What’s a Small Business for Tax Rules?
The SBA uses a number of definitions for “small business,” depending on the industry. So, too, does the tax law, which has various definitions of “small business” for different tax breaks. These definitions are based on employees, revenues, expenditures and assets. Confusing? You bet! Here’s a list to help you.
- DbK retirement plan. This type of qualified retirement plan, which has yet to be utilized because of lack of IRS guidance, combines a pension with a contributory element (like a 401(k) plan). It is limited to companies with 500 or fewer employees.
- Disabled access credit. A tax credit of 50% of costs between $250 and $10,250 (maximum credit of $5,000) can be claimed for the cost of making a company more accessible to the disabled. The company can have no more than 30 full-time employees during the preceding year; there is also a gross receipts (revenue) test explained later.
- Employer wage differential credit for activated reservists. Employers with fewer than 50 employees can claim a tax credit for continuing to pay wages to employees called to active duty.
- Retirement plan start-up credit. A tax credit of up to $500 for the administrative costs of starting a qualified retirement plan can be claimed by a company with no more than 100 employees who have compensation over $5,000 in the preceding year.
- Savings incentive match plans for employees (SIMPLE) plans. These are retirement plans to which employees and employers both contribute. SIMPLE plans can be used by a business with 100 or fewer employees who received compensation over $5,000 in the preceding year.
- Simple cafeteria plans. Cafeteria plans are used to offer a menu of fringe benefits to employees. A simple version, which avoids the need for testing for discrimination, can be used for a company with 100 or fewer employees on business days during either of the two preceding years.
- Small employer health insurance credit. A credit of up to 35% of premiums paid in 2013 by employers can be claimed by a company with no more than 25 full-time equivalent employees (FTEs) with average wages of less than $50,000. The full credit applies for up to 10 FTEs; a reduced credit is allowed for 11 to 25 FTEs.
- Accrual method exception for small inventory-based businesses. While, most firms with inventory must use the accrual method of accounting to report their income and expenses, “small” firms can use the cash method. Small firms are those with average annual gross receipts of no more than $10 million in the three prior years (fewer years if the company hasn’t been in business for three years).
- Bad debts deduction. Small businesses performing services in certain fields (e.g., law, accounting) can write off bad debts on the non-accrual experience method, which means they don’t accrue service-related income expected to be uncollectible. This accounting rule applies only to companies with average annual gross receipts for the three prior years of no more than $5 million.
- Corporate AMT exemption. Small C corporations are exempt from the alternative minimum tax. This exemption applies only to those with average annual gross receipts of no more than $7 million ($5 million for the first three-year period).
- Disabled access credit. The credit described earlier can be claimed by a company with gross receipts of no more than $1 million in the preceding year (see the employee definition above).
- Late filing penalties for certain information returns. Businesses must report certain payments to the IRS by set dates. Reduced penalties for the failure to meet this obligation apply to companies with average annual gross receipts of no more than $5 million for a three-year period.
- UNICAP rules. These rules impact when expenses can be deducted. There is a small reseller exception for property acquired for resale; the exception applies to companies with average annual gross receipts of no more than $10 million for a three-year period. There is a simplified dollar value last-in, first out (LIFO) method for applying the UNICAP rules; the method applies only to companies with average annual gross receipts of no more than $5 million for a three-year period.
- First-year expensing. The cost of machinery and equipment can be deducted upfront rather than depreciated over a number of years if total annual investments in these assets do not exceed a dollar limit. For 2013, the full expensing deduction of up to $500,000 can be claimed as long as purchases don’t exceed $2 million. This dollar limit is reduced for excess purchases; no deduction applies once purchases for the year exceed $2.5 million.
- Shifting the burden of proof to the IRS. Whether a worker is an employee or an independent contractor or whether compensation is “reasonable” can be shifted to the IRS for a business with a net worth not in excess of $7 million.
- Small business stock. Gain on the sale of qualified small business stock in certain C corporations acquired after September 27, 2010, and before January 1, 2014, is not taxable if the stock is held more than five years (a partial break applies for stock acquired before or after these dates). The stock is “qualified” only if the corporation’s gross assets do not exceed $50 million when the stock is issued and immediately thereafter.
There are many tax breaks exclusively for small companies. Knowing whether you are eligible for a particular one depends on the tax law’s definition. If you’re unsure, talk with your tax advisor.
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7 Quick Tips for Better Business Communications
It used to be that most of the business world understood that simple, clear business writing was a powerful skill. We needed to communicate, explain and convince people in memos, proposals, plans and reports. Simple sentences worked better. Clear and concise worked better.
Maybe I care more about writing than the next person because I’ve spent so much of my career dealing with business plans: writing them for years, then getting them funded and, more recently, reading them. I read more than 100 business plans a year. They’re shorter than they used to be, for sure; but the qualities that make something readable—including good writing, spelling and grammar, are as important as ever.
But writing has been diluted, for sure, with the forward march of email, websites—and now Facebook and Twitter and text and rushed communications with two thumbs while trying not to bonk the other people sharing the sidewalk. So writing, spelling and grammar seem out of style; but still, some writing comes up all the time. The business plan is just the most obvious example. Beyond that:
- In email
- In blog posts
- In comments to blog posts
- In social media updates
- Plans, memos, reports
- In text or sms messages? I’m not sure about that one. What do you think? The obvious abbreviations are so tempting ... but does that have to spread into the rest of our writing. I forgive “idk” in a text but not in a memo (it stands for I don’t know).
So here are some of my suggestions for minding the writing without ignoring that it’s relegated to many kinds of in-between and compromise contexts, like text and on smartphones. And with business plans too, of course.
- Use short simple sentences. Use periods more often to end sentences. Separate your points into shorter sentences.
- Get to the point fast. Put the headline first—then explain. People skim emails and memos. Don’t bury the main point in a dumpling-like mass of explanations.
- Stop using apostrophes to show plural. Apostrophes are for contraction (don’t) or possession (Ralph’s or Mary’s opinion). Stop putting an apostrophe every time you have a plural noun. It’s balls and bats, not ball’s and bat’s.
- Then and than have different meanings. Then is time and sequence, as in first we do this and then that. Than is comparison, like more than and less than.
- Simple words are better. Avoid jargon and buzzwords. Don’t incentivize people when you can motivate or encourage them instead. Use things; don’t utilize them. The phrase “outside the box” is inside the box. Are we really all engaging all the time?
- Although it does take an extra effort to hold down two fingers at once or add a keystroke to capitalize words, it looks better. Capitalize your words like you learned in second grade.
- Don’t write long emails with multiple topics and points. Make each email have its own topic and subject line. Your recipients will get your point faster and better than way.
While it’s apparently true that we live in a world of video, and books and print media are in a decline, technology has also put writing into almost every obscure corner and extra little piece of time in our lives. Not just for business plans. In all cases, let’s do it well.
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Sole Proprietorship—Is this Popular Business Structure Right for You?
If you’re starting a business, you may be wondering how to legally structure it. Should you incorporate, become an LLC, or operate as a sole proprietor?
Over 70 percent of U.S. businesses are owned and operated by sole proprietors or sole traders.
But what does being a sole proprietor involve and is it the right structure for your small business? Here’s what you need to know about the advantages and disadvantages of being a sole proprietor.
What is a Sole Proprietor?
A sole proprietorship is basically an unincorporated business owned and run by one individual (no partners are involved), with no distinction between the business and its owner. As a sole proprietor, you are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.
A sole proprietorship is the easiest business structure to form (you only need to get a license or permit and register your business with your local government) (hence its popularity). It is also a simple structure to maintain with few forms and little business administration needed. Many freelancers, consultants and independent contractors operate as sole proprietors for ease and convenience.
SBA’s Sole Proprietor Guide offers more details about the process of starting a business as a sole proprietor and the steps you’ll need to follow.
What Are the Advantages of Being a Sole Proprietor?
As mentioned above, the ease of starting and operating a sole proprietorship is one of the reasons this business structure is hugely popular. Also, sole proprietors are relatively unencumbered by government regulations and can run their business autonomously without the need to report to partners, shareholders and board members. You control all your own decisions and the money you make.
Sole proprietors have the benefit of reporting tax on any income earned through their own personal tax return, rather than filing separately as a business – which can save time and hassle. You also won’t need to prepare a balance sheet for your company.
Sole proprietors also have a lot of flexibility when it comes to their careers. You can easily close your business without too much bureaucracy, or work on a full or part-time basis for another employer without worrying about answering to anyone about your own business affairs (aside from your clients, of course) – another reason this is a popular option for freelancers, many of whom hold down two jobs!
What About the Disadvantages?
One of the reasons many new business owners seek to incorporate instead of being a sole proprietor is the liability issue.
You may not think now that you need protection against liability, but what if a client holds you in breach of contract or threatens to sue you? Can you afford to put your personal assets at risk to satisfy any claims against your business? As a sole proprietor, there is no legal distinction between the owner and the business. This means that you are personally liable for all business losses and debts. Business incorporation can limit your liability as a business owner, essentially putting your personal assets off limits if anyone brings a judgment against you. So sole proprietors are inherently exposed to risk that incorporating as a corporation or limited liability company can help alleviate.
Other disadvantages can potentially impact your bottom line and growth plans. For example, banks typically require that businesses incorporate before they’ll lend them money, leaving you to rely on savings, credit cards and other sources of capital. Then there’s the perception issue – being an incorporated business can give you a more professional appearance to potential clients.
Finally, because you aren’t required to produce financial statements or a balance sheet, your financial controls might not be as sharp as the need to be and this could be detrimental in the long term.
The Bottom Line
If you are starting a business, operating it as a sole proprietor can afford many benefits:
- Ease of start-up (from an administrative perspective)
- Lower start-up costs (incorporation involves forms, fees and sometimes legal advice)
- Quicker and simpler tax preparation
- Autonomy of business decisions and control of profits
Then again, it’s important to consider the downsides.
- Liability – If you run a business that could expose you to risk in the form of debt or lawsuits (e.g., industries such as a child care or a food service business), then operating as a sole proprietor could leave your personal assets vulnerable.
- Raising capital can be hard
- Lack of financial controls
- Lack of professionalism
If you still have questions, there are a number of counseling resources in your community that can help, including Small Business Development Centers. Find them here.
For a complete guide to your available business structure options and how to set them up refer to SBA’s Choosing a Business Structure guide.
If you think incorporation might be right for your small business, check out this recent blog: Top 10 Questions about Small Business Incorporation Answered.
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Calling Small Business Exporters- Tell Us Your Story for a Chance to Win Cash Prizes
Are you a small business exporter? Do you sell bowling balls to Bangladesh? Or dish towels to Delhi? Maybe you send laser technology to Lisbon? If you have a success story to tell about the goods or services you sell around the world and have used a federal government program or assistance to get there, the U.S. Small Business Administration and Visa Inc. (NYSE: V) are cosponsoring the “2013 SBA-Visa Export Video Contest” where your company will have the chance to win up to $10,000 just by sharing your story with other small business exporters on http://exportvideo.challenge.gov/.
Participating in the contest is easy and free: Among other requirements, the company must be a small business as determined by SBA’s size standards, have successfully completed at least one export transaction and used at least one federal program or service to support such transaction. In order to participate, contestants must register and create an account with www.challenge.gov, the contest portal that also will serve as repository for the video entries. For information on SBA size standards for small businesses, visit http://www.sba.gov/content/summary-size-standards-industry.
The videos must meet several criteria that include duration no longer than three minutes and a high-resolution format. Content must be educational, not promotional. A panel of judges chosen by SBA will select five videos to be awarded cash prizes directly by Visa, Inc.
The prizes are:
- First place - $10,000
- Second place - $8,000
- Third place - $6,000
- Fourth place - $4,000
- Fifth place - $2,000
The contest is open from Feb. 25 to April 22 to small businesses in the U.S. and its territories, including the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and Guam. Winners will be announced no later than May 31, 2013.
For more information, submission procedures and requirements please visit http://exportvideo.challenge.gov/.
About the Author:
Former SBA Official
SBA Small Business Learning Center: Training, Tools and Answers via Your Desktop
Starting or growing a business? Owning a small business can be a fulfilling endeavor, but as you probably already know or are just finding out – it requires that you wear many hats. This of course leaves you with little time to take a deep dive into the many aspects of starting and growing a business. Instead, many business owners turn to search engines for answers when questions come up.
But what if you had access to a small business classroom that provided informed, accurate and always-available access to the advice and guidance you need?
Welcome to the SBA Small Business Learning Center.
Online Training and Tools for Small Business Owners
Launched in late 2012, the SBA Small Business Learning Center is an online portal that hosts a variety of self-paced online training courses, quick videos, web chats and more to help small business owners explore and learn about the many aspects of business ownership.
Content is filtered by topic, so no matter the stage of your business, or the kind of insight you need, you can quickly get answers.
For example, if you’re wondering how SBA loan programs work or just need a primer in accounting or small business taxes, check out these self-paced online financing courses and short videos. Or explore tips from the pros in these archived SBA Web Chats.
Other topics covered include starting a business as a young entrepreneur, an introduction to franchising, taking your business global with exporting, marketing 101, selling to the U.S. government, and much more.
Get More Help Offline
And if you can’t find the training or advice that you need, use the “Get Local Assistance” interactive map to find one of many small business counseling, assistance and mentoring organizations in your community.
Browse around, and let us know what you think about the SBA Small Business Learning Center!
A Guide to SBA Loan Programs - Just one of the self-paced online courses available in the new SBA Learning Center
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4 Factors to Consider When Deciding About Financing
If you are looking to make any major improvements in your business, whether it is a second location, new equipment, or an additional product line, you most likely need business financing. But getting financing for your business can be intimidating. Despite this economic downturn, banks are still lending. However, the way banks are lending to small businesses has changed pretty significantly and they are more cautious about where the money is going, especially when considering a loan to new businesses with no track record. As a result, you may need to consider a number of options to get the money you need, whether you are looking to launch a business or need additional financing for an existing enterprise. However, before you look into alternative financing, talk to a SCORE mentor about the various factors that influence which financing option will suit your needs:
According to the U.S. Small Business Administration, factors financing institutions take into consideration include determining the specific uses for which you need the money, whether your business is seasonal or cyclical, and whether you plan to expand. Work with your SCORE mentor to create a written business plan that will help you clarify your financing needs.
Types of Financing
Common types of financing include bank loans, SBA loans, crowdfunding, receiving funds from a venture capitalist (in which you take on investors in exchange for providing them with an ownership stake), or borrowing from friends and family members. If your small business is engaged in scientific research and development (R&D), you may qualify for federal grants under the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs. You may need to solicit funds from all of these sources to obtain the amount of money you need. You could also tap into personal savings or even take out a second mortgage on your home.
Pros and Cons
Each type of financing offers certain benefits and pitfalls. For example, grant money, venture capital funds and your own money do not have to be repaid, so you won't incur additional debt. If you borrow from family and friends, you may receive a low interest rate as well as flexibility in payment terms. If you borrow from a bank, you may have more stability, avoid using your own money, as well as avoiding the potential tough situation of approaching people you know to ask for money.
If you borrow from friends and family, you need to consider what would happen to your relationship if your business fails and you cannot repay them. If you default on a bank loan, you could lose your business and need to file bankruptcy. If you work with venture capitalists, you may need to relinquish some control of your operation.
Whatever method of financing you decide to pursue, your ability to sell your business concept for starting or growing successfully will increase the potential of obtaining financing when asking for money. Factors that will help you sell your idea include a solid business plan, the ability to demonstrate the need for your business in the marketplace, and any successful business experience you had in the past. Talk to your SCORE mentor today to get started with your financing planning needs.
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How to Break Through 5 Common Barriers to Small Business Growth
Trying to grow your business, but thwarted at every turn by problems within your own organization or by external factors such as broken supply chains?
For many businesses, the biggest obstacle to growth isn’t poor sales, financing or tough competition; it’s often the business itself!
So, if you find yourself operationally ill prepared to grow, what can you do about it? Here are some strategies that can help you break through some of the common barriers to growth that many small businesses experience.
1. Watch the indicators for growth
Before you embark on any growth strategy, step back and take a look at some key business indicators to help you decide whether you are actually ready for growth!
Are you successful in a current market and want to open a new location? Are you about to clinch a big sales deal? Is your sales pipeline full? Is product development success opening the door to new opportunities?
These are all important indicators that will drive growth and should be constantly monitored to ensure you are able to effectively prepare for that growth. Study your pipeline, conversion rates and market trends in dashboard form every day.
2. Keep one eye on your competition, but always think big picture
Underpinning any growth strategy should be a deep knowledge of where you stand against your competition. A simple SWOT analysis, reviewed quarterly, can help you determine where you fit in relation to your competitors and areas of opportunity to exploit your strengths and their weaknesses. Likewise, it will give you a good view of any threats to your growth and guide you towards developing a plan to fix or compensate for these.
Then take a look at your market – your potential customers. Do some market analysis to find out how your customers view your business and what they see in the competition that would make them buy from them instead of you.
Look for ways to differentiate yourself – how does your competition position itself in the marketplace relative to your business? How does your business/product/service contrast with theirs? Why would a customer buy from you and not them? The answers to these questions will help you see your strengths, exploit market opportunities, and execute a tactical plan to get ahead in areas that you don’t measure up to the competition.
3. Always be recruiting talent
Setting the stage for growth has to involve superstar employees. Even if you can’t afford to right now – keep looking for talent and bring them on part-time or on a contract or hourly basis. Another option that can help guide your growth is to work with an organization like SCORE. SCORE provides free business mentoring services and can partner you with someone with business management experience to help you steer your business on a path to growth. Whether you need help across the entire business, or are looking for help with functions such as business planning or marketing, SCORE can pair you with a mentor for free.
Get more tips in 6 Options for Staffing your Growing Business.
4. Constantly assess risk
If there’s one thing being a manager or business owner teaches us all, it’s that we must always anticipate and manage risk. Look ahead—what variables could occur that might compromise or damage your growth plans? These could be supply chain issues, hiring and training problems, competitive activity, cash flow, or patent infringements. Include these in your SWOT analysis and develop a plan to prevent or manage any issues.
5. The bottom line
If there’s a common thread here, it’s the importance of being prepared. This, of course, means having a plan. Never embark on a growth strategy without a plan. It doesn’t have to be encyclopedic, but it should contain the key elements discussed above. Break your plan down into chunks – have one strategic plan that contains your market findings and helps inform where you are and where you want to be. Then assemble smaller plans. For example, have a day-to-day operations plan, a hiring plan and a marketing plan, each of which lay out the tactics for using your business resources to accomplish your strategy.
If you don’t have a business plan, check out SBA’s Build your Business Plan Tool. This step-by-step online tool guides you through the process of creating an actionable plan.
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SBA Features New Tools During National Entrepreneurship Week
In conjunction with National Entrepreneurship Week (Feb 16-23, 2013), SBA is hosting a series of online briefings to discuss “crowdfunding” strategies for entrepreneurs. The series is comprised of daily webinars Feb 19-21 and a free online briefer to showcase innovative business financing opportunities.
Hosted by the Consortium for Entrepreneurship Education, National Entrepreneurship Week celebrates the origins of American entrepreneurship and promotes education for young entrepreneurs. Hundreds of schools, mentoring organizations, municipal government entities and distinguished volunteers partner with young entrepreneurs to support their interests and pursuits throughout the year. SBA’s mentor network offers the valuable resources of SCORE, Small Business Development Centers and Women’s Business Centers as they work hand-in-hand with local communities to ‘power’ the American dream of entrepreneurship. Join us in celebrating the work of these business coaches as they empower the next generation of leaders. You can find one of our counselors and mentors in your community at www.sba.gov, along with a host of online learning and other resources to help you start and grow your business. Just enter your zip code under “Local Assistance” and get started.
What is Crowdfunding?
The Jumpstart Our Business Startups Act (JOBS Act) encourages growth opportunities such as crowdfunding to help spur startups and job creation.
Crowdfunding brings together a network of investors who pool their financial resources to fund a start-up company. While peer-to-peer lending brings individuals together for the purpose of supplying and receiving small business loans, crowdfunding aggregates the financial resources of myriad individual investors. The Internet, especially social media sites and emerging platforms, allows rapid introduction and facilitation of crowdfunding investors to pool their resources for funding a small business.
Crowdsourcing.org reported that by the end of 2012, there were more than 530 crowdfunding platforms (CFPs), up over 60 percent from the numbers posted during 2011. The four primary crowdfunding categories that comprise CFPs include donation-based, reward-base, lending-based, and equity-based. As reported by USA Today, approximately $1.5 billion was raised by crowdfunding sites in 2011.
Crowdfunding may also create a strong support network for small business owners that may need assistance in areas outside of their business expertise. For example, a young entrepreneur owner who does not have marketing experience may benefit from the advice of a crowdfunding investor who has established a successful marketing career.
SBA’s crowdfunding webinars feature expert speakers offering practical tips and suggestions for immediate use. I encourage aspiring entrepreneurs and existing business owners to dial-in for this impressive series.
Our recently redesigned Online Learning Center offers a brand new e-briefer on crowdfunding. This learning portal is becoming a destination for users that seek to educate themselves on sound business practices and emerging trends impacting the small business marketplace.
The crowdfunding e-briefer promotes three objectives:
- Define how crowdfunding helps young entrepreneurs
- Describe each crowdfunding component
- Share crowdfunding resources
So during National Entrepreneurship Week, personally thank a business mentor, participate in a webinar or our e-briefer, encourage a young entrepreneur and re-commit to supporting small businesses in your community.
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Myth vs. Fact- Myth #1: All Businesses Will Be Required to Provide Health Insurance to All of Their Employees
As a business owner, it’s important to understand how the Affordable Care Act can affect your business. However, with so many misconceptions about how the Affordable Care Act works, this can be difficult. To clarify the myths versus facts, we’re launching a new blog series called “Myth vs. Fact: The Affordable Care Act and Small Business”.
This blog covers one of the most common myths we’ve seen out there: All businesses will be required to provide health insurance to all of their employees.
Fact: Employers are not required to provide coverage to their employees under the Affordable Care Act. However, starting in 2014, some businesses that do not offer health coverage to their full-time employees may be subject to a shared responsibility payment under the health care law.
How do I know if I may be subject to an Employer Shared Responsibility Payment?
Businesses with 50 or more full-time or full-time equivalent (FTE) employees that do not offer affordable health insurance that provides a minimum level of coverage to their full-time employees (and dependent children under the age of 26 starting in 2015) may be subject to a shared responsibility payment if at least one of their full-time employees receives a premium tax credit in an Affordable Insurance Exchange, or Marketplace. For the purposes of these provisions, a full-time employee is one who is employed an average of at least 30 hours per week.
Businesses will not be affected by these provisions if they already offer affordable health coverage that provides a minimum level of coverage to their full-time employees, which is the vast majority of these businesses.
Businesses with fewer than 50 full-time or FTE employees are generally not affected by these provisions. However, it’s important to know that if companies have a common owner or are otherwise related, their total combined number of employees is used to determine whether each separate company is subject to these provisions — even if none of the member companies individually employ 50 or more full-time or FTE employees.
How can I find out if I meet the threshold number of 50 or more full-time or FTE employees?
To assist employers, the IRS has developed a helpful set of Q&As on the Employer Shared Responsibility provisions. The IRS has also issued a set of proposed rules relating to the Employer Shared Responsibility provisions, and is accepting written or electronic comments by or before March 18, 2013.
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SBA Learning Center
Welcome to the SBA’s online training course: An introduction to crowdfunding for entrepreneurs. SBA’s Office of Entrepreneurship Education provides this self-paced training exercise as an overview of crowdfunding (also commonly referred to as ‘crowd financing’ or ‘crowd sourced capital’). You will find the course easy to follow and the subject matter indexed for quick reference and easy access. It will take about 30 minutes to complete the course. As audio is used throughout the training, please adjust your speakers accordingly. A transcript and keyboard shortcuts are available to further assist with user accessibility. The highlighted next steps at the conclusion of the program will help you apply what you have learned and engage you in the process of crowdfunding. When you complete the course, you will have the option of receiving a completion confirmation from the SBA.
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Get Local Assistance
Counseling, mentoring, and training from an SBA District Office, SCORE Chapter, Small Business Development Center or Women’s Business Center in your area.