Could Taxes Sink Your business?

Tough Times for Lenders blog posted Ticking Sound: Will the Current Tax Valuation Drag You Down?. Which brought back to mind this headline: State sets sights on back taxes. This comes from that Muncie Star-Pess article:

Sometimes the taxes owed are in dispute. Ed Faulkner Jr. of Faulkner Mortuary, which is included on the list, says he's "been battling with the state for the last 20 years to get our sales tax issues resolved." Faulkner said the amount he owes is less than $10,000 compared to a one-time bill of $160,000.

McFarland noted that some might assume the businesses owing back taxes are all small, "mom and pop" operations, but that isn't the case.

Tough Times has this in its post:

So, my suggestion simply is to add this topic to your workout check list, and include the following as tasks directed at this ticking sound:

* What taxes or assessments cover or encumber the collaterals? Governmental (per a current search of applicable governmental taxing offices)? Private (per a current title report)?
* What valuation has been given to the collateral? (Is it high?)
* How is valuation determined?
* What are the key dates (Due dates? Appeal dates? Etc.)
* Has the owner\borrower contested the valuation? Are written agreements covering valuation in place?
* Is it possible to file a “late” appeal? Are there special conditions for filing a late appeal?
* What input or role does the lender\servicer have in the valuation determination or appeal process? (Under applicable law or regulations? Under the loan documents?)

Todd Franks (with The Cantrell Company) tells me that they have recovered over $100,000 in overpaid property taxes for one loan servicer, after a borrower failed to timely protest their 2008 property tax valuation (in a situation involving Texas real property collateral). His experience is that if the current owner is unsophisticated and\or unfamiliar with the property valuation process, then when the owner is struggling to keep the property and to avoid a loan default or a foreclosure, many owners simply give up on contesting property valuations handed out by taxing authorities. (The result: it is a problem discovered by you AFTER you take title.)

Small Businesses and Taxes

I received the following notice from the Small Business Administration:

This contract research report, "Effective Federal Income Tax Rates Faced By
Small Businesses in the United States," attempts to calculate the average
effective tax rates faced by small businesses as a result of federal income
taxes. The report finds that small businesses in the United States pay an
estimated average effective tax rate of approximately 19.8 percent.

A copy of the report is located at:
http://www.sba.gov/advo/research/rs343tot.pdf and the research summary
can be found at: http://www.sba.gov/advo/research/rs343.pdf.

Reading the summary, I think there are some interesting points made that may need to be taken into account by anyone starting a new business.

Start Ups: Subchapter S or C-Corporation Status

For a long time I have debated with an accountant friend whether Subchapter S is really necessary for a new corporation. My starting point has been that the tax savings for a Subchapter S do not exist unless you have a C-Corporation paying dividends. Let me now add

Venture Capital investments in C-Corporations from LearnVC.com to the mix:

In most circumstances, a company must be a C-Corporation when taking investments from venture capital firms. There are a few reasons for this:

1. VC Limited Partners (LPs) contractually obligate the VC General Partners (GPs) to avoid any pass through tax liabilities that may result in an investment into a portfolio company that wasn’t a C-Corp.
2. Even if the company was a non pass-through tax entity (like an LLC with an election to be treated as a non pass-through entity), the governance of the company would be non-standard as compared to a C-Corporation. VCs focus on C-Corps, and even though it is possible to invest in an entity like an LLC, they don’t to avoid complexity.
3. Lastly, if the company was an S-Corp, the company would immediately be converted to a C-Corp when a VC invests, as the fund is a non-person. See this post for more information.

In essence, my first concern with a business that wants to be a corporation is with structure and tax issues revolve around the issue of structure. Accountants think first of taxes. Bottom line is that the business needs to know what it wants so that the best structure with the best tax consequences can be created by the accountant and the lawyer.

Indiana Businesses and Property Tax Appeals

The Indianapolis Business Journal's Appeals pay off for biz owners Over 1 in 4 assessments challenged needs read not only for businesses in Marion County but throughout Indiana.

More than one in four Marion County commercial and industrial property owners has appealed its property tax assessments this year, and the challenges often are paying off in a big way.

With only 11 percent of the 6,503 appeals complete, local officials already have agreed to more than $567 million in reductions. That represents a 43-percent drop from the amounts they were challenging.

An IBJ analysis of the 708 business appeals that have been settled found 123 cases where appeals resulted in decreases of $1 million or more. A handful produced assessment cuts in the tens of millions.

IndianaTax Nexus Case

A friend of mine, a CPA, has given me an interest in these tax nexus cases. He thinks businesses need to be more aware of these issues. I agree with him, even though tax law is not an area of my practice. Which is why I am linking to

Economic presence meets taxing requirement from The Indiana Lawyer:

In a matter of first impression, the Indiana Tax Court has ruled that a bank didn't need to have a physical presence in the state to be subject to Indiana's Financial Institutions Tax.

In MBNA America Bank, N.A. & Affiliates v. Indiana Department of State Revenue, No.
49T10-0506-TA-53, MBNA America Bank appealed the Department of State
Revenue's denial of its claims for a refund of the Indiana Financial
Institutions Tax (FIT) it paid during the 1992-98 tax years. MBNA
argued because its principal place of business is in Delaware and it
doesn't have a place of business here nor did any of its employees come
here on business, it wasn't subject to the FIT


The bank believed under the Commerce Clause, which prohibits states from charging taxes on an out-of-state business unless it has a "substantial nexus" with the taxing state, a company has to have a physical presence in Indiana in order to be charged the FIT. The department moved for summary judgment on the issue.

Indiana Tax Judge Thomas Fischer determined the U.S. Supreme Court holdings in National Bellas Hess v. Department of Revenue of Illinois, 386 U.S. 753 (1967), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992), don't control in the instant case because the U.S. Supreme Court didn't extend the physical presence requirement beyond sales and use taxes.

Starting an Indiana Business - The Indiana Department of Revenue

I generally do not bring up tax issues. Not being an accountant, I avoid getting into the nitty-gritty of tax law. This post still avoids the details of tax law for more general. Indiana's Department of Revenue has the following information for new businesses in Indiana at Register a Business.

If you are starting a new business in Indiana, you may need to register with the Indiana Department of Revenue (IDOR). Registration is required if you will have employees, intend to engage in selling (retail or wholesale) and/or renting/leasing tangible personal property, etc..

****

If you indicate on your Business Tax Application (BT-1), that you will be collecting Indiana Gross Retail Sales Tax you will be issued a Registered Retail Merchants Certificate (RRMC). A RRMC must be displayed at each location you intend to collect Indiana Sales Tax and/or issue and receive exemption certificates.

A company that has no employees and simply provides a service may not need to register. If you are unsure, please contact the Department for additional information.

There is separate information for Independent Contractors doing business in Indiana. Please review this information for things you need to be aware of.

Are you ready for tax time?

Read Find tax breaks for your business before seeing your accountant. You do have an accountant for your business, right?

Business Law: Employer Identification Numbers (EIN) FAQs

For those starting a limited liability company or a corporation, you need an EIN. IRS maintains FAQs (Frequently Asked Questions) about EIN numbers. These FAQs include:

Do You Need an EIN?

Online EIN: Frequently Asked Questions

Employment Taxes for Businesses

If you have an employees, you got to worry about withholding taxes. The IRS has a page on this subject that ought to be read by anyone starting a business who will have employees.

Business resource - federal taxes

I guess you could say that these are good uses of our tax dollars.

The Internal Revenue Service has its Tax Information For Businesses page. This page looks like a portal (that is a links page) for businesses wanting tax information and forms. I think three particular pages ought to have general interest. The others may be important to you because of particular interests and should still be checked out. One link of general interest leads to Small Business Products Online Ordering where you can buy IRS products for your business. One thought here - ask your accountant about these products first. The second is Small Business and Self-Employed One-Stop Resource and I think the name says it all. Lastly, I think here is one also of self-evident interest: Starting a Business.

The Indiana Department of Revenue has a links page for business-related issues here. While most times we think of taxes in terms of income taxes and thus the Internal Revenue Service, but that is not always so. Indiana businesses selling things must keep an eye on their sales taxes which are handled through the Indiana Department of Revenue.

Links for 2-25-07: Businesses and taxes

From the Fort Wayne Journal Gazette an article on the perils for business people doing their own taxes:

The expression “Don’t try this at home, kids” can easily apply to small-business owners who try to compile income tax returns without the help of a tax preparer or tax prep software.

The Kokomo Tribune published an article on Congressman Donnelly's work on the Small Business Tax Relief bill. This might be a bit of a puff piece for the freshman Congressman, bu still the bill does sound interesting:

The bill will increase the deduction small businesses can take from their taxes from $112,000 to $125,000 and increase the number of businesses that will be eligible.