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Calendar or Fiscal? Which Tax Year is Right for your Small Business?

By Caron_Beesley, Contributor
Published: January 7, 2013 Updated: September 19, 2016

Did you start a business last year? No? Are you planning to start one this year? Did you know you can choose the tax year you intend to operate under?  Choose well, because there are pros and cons for either method. 

A tax year is an accounting period for which you must report your taxable income and business expenses, and the law requires you to operate according to a consistent tax year. The most common is the most obvious: the calendar year. However, businesses can also report based on a fiscal tax year and a short tax year.

Here are some tips for choosing the right period for your small business.

1. Calendar Tax Year

This is a simple and intuitive method adopted by many small business owners, requiring you to track and report income and expenses to the IRS much like individual tax payers do: on an annual basis from January 1 to December 31.

Whether you should use this method is typically determined by how your business is legally structured. For example, if you are a sole proprietor, there is no separation of your business and personal taxes, so a calendar year method is typically required. Likewise, business partnerships or limited liability companies (LLCs) also will generally use the same tax year most business owner(s). S corporations and personal service corporations will also use a calendar year in most cases.

  • Generally, anyone can adopt the calendar year. However, if any of the following apply, the IRS requires you to adopt the calendar year:
  • You keep no books or records
  • You have no annual accounting period
  • Your present tax year does not qualify as a fiscal year
  • You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations

Read more about the tax implications of your business structure.

2. Fiscal Tax Year

Many corporations and larger firms operate on a fiscal tax year basis – a period of 12 consecutive months ending on the last day of any month that isn’t December. For small businesses that might not have the accounting expertise on-hand to keep everything reconciled, a calendar tax year is easier to manage. But there are exceptions where it may make sense to consider a fiscal year. For example, if you operate a seasonal business, reporting income by calendar year could split your season and give a distorted view of income and expenses.

Likewise, if your business shows most of its expenses in one year and income in another, it may be worth looking into a fiscal tax year so that both periods are included in the same 12-month set.

3. Short Tax Year

Technically, a short tax year (less than 12 months) is not an annual accounting period; instead, it applies to businesses that didn’t exist for the entire tax year or those that changed their tax year period during the year.

If you started your business any time during the tax year, you still need to file a tax return for the time you were in existence. Requirements for filing the return and calculating tax owed are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year.

Can You Change a Tax Year?

Once you’ve adopted a tax year, you may need to get IRS approval to change it. Typically, businesses that change their legal structure may wish to shift from a calendar year to a fiscal year method. In these cases, you will need to file Form 1128, Application to Adopt, Change, or Retain a Tax Year.

Read more from the IRS about Tax Years.

Additional Resources

About the Author:

Caron_Beesley
Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

What Will 2013 Look Like For Franchising?

By FranchiseKing, Guest Blogger
Published: January 3, 2013 Updated: July 5, 2016

Will great things finally start to happen in franchising in 2013?

Should you become the owner of a franchise business in 2013?

What are some of the trends in franchising?

Let’s dig in...                                         

 

Employment

Jobs aren’t what they used to be. The days of working for the same company for 30 years are over. A lot of today’s corporate employees move from job to job. And it’s usually not their fault. Divisions close down. Companies restructure. As Guy Kawasaki* says, “Shitake happens.”

A lot of people I talk to are sick of getting downsized*, right-sized and just plain outsized. They want to have some semblance of control back in their professional lives. That’s one reason that a lot of downsized workers look into franchise ownership.

The effects of the recession still linger; some of those who’ve lost their jobs aren’t even in the job market anymore. They’ve essentially opted out*.

The sheer amount of people that have opted out of job-seeking could be a boon to franchising, which has not seen a lot of growth the last couple of years.*

 

Opportunities

If you’ve opted out of the job market, you’re probably open to other ideas...like owning your own business. If so, franchise ownership may be worth a look.

Just make sure that you’re right for the franchise business model. Make sure that you’re 100% on-board with following rules. Make sure that your family is on board with this idea of yours, too. It’s important to have their support.

 

Is Now The Time?

There are three very positive things happening for today’s future franchise owners.

1.      Small business loan rates have been very reasonable.

2.      Franchisors are aggressively discounting some of their fees

3.      Commercial space (depending on your area) is readily available

If you feel that you have what it takes to become the owner of a franchise, and you can leverage those three things, 2013 may be your year.

Just don’t forget to do a great job on your due diligence. Because if you don’t do a thorough job with your research, and don’t use the plethora of small business resources that are readily available these days, 2013 may not be your year.

In other words, take your time. And don’t do it alone.

 

Franchise Trends

If you’re going to look into franchise ownership in 2013, it wouldn’t hurt to start noticing and learning about the current business and franchise trends.

One of the biggest trends taking place—and it’s affecting everything we do—is mobile communications and technology.

According to one study*, 47% of consumers confirm they use their smartphone to search for local information such as a local store they want to visit. Forty-six percent of consumers look up prices on a store’s mobile site and 42% check inventory prior to shopping in the store.

If you’re thinking of becoming the owner of a franchise that requires a physical location, you really need to keep an eye on the latest trends in mobile technology and mobile marketing, like these*.

Interestingly enough, most of the top franchise trends for 2013 involve franchise opportunities that do require a commercial space. Again, pay attention to what’s happening in the world of mobile technology.

2013 could shape up to be a great year to become a franchise business owner.

There’s good commercial space available. Small business loan rates are decent. Some franchisors are aggressively reducing up-front costs. Fantastic business tools and resources are easily accessible.

You just have to use them.

*Non-US Government links

About the Author:

FranchiseKing
Joel Libava

Guest Blogger

The Franchise King®, Joel Libava, is the author of Become a Franchise Owner! and recently launched Franchise Business University.

4 Tips for Hiring Your First Employee in 2013

By Caron_Beesley, Contributor
Published: December 31, 2012 Updated: September 21, 2016

Are you turning down work because you simply don’t have enough time or hands on-board to take it on? Thinking of hiring your first employee? Congratulations – your business is doing well!

But before you advertise for a new employee, proceed with caution. Hiring staff is a commitment to the future, and should be made in the context of your long-term growth plan and whether you really want to be an employer. Here are some points to consider, plus some tips for determining whether you can afford to hire your first employee.

1. What is your vision for your business?

When faced with too much work, solopreneurs are often encouraged to hire up, but is that what you want for your business? Is it your goal to become a larger business or remain a sole proprietor? Could you farm off work to independent contractors or outsource certain functions to take some weight off your shoulders? Could you team with other businesses to complement your services? For example, a graphic designer or web designer could “partner” with a marketing consultant to offer customers a range of full-service solutions.

Virtual assistants are another non-hire staffing option and can help you with administrative and even basic sales and marketing tasks. Temporary workers might be a short term option, but be aware: many laws and regulations that apply to full-time employees also apply to seasonal or part-time employees.

The following article offer some tips for alternative source of labor:

2. Where do you need help?

If you’ve decided to bring an employee on board, your first step is to project your business workload and identify areas where you need help. What does your workload or pipeline look like for the next 30 days, 90 days and six months, and which jobs do you need help with? What are you doing now that you could offload or have an employee augment? Perhaps you need skilled labor out in the field, or a sales rep to help you grow your business. Or, maybe you simply want to free up your time to concentrate on bringing in and fulfilling business orders.

3. Can you manage people?

Don’t overlook this important consideration. If you’ve managed employees in another occupation, how successful were you at making good hiring decisions? How many bad ones have you made? 

4. Can You Afford It?

Working out whether you can afford to hire is a common stumbling block. Start by building a realistic picture of the costs and overheads that your business will incur. These include:

  • Wages
  • Unemployment Tax – State unemployment taxes vary by state, so check with yours. Federal unemployment tax is 0.8 percent on each employee's first $7,000 of earnings.
  • Workers Compensation Insurance – For new employers, this figure depends on your industry and the job performed. Again, check with your state about your expected rate.
  • Medicare and Social Security Taxes – Currently, Social Security tax is 6.2 percent on wages up to $113,700, and Medicare tax is another 1.45 percent.
  • Recruitment and Training Costs – These can run into the thousands, but, you can reduce them by using networking and referrals to uncover candidates.
  • Benefits – Optional!
  • Payroll Costs – It takes time and money to administer payroll and calculate taxes and withholding. Examine the cost of payroll software that can help streamline this task.
  • New Equipment – Computer, desk, other tools.
  • Software Licenses and Phone Data Plans
  • Insurance for Company Vehicles

Next, look at last year’s income and expenses and factor in the projected annual cost of an employee and the extra income one might make possible. Then, consider your pipeline and cash flow. Can you afford to live with reduced profitability for a few months as your business ramps up? Calculate what you can put into generating new business if you are freed up.

You don’t have to do this all on your own. Organizations like SCORE, Small Business Development Centers and Women’s Business Centers have resources and experts on hand to help small business owners navigate this process. Find assistance in your community here.

Additional Resources

 

About the Author:

Caron_Beesley
Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Free Sources of Market Data and How to use that Data for Business Planning

By Caron_Beesley, Contributor
Published: December 20, 2012 Updated: September 9, 2016

The federal government offers many tools to help small business owners understand their markets, but where do go to find that data, and how do you use it once you’ve got your hands on it? 

First, conducting market research doesn’t always have to involve hiring a research firm or commissioning focus groups; much of the information you need may be at your fingertips.

This research can impact and inform all areas of your business, from where you locate your business to the color of your logo. Even a small amount of analysis can help you gauge the receptivity of your target market to your idea. Check out this blog for a quick overview of the type of data you can draw from these sources: Conducting Market Research? Here are 5 Official Sources of Free Data That Can Help.

But how will you use this data effectively? Here are some tips for finding data you need and translating it into information you can use in a business plan or simply to inform your strategy:

Sources of Market Data

So, where do you look?

  • Free Government Market Data – One of the best sources of data is the U.S. Census Bureau. The information there is vast, and among the easiest to navigate. Thanks to a variety of Data Access Tools such as the 2010 Census Interactive Population Map, you can pinpoint census data to the block level and compare one community to another. Census data can help you answer many questions that come up during the business planning process, such as:

o   How do we know the size of industries and businesses?

o   How can we determine the economic activity of communities large and small?

o   Where should I place a new business?

o   What products in my industry are growing?

o   What materials are purchased by my industry?

o   What industries purchase my products?

  • Competitive Data - Want to know how your business stacks up against the competition? Where your potential competitors located? The best places to advertise? These are all critical inputs for your business plan and can also support your financing applications. SBA’s new SizeUp tool lets you crunch millions of data points to get customizable reports and statistics about your business and its competition. Enter your industry, city, state and other details. The tool then runs various reports and provides maps and data related to your competition, suppliers and customers. It also highlights potential advertising opportunities.
  • Use Your Own Data – Don’t just rely on external data sources. As your business grows, use your own data to analyze consumer profiles, buying behaviors and so on.

How to Use the Data

Here are some ways you can use the data you uncover in your market research to build your business plan or inform your strategy:

  • Get to know your target market – If you are seeking investors, they will want to know that your market is sizable and that you have researched and understand its opportunities and its limitations. Is your market definable? Is it sufficiently large that you can reach it efficiently (for example, are population or demographic shifts likely to play to your advantage)? Where do your competitors fit in? Can you segment that market further? Above all, is there a niche you can carve for yourself?

As you prepare your business plan, think about providing: 1) A description of your target market, 2) the trends that impact that market and 3) strategic opportunities for your business in this market.

  • What is going on in your industry? – Few businesses are immune to industry trends. If consumer spending is down or unemployment is on the rise, this may affect your plans and your budget. Use economic indicator data to assess trends and market forces that can help you succeed. If your industry is in flux, could you use this fact to your advantage and position your business for future growth? Investors will want to see that you understand the factors that affect your business’ success. Be sure to include in your plan: 1) a description of your industry, 2) industry trends and 3) strategic opportunities in your industry.
  • Analyzing the competition – SBA’s SizeUp Tool can help you zoom in on exactly who your competitors are – use this information wisely.  Include a description of your competition in your business plan. What market share do they command? Who are their customers? What barriers to entry do they represent for your business? What opportunities are there? The SizeUp tool is very visual; consider using screen caps or charts to back up your data. Knowing your competition will help you better position yourself against them and reach your target market more effectively.

Bonus Tip: use SBA’s Build a Business Plan tool to help guide you through the process of creating a basic, downloadable business plan

 

About the Author:

Caron_Beesley
Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

You Have to Know Your Numbers

By Tim Berry, Guest Blogger
Published: December 19, 2012

The other day I had coffee with a former student, now in her late 20s, whose first taste of startups and entrepreneurship was in a class I used to teach at the University of Oregon. The class included—of course—a hard look at cash flow and business numbers. But she told me she had no idea how important the numbers were until she actually started her own business.

“Back then, in class, it seemed like theory to me,” she said. “Like the business numbers were something that the bankers and accountants worried about, while the rest of us were out selling.”

“You can bet that changed,” she added. (And for the record, quotes are paraphrased from memory.)

Rose (not her real name) explained how getting her own business seemed to be swallowing her life. She was always worried, always wondering, playing over in her mind the next month what would she have to pay, where would the money come from. There were always questions about if and when she should add people as employees, offer more services and so forth.

Instead of drifting slowly off to sleep, she’d play over the worries in her mind. And instead of dealing peacefully with the rest of her life, she’d fill her spare moments with work—and work worries.

And for her, at least, she was much better with all this after really learning to know her numbers. In her case (I’m proud to say), she had some residual idea of business numbers still lingering from the classroom experience. So she knew where to start looking. She dug up some old explanations of cash flow, and dug into her online bookkeeping, and began to pull apart her last year or so of sales, costs of sales, running costs, fixed costs and cash flow.

She spent some time digging into the details of her business-to-business sales that required delivering an invoice and waiting to get paid. She took the extra effort to figure out the gross margin (sales less direct costs) for each of her three lines of service sales. And she looked at the difference between the clients who paid on time, or in some cases early (prepayments), compared to clients who paid late. And she looked at some supplies she was buying at a lower rate in bulk, but the real costs of storing the bulk.

“It’s been a real positive change,” she announced, proudly. “Now I have a pretty good idea, day by day, of where I stand with cash, receivables and payables.”

Not that she no longer worries. “At least I know now when I have something to worry about -- and here’s the good news -- when I don’t. So it’s way easier now to turn the worry off when things are okay. And when they aren’t okay, I know that early now, so I know when and why to worry and what’s the problem when I have one.”

And that’s a lesson I’d like to share in this space. I learned that myself, just like Rose did. My first degree was literature, my second Journalism, and although I did get the MBA later, I’m by nature a words and concepts person. But if you’re going to run a business, and you also want a life, then you should know your core business numbers: sales, costs, expenses, burn rate, balance sheet and, by far the most important, cash flow. 

About the Author:

Tim Berry
Tim Berry

Guest Blogger

Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 46 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including his latest, 'Lean Business Planning,' 2015, Motivational Press. Contents of that book are available for web browsing free at leanplan.com .

Use a Business Mentor to Plan for 2013

By bridgetwpollack, Guest Blogger
Published: December 17, 2012 Updated: December 17, 2012

Now that 2012 is wrapping up, we have the opportunity to take a breath, evaluate where the year has taken us in relation to our business goals and create a game plan for how we will move forward towards success in the new year. A business mentor may just be the perfect means to helping you create that plan. A study by the U.S. Small Business Administration, SBA ED Resources 10-11 Impact Study Final Report, found that small business clients who had received 3 or more hours of mentoring reported higher revenues and increased business growths. Whether you are already in business or looking to start one during the next calendar year, a mentor can help guide your business by providing an outside, unbiased perspective that will keep you on track towards your goals or, perhaps, offer new ideas you had not yet considered.

Planning for Your New Business Idea

If you have a great business concept—or even just a general idea of the kind of work you would like to be doing for yourself—a mentor can assist in hammering out the details of how to bring your ideas to fruition. If you have not yet created a business plan, a mentor can walk you through the process of doing so, bringing to the table years of real world business experience and having helped numerous other entrepreneurs get their ideas off the ground as well.

If you are not sure exactly what shape your business will take, the process of creating financial projections like pro forma income statements and profit and loss statements will give you insight into the results of several different scenarios before taking the financial and personal plunge. These financial statements can seem daunting to the uninitiated, but with a mentor with financial expertise at your side, you will be able to navigate them with ease. Having a clear picture of the financial potential of your business concept will let you know if it truly is feasible or needs to be further refined in 2013.

Planning for Your Current Enterprise

For current business operators, a mentor can help evaluate the current state of your business and make sure it is on track towards your goals. If you have not yet created a business plan for your enterprise, a mentor can guide you through doing so. If you have drafted a complete business plan, they can help you evaluate how you have met your objectives and revise the plan according to changes in the business, the business landscape or your goals.

No matter what the business topic, a mentor has likely encountered the same scenario or is able to refer you to someone else who has. Mentors are unique in that they have specific expertise from their own experiences in the business world, but also a wealth of general business knowledge from helping others start and grow their ventures. Some topics and questions a mentor can help you think through in planning for 2013 are:

Marketing: How effective is my current marketing plan? Are these efforts on track with my goals

New Offerings & Directions: Where does my business stand in relationship to my competitors? What opportunities exist for me to expand or take the business in new and profitable directions?

Technology: Are my employees equipped with the right technology for the activities and goals I want to accomplish?

Budget & Cash Flow: Does my budget match with the initiatives I have set out for next year? Will I have sufficient cash flow to carry me throughout 2013?

A Sounding Board

One of the greatest benefits a mentor can offer your business is simply a wise ear. We hear time and again from SCORE clients that the greatest function their mentor serves is as a sounding board: someone to bounce ideas off of, rehearse their elevator pitches with and be reassured that they are on the right path. A mentor also makes a fantastic addition to your business team because they offer an outside, unbiased perspective that can spot obvious fixes or opportunities you may be too entrenched to see and supply fresh ideas to solve nagging problems. Cassie Green, owner of Green Grocer Chicago, spoke of her mentor saying, “It’s great to get a perspective from someone who doesn’t have a personal interest in the business. They are totally objective and just want you to succeed.”

Entrepreneurship can certainly seem like a lonely road at times. But working with a mentor to plan out a map that will help guide you along that road can make it a little easier.

About the Author:

bridgetwpollack
Bridget Weston Pollack

Guest Blogger

Bridget Weston Pollack is the Vice President of Marketing and Communications at the SCORE Association. She is responsible for all branding, marketing, PR, and communication efforts. She focuses on implementing marketing plans and strategies to facilitate the growth of SCORE’s mentoring and trainings services. She collaborates with SCORE volunteers and develops SCORE’s online marketing strategy.

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