Started a business? Then….. YOU STARTED A BUSINESS

So many people have decided to make a little extra money on the side. Whether you think your side gig is just going to bring in a few dollars to make ends meet, it’s a way to have more flexibility, or if this is the next big thing where you envision quitting your day job; in most instances – you’ve started a business.

And being a business means you’ve triggered rules/obligations/laws that you now have to adhere to. Intent doesn’t have a lot to do with tax law compliance. Because of the prevalence of do-it-yourself online tools and one-line soundbites that tell you how easy it is to create a business, I thought this would be a good opportunity to highlight what these do-it-yourself tools don’t make clear.

The forms you complete, the boxes you do/do not check have legal meaning and consequences. You may be dipping your toe into whether or not you’re going to ‘seriously’ work on this business – but the taxing authorities don’t have a category called “I may be in business, but I haven’t decided yet”.

So, you’re either in business or you have a hobby.

People want all of the advantages of being a business:

• Write off a portion of my home expenses
• Write off mileage-driven
• Write off meals with potential clients
• Write off the purchase of equipment.

Yes, a person in a photography business can write off the extra storage and backup on the internet, the cost of a new digital camera, the room in their home they use to conduct business, the cost of the website, etc.

However, these costs could also easily be associated with someone passionate about their photography hobby.

But people push back when told of the requirements that a business has. Like all aspects of life, you can’t have your cake and eat it too. Do you want the ‘pro’ of writing off these expenses? Then you need to be running a legitimate business – and all that entails.

There is something in tax law called “facts and circumstance” standard – do your facts and circumstances support you’re running a business? Or do they support you have a hobby? People think there are tons of compliance rules just to meet government obligations. However, from the government’s perspective, any legitimate business would be doing these things anyway – the government just wants you to report on it through their forms.

For example, a legitimate business would:

• Have a consistent/reliable process to track income and expenses
• Have documentation of expenses (i.e. if you worked for Coke, do they take your word for it that you spent $650 on a hotel? No, they require proof of payment and a bill from the hotel before reimbursing you)
• Eventually stop operating or change course if losses go on for too long
• Keep personal and business activity separate (i.e. The CEO of Coke doesn’t use the Coke bank account to pay their personal bills. Nor does the CEO at Coke use their personal account to pay Coke vendors)

When a taxpayer tells me about their business, and I ask for this type of information, it’s not to make their life complicated. It’s so your tax return appropriately supports being in business.

A few of the steps to start a business you probably know, but are you fully aware of the obligations these on-line forms create?

?? Creating an EIN with the IRS can be done on-line. You’re telling the IRS what kind of business you’re in and are now turning ‘on’ certain requirements and forms that they are expecting to be filed. Do you know what each of those checkboxes mean?

For Example:

?? Check the box ‘yes, I plan on having employees’.

• You’ve just opened a payroll account with the IRS and you’re expected to file quarterly tax reports
• Yes, even if you haven’t hired any employees yet
• Yes there are penalties for not filing the payroll forms

?? Depending on the entity type you select, you have to file a tax return.

• Yes, every year.
• Yes, even if the business had a loss.
• Yes, even if you had zero activity.
• Until a ‘final’ tax return is filed, the IRS expects a tax return – every year.

There are many such obligations that must be fulfilled and if not result in notices and penalties.

When it comes to tax law, there are multiple items that are ‘easy’ to get into, but difficult (or at a minimum, has specific, time-consuming deadline generated processes), to unwind the obligation you created.

This is the case for federal, state, and local authorities. And because there are non-tax obligations as well.

The newest of these non-tax obligations that businesses have is BOI reporting, Beneficial Ownership Information. It became effective on January 1, 2024 and is administered through the Financial Crimes Enforcement Network (FinCEN).

Here’s a sample of our communications regarding this requirement:

IMPORTANT LAW CHANGE

Please see: https://www.fincen.gov/boi and https://www.fincen.gov/boi-faqs

The recently passed Corporate Transparency Act requires a report of Beneficial Ownership Information (BOI) for most non-publicly traded companies to the Financial Crimes Enforcement Network (FinCEN). There was a widespread belief that this requirement would be postponed since no form/website/process was available to comply with this new law. However, on January 1, 2024 FinCEN launched its site for filing and compliance at FinCEN BOI Reporting Site

As you’ll see in the FAQ’s, whether the entity is profitable, had activity, etc. is irrelevant to this reporting requirement. Please research this new requirement and be sure to file the appropriate form in a timely basis. At the time of this writing, existing entities have until 12/31/24 and newly created entities created in 2024 have 90 days to complete this reporting.

Information regarding the BOI reporting requirements can be found at https://www.fincen.gov/boi.

As specified in the Corporate Transparency Act, a person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. Therefore, consider consulting with legal counsel if you have questions regarding the applicability of the CTA’s reporting requirements and issues surrounding the collection of relevant ownership information for Some Company.

Being a business owner can be rewarding personally and professionally, it also has plenty of tax pros and cons. And one of the ‘cons’ is compliance obligations.

Hopefully this quick synopsis is a reminder that opening a business creates tax and reporting obligations that a person does not have.

• “But I lost money” – irrelevant, you have a business.
• “But I’m just testing the waters, not sure exactly what my plan is” – irrelevant, you have a business.
• “My business can lose money for 5yrs before the IRS questions if it’s a legitimate business” – no, this is Tax Myth.

Maybe you are already a business owner or maybe you’re considering a ‘side gig’. Just remember, businesses are different than individuals – and be prepared for the additional compliance obligations that are created (intentional and unintentional) when opening and operating a business.

And as always, this newsletter is educational in nature and not specific tax advice, please contact your specific tax professional to see how this information specifically impacts you.

If your organization and its members are looking to understand how the tax code impacts them, I’m here for you.

When I speak to new business owners, I teach them strategies for tax planning then they can feel more comfortable making informed decisions. When I speak to new executives, I teach them ‘why’s’ of alternative compensation so they feel more comfortable making an employment decision. And when I speak to taxpayers in their prime earning years, I teach them the strategies available to them regarding the alphabet soup of the tax code to accomplish those incremental base hits that help over the long-term.

If you're interested in learning more about how your team or organization can benefit from understanding how the tax code impacts them, don't hesitate to reach out.

Book a free call with me, and let’s strategize making your next event meaningful.

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About Cecily Welch

Cecily Welch demystifies complex financial issues so people can make informed decisions and turn goals into financial action. She began her career as a national and international auditor. Cecily has continued to provide client focused accounting and financial expertise for both large and small CPA firms. Cecily is adept at helping people understand how their financial decisions help them meet their life goals. And because no financial decision should be made in isolation, she is dedicated to educating others on the impacts of tax policy as an advocate for taxpayers, earning her the moniker as ""The Accountant I Can Understand?.

She's been published in the Wall Street Journal, 3-time guest on Georgia Public Radio/NPR on Second Thought with Celeste Headlee, and created a 3 series webinar on business financials for Cobb County, GA.

In addition to being a licensed CPA in both Illinois and Georgia, Cecily has more than 30 years experience as a certified financial planner (CFP?) and a public accountant. She earned her Bachelor of Accounting from North Carolina A & T State University and MBA from the University of Wisconsin-Madison. She is an active member of several non-profits and professional associations, including:

• City of Atlanta, Governing Board of the Inspector General (formally the Board of Ethics and Independent Compliance)
• AICPA IRS Advocacy & Relations Committee, Appointed
• Georgia Society of Certified Public Accountants (GSCPA), Leadership Council, Tax Task Force - Former Chair, Former Board Member
• Internal Revenue Service Advisory Council (IRSAC) - Three year appointment (2011-2013) Sub-Chair Small Business and Self Employed