by | January 30, 2012

Our Equinox Focus Event last week “Tax Update: What You Need to Know for 2012 (and 2011, too)!”  was quite a success with raves from our participants.   I wanted to share some of my key takeaways from the program.

–  Pre-Opening Costs.  For folks starting or launching a business, certain pre-opening costs are tax deductible.  In order to take advantage of this deduction for startups, you need to plan for the timing of your entity formation and your expenses.  Documentation is key as well.

–  Compensation to S-Corporation Business Owners.  The “salary” part of business owners’ compensation in an S-corporation must pass muster with the IRS.  You cannot pay yourself too little salary so as to take advantage of the “profit” component.   There’s not a hard and fast rule on this, so you must work with your professional team to determine what is “reasonable.”  Also, it’s important to remember that this rule applies to any entity taxed as an S-corporation whether the company is an LLC or a corporation.   Proper assessment and documentation of compensation for owners is critical to defending against an audit.

–  Contractors versus Employees.   Mis-classification of workers as contractors is a huge area of audit at both the state and federal levels.  The IRS has 20 factors to consider whereas Washington State has a 6 point test (7 points if you’re a general contractor) where each of the points must be met.  If your “contractors” are found to be “employees,” you not only have back taxes, penalties and interest, but you may also have a disaster with respect to company retirement plans which require that you allow all eligible employees to participate.   To avoid these costs, be sure to classify these workers correctly.

–  Small Employer Health Insurance.  A tax credit exists through 2015 for employers with fewer than 25 full time equivalent employees and an average of $50,000 in average annual wages.  The credit has a pretty limited scope but if you think you qualify, you should look into it.

Business planning is not only about operations but also about finance and tax and mitigating risk.  Think about these factors in your business and any steps you should take to plan for the year to capitalize on these small business and startup incentives and protect your business against certain risks.