by guest author Laurel Zellner, CPA

It was a dark and stormy night.  Sam pushed her way through the overgrown forest, silently regretting her choice to take the shortcut.  It had all looked so clear from the roadway; now she was horribly lost.  Worse yet, she knew she wasn’t alone.  Someone or something was lurking in the shadows, watching her every move.  She could feel it in her bones, and she was frightened.

New business owners commonly think of the IRS as a monster lurking in the shadows.  Others disregard the “monster” altogether, denying its existence.  It’s a scary thought in either case.  We are here to tell you that dealing with tax issues need not turn into a horror story.  These are the five most popular shortcuts we see new business owners take, and how problems they created could easily have been avoided.

1. “Superhero”:  This person wants to save money by doing it themselves.  Unfortunately, time and again we see simple errors snowball into expensive, time consuming projects.  For example, choice of entity can have serious legal and tax implications that you do not want to ignore.  Talk to your attorney and CPA before heading down this route.  They want you to succeed, and will be an invaluable source of support.
2. “More Month than Money”:  Cash is King, and the sooner you discover you have a problem, the better your chance of success.  Budgeting can seem like a daunting task, but the exercise helps owners manage expenses and unearth issues before they become a menacing mess.  Your CPA can do more than your tax return.  Let her assist you in the planning stage, so you are better equipped to take your business all the way.
3. “Shoebox Client”:   This term fondly refers to the client whose records consist of a box of receipts at year end.  It doesn’t work well for anyone, and the majority of business owners will suffer from this method of recordkeeping.  What’s worse, they may not even realize it!-  First, you have just racked up additional bookkeeping fees that could easily have been avoided.  Someone has to organize that box, and it takes time.  Your real value comes from letting your tax preparer focus on ways to save you taxes, not trying to figure out if that Menard’s receipt is really a business expense.- Second, and worse, you have no idea of how your business is doing throughout the year.  Good records will give you a snapshot of the health of your business, which you should be monitoring frequently.-Third, without knowing how your business is doing, how can you plan to take advantage of any tax benefits?  Your CPA can help you predict what your tax liability will be, before the year ends.  They can also offer suggestions on actions you can take before year end which may decrease your tax liability.There are different ways to tackle the shoebox problem. Most often owners will purchase pre-packaged accounting software, such as QuickBooks.  You can do the bookkeeping yourself, or hire a bookkeeper to assist you.  In any case, it is our strong recommendation that you have a professional help you get set up, train you how to use the software, and show you how to read the reports.  QuickBooks offers a special certification training program called “QuickBooks ProAdvisor”.  If you see this designation, it means that person has special knowledge in the use of QuickBooks software.  Even if you do the bookkeeping yourself, it’s always a good idea to have a professional look over the books on a regular basis.  They are trained to spot problems before they become nightmares.
4. “The Payroll Predicament”:  What’s so hard?  Answer…everything!  Did you know that S-Corporation owners are required to take a “reasonable” salary, but the IRS does little to define “reasonable”?  Owners in an LLC may be required to take out guaranteed payments, not salaries; these payments follow special tax rules. S-Corporation owners must follow special reporting rules or they may be denied their health insurance deduction.  Not only must payroll tax deposits be made on time, but there are requirements as to HOW they are paid.  What about the popular flex spending accounts?  The list goes on and on.  Worst of all, you don’t know there’s a crisis until time has lapsed and suddenly you are presented with the dreaded notice.  And the notices never stop at just one.Payroll should be discussed with your attorney and CPA while making your choice of entity selection.  We also strongly recommend a payroll service.  Not all payroll services are created equal.  Your CPA can help you choose one, assist with setup, and determine if you have any special reporting requirements.  If you have employees, it’s a good idea to bring a human resource specialist into your team of advisors.
5. “State Surprise”:  You are not alone if you’ve forgotten about the state.  Each state has a variety of different taxes and their own set of rules, and you are required to know them.  Tales of horror abound, from the office that didn’t pay use tax on internet purchases, to the Wisconsin trade show exhibitor who failed to register for Wisconsin sales tax, to the neighborhood bar forced to accept an inflated state estimated tax when he didn’t have adequate records to support actual sales.  Avoid these dreadful situations with a little planning.  If you operate in Minnesota, make sure you know the rules for sales and use tax.  The Minnesota Department of Revenue offers free classes and “fact sheets” on their website to help you out.  If you set foot in another state, make sure you know their rules.  Your CPA frequently deals with multiple state issues and is a great resource.  The key is to know the rules before you go in.

So what happened to Sam?  Thankfully, she knew it was never too late to call for help.  Her rescue team swooped in and brought her to safety.  It wasn’t easy, but she’s grateful now that they were there.

Laurel Zellner is the founder and owner of the certified public accounting firm, Zellner & Associates, PA.  She and her staff specialize in accounting and tax issues for small business owners, priced with the small business in mind.  Laurel is a member of the Minnesota Society of CPAs and the American Institute of CPAs.