't deduct expenses you can't prove you made. Deducting expenses - and lowering your business taxes - depends on good records. No records, no deductions.
Customers in Florida will now be paying more to buy from Amazon. Effective May 1, Amazon will be charging 7% sales tax to Florida customers. This change is due to two new fulfillment centers in the state, not to an online sales tax law. But predictions are that Amazon's sales will be affected by this tax.
households reduced their spending on Amazon by about 10 percent compared to those in states that don't have the levy. For online purchases of more than $300, sales fell by 24 percent, according to the report titled "The Amazon Tax."
As I've reported before, more and more states have been enacting legislation to attempt to capture sales taxes for online transactions. In most states, sales tax is charged to customers of larger sellers, like Amazon, and smaller businesses are often exempt. Amazon says it charges sales tax in 20 states, including Florida.
Congress has made several attempts to enact a federal law mandating sales taxes for online transactions. The most recent, the Marketplace Fairness Act, has been stalled for over a year, with little chance of being acted upon before the midterm elections.
For now, as Amazon moves fulfillment centers into more states, and additional states consider online sales taxes, the pace of change will be slow. If the Marketplace Fairness Act is turned into law, everything could change - quickly. And if Ohio State University's findings extend to other large online sellers, many online businesses could be in jeopardy.
Arbitration clauses in business contracts with consumers have become more and more common. I have noticed them in contracts with a variety of businesses lately. A few recent additions to the forced arbitration list: Dropbox, PayPal, and Instagram.
The reasoning behind these arbitration agreements by businesses has been that they save time and money for both parties. The consumer must agree to the arbitration or the business will not agree to the contract.
Even businesses dealing with larger businesses are affected. In 2013, the U.S. Supreme Court ruled that "a group of merchants was bound by an arbitration agreement that prohibits them from bringing class action claims against American Express, even if the cost of arbitrating antitrust claims on an individual basis is prohibitive."
Consumers have been fighting back. In 2012, customers petitioned Starbucks to removed forced arbitration from its gift card terms of service, and, more recently, General Mills (as reported in the Christian Science Monitor) recently abandoned a forced arbitration clause, after a "flurry of negative press," primarily on Facebook, General Mills abandoned the arbitration clause.
Congress has made several attempts to even the playing field on arbitration with legislation, like the Arbitration Fairness Act of 2013, which "[d]eclares that no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of an employment, consumer, antitrust, or civil rights dispute." Congress has not acted on this legislation.
For more information, this 2009 article by the National Association of Attorneys General lays out the issues.
More on issues involved in Mandatory/Forced Arbitration
Barter has been around since the beginning of human interaction. But it's only been a few generations since the concept of taxing barter transactions has come into being. The IRS wants to cut the Tax Gap so they want to know about how much income you generate from barter.
What is barter?
Barter is a non-cash exchange of products or services between businesses. In other words, it's "you do this for me, and I'll do that for you." Barter is a legitimate way to do business, saving both parties money while giving each of them valuable services or products.
Before You Enter Into a Barter Relationship, consider:
- Barter transactions are income to one party, an expense to the other. And vice versa. Both parties must report both the expense and the income. Bonnie Lee, on Fox Business, says both parties must agree on a value for the trade, even if it's an even exchange. Report the value as sales and the offset [expense] accordingly.
- Tax Implications. While barter is a legal way to do business, barter is considered taxable by the IRS.
- Barter transactions may affect other taxes, including self-employment taxes, employment taxes, excise taxes, and state sales taxes. For example, a bartered item still includes the same sales tax liability as if the item were sold to a paying customer.
- Reporting barter transactions. You must report barter transactions annually on Form 1099-B, along with other 1099 forms, both to the recipient and the IRS.
- Keep good records on barter transactions. The requirement to keep good records is just as important for barter transactions as for other business transactions. Record the income from each transaction, including date, amount (fair market value) and what it was for. Also record your expense for the transaction, along with the same information.
- Consider a barter exchange. If you like bartering, you can join a barter exchange . to keep track of transactions and generate sales.
Read more from Bonnie Lee at Fox Business on Tax Rules for Bartering.
Barter is an excellent way to save on costs during start-up and to help you get referrals from other business owners. Just be sure you treat barter as you would any other business transaction.
For More Information
Teenagers make great business owners. They are enthusiastic and hard working and smart! In a search for information about children starting businesses I ran across Carol Topp, a CPA who writes about teenagers in business.
I asked her some questions about teen micro businesses, about the best kinds of businesses for teens to start, the best business legal form, and, of course, taxes.
So what's a "micro business" and why is it a good business for teens? Carol says:
A micro business is a very small business with only one worker--the owner. No employees and no partners so the owner does everything and learns a lot. A micro business is usually easy to start and easy to shut down; it's home based and uses what the owner already owns or knows. Micro businesses are ideal for teenagers because they are usually very flexible and manageable for a busy student.
Carol recommends that teens start service-based businesses, as sole proprietors. She discourages teens from hiring employees (who wants to fire a friend?!) or selling products, to avoid inventory and sales tax issues.
Read more about Teen Micro Business Owners, including income taxes and self-employment taxes, and doing business with minors.
Carol Topp, CPA, is an accountant and author of the Micro Business for Teens book series. She enjoys encouraging teenagers to start their own micro businesses. Her goal is to make taxes and accounting easy to understand via her website, books, videos, and podcasts. Visit MicroBusinessForTeens.com for micro business ideas and tips.
photo courtesy Carol Topp
Some tips for hiring teenagers to help in your business this summer:
Check federal laws on hours and pay. If you are hiring younger workers (under 18), the U.S. Department of Labor and your state have restrictions on the hours they can work and the types of work they can perform. For example, workers under 18 can't use knives, saws, or other sharp implements. They may be restricted in the hours per week and time of day they can work, depending on their age.The Department of Labor's YouthRules! section has lots of information, including this quick fact sheet.
Don't forget state laws. State laws may be more stringent than federal laws on work hours and types of work. Check with your state's employment office for more information.
Pay the same as other workers. Minimum wage laws apply to younger workers, with one exception: A minimum wage of not less than $4.25 may be paid to employees under the age of 20 for their first 90 consecutive calendar days of employment, as long as their work does not displace other workers.
Set up a separate employee category and keep track of hours. You don't have to pay benefits to young workers. You also don't have to give them time off. As hourly employees, they just get paid for the time they work. If a summer worker (including a teenager) meets the requirements for any benefits, they must receive these benefits, so keep good records on how many hours the employee works.
In general, summer workers and youth workers should receive the same consideration as other employees in your company, but there are restrictions on work hours and tasks for teens.
Image: Getty Images
Am I self-employed? Why does it matter? It matters how you see yourself and how you act. Why does it matter? For the taxes, of course.
Here's what I mean:
If you sell anything (products or services) to anyone, you are self-employed (unless you are the owner of a corporation), and that means you must pay business taxes.
- If you mow lawns for money,
- If you sell produce or crafts at a flea market or farmer's market
- If you sell your freelance creative services over the internet
- If you are an independent contractor, working for someone, and you are not considered an employee
Anyone who sells a product or service to anyone - and receives money in any form from those sales - is self-employed. If you are registered with your state as an LLC or partnership, you are self-employed. The only exception is this: If you are the owner or shareholder of a corporation, and you work in the corporation, you are considered an employee, not self-employed.
Being self-employed means you must report the income from that self-employment, for federal and state income tax filing. If you receive a 1099-MISC form from a business or individual showing your income from self-employment, you must report it. Even if you don't receive a 1099-MISC for that income, you must still report it. Even if that income is from barter (I discussed this recently), you must report it.
Being self-employed means you must collect, report, and pay sales taxes on taxable products and services. Even if you sell those products or services online, you must comply with the online sales tax requirements of your state.
Being self-employed means you must pay Social Security and Medicare taxes on your net income from being self-employed. This self-employment tax is calculated on the profit (income minus expenses) from your business.
Being self-employed may mean you have employees who work for you. But you may also work alone. Being self-employed means you are running a business, being taxed on the profits of that business.
Payroll taxes, as I always say, are complicated and tricky. Add to that the oversight of the IRS and state taxing authorities, and it's not surprising that many businesses make mistakes. Barbara Weltman, writing for the Small Business Administration, has a new article on common payroll tax mistakes and how to avoid them. I have combined my own suggestions with hers:
1. Mis-classifying workers. This is top on the list to get you an IRS audit. Mis-classifying means classifying workers as independent contractors when they should be considered as employees. Employees (and employers) must pay FICA taxes (Social Security and Medicare), while an employer of an independent worker doesn't have to pay this tax (the independent pays the whole thing). If you aren't sure which is which, check out this article on Independent Contractors vs. Employees.
2. Poor payroll record keeping. You are required to get and keep payroll records for each employee. This includes all new hire paperwork like a W-4 for income tax withholding and I-9 forms to verify work eligibility. You must also keep records on every paycheck, withholding, and deductions. All records must be available to an auditor, like the IRS. Read more about requirements for payroll records.
3. Not paying payroll taxes to the IRS, or, as Barbara puts it "choosing to pay creditors before the IRS." Not even illness, surgery, pregnancy, or family troubles can absolve you from payroll tax payments, as a recent Tax Court case (T.C. Memo 2014-13) shows. Set aside the money for payroll taxes and other trust fund taxes like sales taxes so you can make the payments on time.
4. Forgetting about state payroll taxes. Most states have income taxes, and you must report employee pay and send withholding to your state's taxing authority. States also have unemployment taxes and worker's compensation funds you as an employer must pay into, to provide benefits for employees.
5. Not setting up a good payroll system, and then not monitoring it. Some employers prefer to let a payroll firm do the work, but you (the business owner/employer) are still responsible to make sure everything is done correctly. Doing it yourself is risky - you don't have the time or expertise. Consider these options for payroll processing and then implement your system.
Use the syllabus for my Online Course on Payroll and Payroll Taxes to help you understand the terminology and requirements to process payroll and collect, report, and pay payroll taxes.
The owner of a carpet cleaning business reported business use on 9 vehicles. He admitted he used the vehicles sometimes for personal use, but all he had to prove business use was a handwritten summary, with no receipts. The IRS denied his claim for 75% business use for 4 vehicles. The Tax Court was willing to give the business owner some business expenses for these vehicles, but he had no acceptable evidence to support his claim. So no deduction for business use.
Points to note:
- The burden of proof is on the taxpayer.
- The default is no deduction for business use.
- You don't have to prove personal use, just business use.
- The proof is a contemporaneous (at the time) log, or other evidence created, according to the Tax Court, "at or near the time of use."
- You can't deduct commuting expenses back and forth from home to work, except in some specific cases.
Getting "Business Use" Deductions
To be able to deduct expenses for business travel and for business use of vehicles, you must be able to prove business use with records that are complete, accurate, and timely (made at the time of the expense). Your records must:
- Show that the trip was for business purposes
- Include date
- Note the mileage, if the expenses are for driving
The IRS clarifies timely by noting:
You do not need to write down the elements of every expense on the day of the expense. If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record.
Talk with your tax professional about the best way to keep good records, then find a system and stick to it. Yes, there's an App for that, too!
Source: T.C. Summ. Op. 2014-16