10 Year-Round Tax Tips for Businesses

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By: Baljeet Singh

Tax compliance is one of the most significant challenges among the challenges faced by business owners. Here are some of the important tax tips that you don’t want to miss out.

Being a business owner comes with many responsibilities and challenges. Among the various challenges, tax compliance is one of the most significant one that is often overlooked. Here are a few year-round tax tips for business owners that could help to comply with tax laws and save on taxes, potential interest and penalties.

  • Know the reporting requirements related to signature authority, control, or ownership in foreign financial assets or other business entities in any foreign country. There are various forms that could be applicable based on facts and circumstances of each case such as form TD F 90-22.1, form 8938, form 5471, form 5472, form 8865, form 926, form 3520 and form 3521. Be sure to get the applicability of foreign reporting evaluated in your case and comply if applicable.
  • Know the difference between employees and independent contractors, and classify them correctly. If an employee is wrongly classified as a contractor and IRS learns about the incorrect classification, it could result in back payroll taxes and penalties.
  • Keep separate bank accounts, credit cards, and other documents to keep track of business expenses separately.
  • If any payment is made to stockholders/owners, be sure to classify it correctly as payroll or management fee or distribution depending on various factors like role the stockholder is playing in the business, the other officers who are performing the actual operation of the corporation for which it was started. If an amount paid to the stockholder that is wrongly classified as a management fee instead of payroll, it could result in back payroll taxes and penalties.
  • Before an amount is distributed to an S-corporation stockholder, be sure that the stockholder is otherwise compensated by way of a payroll for services performed for the S-Corporation. If the stockholder is not sufficiently compensated for the services performed, then IRS could take a stand that distribution is made to stockholder instead of payroll as an attempt to avoid payroll taxes and could impose penalties on S-Corporation.
  • If a business give or take loans from shareholders, be sure to have a formal agreement to include the interest terms, repayment terms. If business financials reflect loan to or from stockholder, there should be corresponding interest income or expenses in the business’ financials and hence on the tax returns.
  • Be aware of requirements of issuing form 1099. Broadly form 1099 should be issued if any payment exceeding $600 is made during the course of your business to contractors either individual or partnership; payment of professional fee to an attorney, doctor, or other professional; payment to an individual or partnership, for rent for office space, machines, equipment. Payments include commissions, fees, interest, rents, royalties, annuities and any other type of compensation or income to a single recipient. Please note that form 1099 is required to be issued for payments to corporations only if they are for medical, health care, legal or fishing activities. Individuals are not required to send 1099-MISC for personal payments.
  • Be sure to timely deposit payroll taxes withheld from employee’s payroll. Do no use the taxes so withheld for the purposes of business operations. Using the payroll taxes for the purposes of business operation could attract criminal and civil penalties, and fines.
  • If you are considering issuing stock options, stock appreciation rights or other instruments to employees; you must consider getting a 409A valuation done to arrive at fair market price of the common stock of the corporation.
  • Be aware of transfer pricing regulations while entering in to any transactions with related parties. In general, the U.S. transfer pricing regulations require that transactions between related parties take place at the same prices that would be expected had the same transactions taken place between unrelated parties.
  • Know the reporting requirements related to signature authority, control, or ownership in foreign financial assets or other business entities in any foreign country. There are various forms that could be applicable based on facts and circumstances of each case such as form TD F 90-22.1, form 8938, form 5471, form 5472, form 8865, form 926, form 3520 and form 3521. Be sure to get the applicability of foreign reporting evaluated in your case and comply if applicable.