A Glossary of Tax Terms for Small Business
Whether this is the first year you're filing taxes as a small business owner, or you need a refresher on tax facts, here are a few tax terms every small business owner should know:
Audit Techniques Guides: If you receive the dreaded audit letter from the IRS, first call your CPA. Then, if you want to take the mystery out of the proceedings, look at the IRS' Audit Techniques Guides, available on its Web site. The guides will let you know what kind of questions you should anticipate in the interview and what types of deductions the IRS considers appropriate for your industry.
CPA: That would be a certified public accountant, the best person to turn to for help in getting your taxes prepared. While there are many tax preparers out there, CPAs have taken classes and passed an exam, so you can feel confident that your taxes are in good hands.
Deductible expenses: These include business travel expenses, client entertainment and anything you buy for running your business or research purposes. (For example, someone in the film industry can write off movie tickets; someone in the spa industry cannot.)
E-file: Filing your taxes online at www.irs.gov is the IRS' preferred method for receiving tax returns and usually results in faster refunds.
Employee forms: Every person who works for you either full- or part-time must fill out a tax form. Use a W-2 for in-house employees and a 1099 for independent contractors. If you want to avoid an audit, make sure you don't count in-house employees as 1099 contractors.
Estimated quarterly taxes: If you file as an individual, the IRS says you must pay quarterly taxes if you expect to owe more than $1,000, and you expect your withholding and credits to be less than 100% of the tax shown on the prior year's return. S-corporations, on the other hand, rarely pay estimated quarterly taxes.
Fixed assets: This refers to the equipment and other items you need to run your business. Make sure your accountant has a list of these objects, along with the dates of purchase and the how much they cost. Even if you use a laptop you bought five years ago, it will still knock a few dollars off what you owe.
Forever: This is how long you should keep a copy of your federal tax returns. Other tax-related forms can be safely discarded after six years.
Non-deductible expenses: Your club dues, health club membership fee, commuting expenses between home and your regular place of work and lunch for your employees are all on the non-deductible list. If you have a question about a specific item you'd like to write off, ask your CPA.
Taxpayer Advocate Service: According to its Web site, "the Taxpayer Advocate Service is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should." Contact information is available on the Web site.