Tax Obligations

In life there are only two inevitabilities: death and taxes. And medical science is making great headway with the former. The moment your company's founders hung out their shingle and unlocked their door, their tax obligations to Uncle Sam changed.

When they still were Joe or Jane Private Citizen, your company's founders were concerned primarily about getting all the right deductions and exemptions for themselves. Once they became employers, however, their lives became more… well, taxing. This chapter shouldn't be considered a comprehensive guide to the latest information on each of the tax laws and requirements. That's a task for a tax professional, especially since tax laws change often, even if just in the small print.

In this website we simply offer some valuable basics and miscellaneous information that may help you understand what your company is up against. Right now, managing the company's tax obligations may not be among your responsibilities, but understanding what must be done and how it must be handled will help you provide the necessary information to the appropriate company staff. And, if the day ever comes when you find yourself settling into the chief executive officer's chair, the background information you pick up here will be well worth the effort. Let's start with some basic business tax rules.

First Step: Hire a Competent Tax Professional Business taxes are going to be one of your company's greatest burdens in terms of both costs and operations. And while your chief financial officer and accounting staff may have a great understanding of tax concepts, an outside tax accountant who works with hundreds or thousands of such returns and arrangements every year is going to provide better service. It's probably the best consulting money your company will ever spend. A certified public accountant (CPA) specializing in tax issues is the best choice. If there's one familiar with your industry, so much the better. Ask for references from regular clients and, as we advised in Chapter 14 regarding the process of choosing a lender, look for a good match—not only in the type of business your company is in, but also in revenue size and operating similarities. The more closely your company matches the other clients served by a particular CPA, the better.

The federal government has a simple way of looking at taxable business income: Businesses are taxed on income Red Flag Never consider the IRS when they receive it and should deduct expenses when they as you would other incur them. (That's how it goes for businesses that operate creditors. The IRS on an accrual basis. For those businesses operating on a cash should be paid first, basis, the situation is slightly different: They deduct exeven during times penses when they pay them.) Life, in the government's eyes, of severe cash is simply that easy. crunches. Vendors tend to forgive payment delays if the But business procedures aren't that easy, and the IRS admits company remains a good that there are finer points to be considered when managing customer. The IRS will levy business funds. That means, as a business, your company fines and penalties and, in has a choice of reporting income on either a cash or an the end, seize company accrual basis. And if your firm holds inventory, the choice is property if taxes aren't paid. even simpler. Companies with inventories must use accrual The IRS will also proceed accounting. No ifs, ands, or buts. If only all matters related against an owner personally if to taxes were that easy! payroll taxes are unpaid.

Don't mess with the IRS!

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