Inside Small Business | Small Business & Home Business Marketing

Making Taxes Easy for Small Business

Sean Goss, Professional Accountant

Many economic scholars see small businesses to be the largest contributor to economic growth and employment creation on the planet. The ratio of small business to big business in different countries varies. It is predicted that small business as a collective will eclipse big business as a force in the economic landscape in future years. Be that as it may, fact remains that small business is crucial to every country’s economic development.

Limited research however, has been conducted on a variety of issues affecting small business. The global small business failure rate remains high, at an unacceptable rate of 80% (some say 95%), within the first year of formation. Common concerns about small business are confined to only cash flow problems and under capitalisation. These two are major culprits in business failures; they not the only factors. Weak marketing, skills shortages, bad management and capacity are other factors contributing to business failure. Taxes can also be added to the list as a cause of business failure.

Since many start-up businesses cannot afford to procure the services of a tax consultant/advisor, they eventually fall foul of the taxation requirements of their respective tax authorities. A small business is treated no different from a huge multinational corporation in many tax regimes around the globe. This treatment comes with its own set of problems. The one being the failure of the small business. Tax authorities vigorously pursue errant taxpayers, be they big or small. In fact, it can be proven that harsher enforcement by tax authorities are reserved for small businesses!

Governments have yet to honestly acknowledge the role of small business and stop paying only lip service to its promotion. The current tax system for small business in most countries will have to be revisited. No one is suggesting that tax authorities should grant small businesses “special treatment” forever. Just a breather, so as to enable them to grow at a faster pace.

To accommodate a small business and its growth, whilst being fair, a concept known as “thresholds tax” can be implemented for small business. It is in place for individuals, and also known as progressive taxation. Simply put, it means the more someone earns, the more they are taxed. Many countries levy a fixed percentage tax on “profits” of businesses, big or small. This tax is not fair and fairness is a prerequisite for a good tax system. Even the slightly different tax regime for “Small Business Corporations” in most countries still does not address the problem.

The controversial “profit” in business accounting, especially small business has not been thoroughly researched by tax lawmakers. Profit does not always equate to positive cash flow.

The working capital factors tied into profit, results in severe cash flow setbacks for small business. It is therefore unfair to tax the small business on profit, like the bigger companies, since bigger businesses finance their profits and/ or working capital via many methods, internal and external. These avenues are not available to smaller businesses.

Here are some suggestions on making taxes easy for small business.

Give small business a tax holiday of about two years after start-up.

• 1. Simplify tax legislation.
• 2. Tax small business only on “cash generated by operations” up to a certain threshold.
• 3.Profit less working capital (debtors and inventory on hand) plus depreciation equals cash generated by operations, which in turn becomes taxable income.
• 4. Exempt small business from employee; value added or general sales tax up to certain thresholds. (Already in place in some countries).
• 5. Taxable income thresholds could be, 0 to $200 000; $201 000 to $500 000(for small business), depending on the definition of a small business in the respective country.
• 6. As soon as the taxable income exceeds $ 500 000, a higher progressive rate applies.

Taxes on “cash” income could also fall away at this level.

My suggestions are in no way exhaustive. More substantive research is needed. If we accept that we live in a global village, taxes will also have to be harmonised and standardised, between the different countries. What International Accounting Standards have done for accounting; can be suggested for taxation also.

Sean Goss, Professional Accountant (SA), LCIBM, Registered Tax Practitioner (SA)
Website: www.sgafc.co.za

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Surfing the Sea of Tax Professionals

Dominique Molina, CPA

Do you feel that you pay too much in tax? You’re not alone! The General Accounting Office estimates that Americans overpay their taxes by a total of almost a billion (yes, that’s billion) dollars each year!

Why do so many pay more than they have to? The main cause is mistakes and errors they, or their tax preparers make on their tax returns!

So how do you find a reliable person to keep some of that billion in your wallet? I put together the following criteria and questions to help you find the best advisor and stop giving Uncle Sam too much!

First ask yourself, what role will this advisor perform as part of your team? How much experience do they have delivering the kind of results you are looking for? What experience do they have with the specific issues you will have? Do their current clients have business experience and average income similar to yours? If you have to educate your advisor about their area of expertise, its time to look for someone new! Remember that you are paying for their knowledge, not paying them to learn!

Do they have the credentials necessary for this role? With the alphabet soup of credentials out there it can be confusing to translate those letters on the business card. At a very minimum, your professional should be a licensed preparer. In California, this means a CTEC certification. CTEC certified preparers must take a course in tax preparation and go through an application process with the state of California. You may consider using an EA, or enrolled agent. EA’s are licensed to represent taxpayers before the IRS and must take educational courses. A Certified Public Accountant or CPA, must have a bachelor’s degree in accounting, have experience working for another CPA and pass a rigorous 2 day exam.

Lastly, in finding the right professional for you, determine what level of responsibility the preparer assumes for your tax returns. Professionals who put their credentials on the line provide the highest level of responsibility and will usually work as accurately as possible to protect their license. Professionals may also offer some sort of warranty for their work, which will provide reimbursement of fees paid, or other insurance to ensure you are protected from liabilities resulting from errors made.

Taking time now to find a reliable competent professional can save you BILLIONS down the road!

Dominique Molina is a licensed CPA and tax strategist. She is an experienced real estate investor and specializes in tax strategies for investors and business owners – helping them keep more of what they earn! She is managing partner of AccountOnIt, LLP with offices in Eastlake and San Diego, California. For more information, please visit www.USATaxCoach.com.

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