Barbara’s Blog

An estimated 40,000 new laws have already taken or will take effect in 2012. Many rules apply exclusively to consumers, but many other new rules affect businesses. Businesses will have to familiarize themselves with the new laws and comply so that they avoid penalties and other problems. Some rules may exempt small businesses; often the definition of what constitutes a small business varies, so it’s not easy to determine whether your company is exempt.

Learning about new laws
It’s a challenge for small businesses to keep up with changes in government rules—be they statutory (new laws) or regulatory (issued by government agencies such as the IRS and EPA). I monitor numerous government sites daily and I’m certain many changes slip by me.

While you’re busy running a business, how can you also stay up on new rules you need to know about? Here are two ways:

1. Be a reader. Find the sites, blogs, and other resources that can help you stay abreast of new rules from the government. Industry associations and trade groups can help. My Idea of the Day® and Big Ideas for Small Business® present many of the changes you need to know about. Following these resources won’t cost you any money, but there is a time commitment you’ll need to handle.
2. Work with a proactive attorney. Many law firms send their newsletters to alert clients to relevant changes. Working with an attorney may cost you billable hours, but save you penalties and hassles with the government.

Cost of compliance
In 2010, the SBA’s Office of Advocacy released a report showing the cost of compliance on small businesses. At that time, the cost of compliance was $1.75 trillion annually. The largest burden falls on small firms (those with fewer than 20 employees), which represent 89% of all small businesses in the U.S. On average small firms pay 36% more than large firms (those with 500 or more employees), but the cost for EPA compliance is four times as much for small firms as large one.

In round numbers, regulatory compliance costs small businesses more than $10,000 for each worker each year. How can this continue? The cost is still rising (remember the cost does not even reflect the increased burdens of Obamacare which are yet to take effect).

Any hope for change in 2012?
Last year the President issued an executive order to improve regulation and regulatory review. The intention is good; the results so far have been questionable.

Small businesses have yet to see any significant results from government on this issue. What’s needed is not just an executive order; we need more common sense from government officials. A small business should not be shut down (because of onerous fines) for a minor, unintentional, infraction. Regulations certainly have their place to protect the public, but overregulation doesn’t help anyone but the bureaucrats who are authorized to enforce them.

On January 24, the President delivered his State of the Union address. He expressed interest in removing regulatory hurdles impeding small businesses (as well as large ones). He also offered a mixed message about taxes: on the one hand, he wants to expand relief to small businesses, while on the other hand, he reiterated his desire to raise taxes on taxpayers with income over $250,000 (remember most small business owners report their share of business income on their personal returns because of pass-through tax treatment and many fall within this category). Overall, in my opinion there was scant recognition of the importance of small business to the U.S. economy, especially in light of recent rhetoric from the White House about changes for small business (e.g., elevating the SBA to a cabinet level). How did the President’s remarks play with small business?

If I can be so bold as to synthesize the numerous blog posts I read, there seemed to be a consensus for applauding the message but concern about his ability to deliver. Details about how his proposals would be translated into action were scant.

The real question is whether what Washington does or does not do really matter to small business creation and growth? According to the Small Business Authority Index, small business creation was up 7% in December compared with November. Something is working in the hearts and minds of entrepreneurs, even if Washington is not.

Sure, it would make things a lot easier, and more profitable, for small businesses to operate if there were less regulation, lower taxes, and more access to credit (the triumvirate of small business issues). However, it is because of the very nature of entrepreneurs—to create and overcome obstacles—that businesses will likely continue to be created, regardless of Washington action or inaction. Small businesses continue to keep their eyes on the customers; as long as they keep coming, small businesses will keep forming and growing.

With the tax season for 2011 returns now underway, I’ve been giving thought to audits. Much is made by many tax advisors about “audit-proofing” your return. The fact is that your actions may have very little to do with whether or not you are audited.

Of course, actions you take on the return can affect audit selection. For example, if you fail to report income that had been reported to the IRS on a 1099 return or on a Schedule K-1, the IRS computer-patching program will identify your return and generate a letter (“correspondence audit”) to you. But even if all the care that’s taken with your return, there are two arbitrary ways you may find yourself being an audit target:

National Research Program
This is a program under which the IRS selects certain returns at random for the purpose of gathering information that will be used to better audit other taxpayers in the future. Three audit projects of note:

• S corporation returns — this audit project examined 5,000 randomly-selected 2003 and 2004 returns in a three-year program that begin in 2005.
• Employment tax returns — this audit project examined 6,000 randomly-selected employment tax returns from companies of all sizes and industries; the project began in 2010 and should be completed by now or very soon.
• Form 1120 (regular corporation) returns — this audit project is set to start this April. Details are not yet available (the project was mentioned by a panelist in passing in an IRS Webinar on January 11, 2012).

High income
The IRS has less money to spend on examinations, so it’s focusing more and more on higher income taxpayers. Most small business owners report their share of business income on their personal returns, so they may fall into the “high income” category without really being rich. Recent statistics revealed by the IRS show while the overall audit rate on taxpayers was just a bit over 1%, the audit rate for certain taxpayers was a lot higher in the government’s fiscal year ending September 30, 2011:

• For taxpayers with income over $200,000, the rate was 3.9%, up from 3.1% in 2010.
• For taxpayers with income over $1 million, the rate was 12.5%, up from 8.4% in 2010.

Bottom line
What can you do to protect yourself?

• Make sure your return has been properly prepared and that you have the documentation to back up the positions taken on your return. This will probably avoid a correspondence audit and even if you are selected for a more detailed audit, likely you will survive with “no change.”
• If you are selected for audit, consider using professional representation. This will cost you money in professional fees, but will probably save you taxes, interest, and penalties in the end.

In addition, you can keep your fingers crossed!

According to the IRS’ annual enforcement report, the tax gap — the spread between what the government thinks it should collect and what it actually collects — grew to $385 billion in 2006 (up from $290 in 2001). The report claims that $122 billion of the tax gap, or nearly one-third, is attributable to unreported income from small businesses on Schedule C (for sole proprietors and one-member LLCs) and Schedule F (for farmers).

However, the numbers for 2006 were for activities from more than five years ago and may not be reflective of what is happening today. The reasons:

• New merchant card reporting (Form 1099-K) will tell the IRS about transactions made on credit and debit cards, and with electronic payments. This reporting of merchant transactions will be reflected on 2011 returns.
• IRS audit activities have increased, especially for higher-income taxpayers.
• The IRS has been continually expanding its audit guide for cash intensive businesses. It contains strategies for auditors to find undisclosed income and to weed out revenue from the underground economy. It applies to such businesses as bail bonds, beauty shops, convenience stores, laundromats, and car washes, but is not limited to these enumerated businesses.
• There is more governance of tax return preparers. They face high penalties for failing to exercise due diligence in preparing returns, so they are required to inquire about income as well as support for deductions that clients want to claim.

Bottom line
Most small businesses owners I know want to do the right thing when it comes to taxes. They don’t try to hide income but instead seek to take advantage of every legal tax break they’re entitled to. Still, the numbers don’t lie, and there surely are businesses skirting the law. If you want to make certain that other businesses are paying their fair share of taxes and reporting their income like you do, only pay through credit cards and/or electronic transfers (e.g., PayPal) that will be reported to the IRS; payments by cash or checks can still slip through the tax cracks.

How many times have you promised yourself at the start of a year to lose weight, save money, eliminate debt, get organized, or undertake some other transformation that’s important to you? If you’re like most people (myself included), resolutions usually don’t work.  According to a FranklinCovey survey some years ago, four out of five people eventually break their New Year’s resolutions, with one-third doing so by the end of January.

Plan instead
Rather than simply making a resolution which you’re likely to break, create a plan that you can follow throughout the year. Whether the plan relates to marketing, employee training, or other activity in your business, or some personal growth endeavor (learning a new language, reading more, etc.), setting out the steps you’ll follow can be an effective tool in seeing things through.

The plan provides these advantages over a simple resolution:

• Setting goals. Using a plan helps you create goals that are realistic and achievable. Without a plan, your goal may be pie in the sky.
• Steps to follow. Rather than face the transformation as a single idea, take things a little as a time. What can you do this month? Next? As the year goes on, you’ll see progress toward achieving the changes you want.
• Benchmark to check progress. From time to time, review your plan to see whether you’ve achieved the goals you’ve set for yourself.
• Reward achievements. Build into your plan a reward for meeting your goals along the way. Even a simple acknowledgment to yourself is a reward of sorts to recognize success.

Tools to help
You can certainly create your own plan for changes you want to make in 2012. But if you need some help, here are some good tools to consider:

• 43Things is a place to list your resolutions, share your progress, and cheer others on along their way. There’s an app for the iPhone.

• HabitForge helps you break or create a habit on the premise that it takes 21 days of repetition to be successful. There are daily email checks to help you.

• Habit Maker Habit Breaker is an iPhone app that has motivation reminders.

Good luck to us all!
I’d love to hear about your plans for change in 2012. Write me at Barbara [at] barbaraweltman [dot] com. Thanks and good luck.

On December 23, the Temporary Payroll Tax Cut Continuation Act of 2011 was signed into law, extending through February 29, 2012, the two percentage point reduction in the employee share of Social Security taxes for FICA purposes. A similar reduction applies to the employee equivalent portion of self-employment tax for self-employed individuals.

What employers must do
You must implement the new payroll tax rate as soon as possible in 2012, but no later than the end of January. If you over-withhold any Social Security tax in January, you must make an offsetting adjustment to employee pay no later than March 31, 2012. (This rule also applies to payroll services that may not have sufficient time to implement the change for customers by January 1, 2012.)

Look for a revised quarterly employer tax return, Form 941, to be issued by the IRS shortly. This form is due on April 30, 2012, for the quarter ending March 31, 2012.

Impact on high earners
There is a new “recapture” rule for high-earners, who are those making more than $18,350 in wages during the two-month extension period. For such individuals, 2% of wages in excess of $18,350 (but not in excess of the annual wage base for 2012 of $110,100) will be recaptured on the 2012 return when it is filed in 2013. For example, let’s say an owner of a business has a salary of $15,000 per month. This means that in the first two months, she will receive $30,000 in wages, or $11,650 more than the $18,350 limit for this period. When she files her 2012 return, $233 (2% of $11,650) will be reported as an additional tax owed.

Final thought
Congress rushed to pay this provision by a voice vote. It failed to address the dozens of income tax rules that expire on December 31, 2011!

As the end of the year approaches, now is a great time to better your balance sheet. This can help you when it comes to obtaining financing for your business.  It can also reduce your taxes.

Here are three actions to consider:

1. Pay outstanding bills
If you are on the cash basis of accounting, deal with your accounts payable now. This will make your balance sheet look better and, in most cases, increase your business deductions (i.e., lower your taxes).

2. Handle receivables
If you’re owed money, whether you try to collect now or wait until the new year depends on your tax picture for 2011 and what you expect for 2012.

• If you are on the cash method of accounting and believe that 2012 will be a much better tax year, try to collect what you’re owed before the end of the year. This will add to your revenue for 2011, which will be taxed at a lower rate than in 2012 (when you expect greater profits).

• If you want to defer income to 2012, do not send out invoices just yet for work completed near the end of the year; wait until the last minute to do so in order to receive payment in next year.

In any event, if you have aging receivables, stay on top of collections. The longer you wait to collect, the less likely it will be that you’ll receive all or even some of what you’re owed.

3. Check your basis
As an S corporation shareholder, losses that pass through from the corporation are deductible by you only to the extent of your basis in stock and loans to the corporation. If you are anticipating losses for the year, make sure you have sufficient basis to claim losses on your 2011 return. You may need to lend money to the corporation to increase your basis.

Alternatively, you can make a contribution to capital (with no expectation of repayment). This will increase the shareholder equity on the balance sheet.

Final word
Talk with your financial advisor before the end of the year to determine what other actions to take in order to improve your balance sheet for the year.

An article from the Fox Small Business Center got me thinking about the ability of small business owners to take time off for the holidays, or at any other time during the year. For many owners (e.g., retailers; those in the hospitality industry), the holiday season is crunch time and they can’t afford to be away from their businesses. Many employees of these small businesses also have to work despite the holidays.

Time off policy
Are you required to give employees time off for Christmas or New Years? While these two days are federally-designated holidays and federal workers typically get time off (December 26, 2011, for Christmas this year since it falls on a Sunday and January 2, 2012, because New Year’s Day is also on a Sunday), you are not legally required to give employees days off for federal or state holidays. Employees usually can be required to work on holidays, but many companies give specific days off.

Caution: You must make a reasonable accommodation for the religious practices of your employees, unless you can show that the accommodation would result in undue hardship for your business. Take this into account during this holiday season.

There are 10 federal holidays each year. According to Salary.com, most companies give nine or 10 of these days as paid holidays to employees. Some companies also recognize state holidays (e.g., Patriots Day in Massachusetts). Now is a good time for you to think ahead about the paid holidays you plan to give your employees in 2012. Find a list of federal holidays here.

A great resource to help you in making vacation decisions for your staff is Inc.’s  “How to Set a Workplace Vacation Policy.”

Closing for the holidays
For some businesses, the holidays are slow business-wise and an opportunity for owners and employees to enjoy time off. Decide whether this works for you, and what pay policy to apply to employees. Continuing to pay wages during this period can be a very well-appreciated holiday gift (provided that you can afford it).

Owner’s concerns
Many business owners start out with the notion that they are free to set their own work schedules, but soon reality sets in and owners find that they work long and hard, and have difficulty taking time off. Consider the benefits that time off during this holiday season can have for you:

• Health—those who do not take vacations experience more health issues and, according to one study, reduced life expectancy.

• Rekindle relationships—owners often short-change their family and friends throughout the year, so spending time with them now can be a big plus.

• Creativity—time away from the company can help you refocus your thoughts and energies.

Final thought
Whatever you decide to do about your vacation policy and time off, let’s all look forward to a prosperous New Year!

Where your business is located can greatly affect your operations, after-tax income, workforce, and more. The climate for small businesses varies greatly from state to state. The Small Business & Entrepreneurship Council has released its 16th Annual Small Business Survival Index and the results are very telling.

The 2011 Index has been expanded to cover 44 major government-imposed or government-related costs affecting small businesses and entrepreneurs. These include personal and corporate tax rates, health care mandates, utility costs, workers’ compensation costs, the crime rate, right-to-work law, and state and local spending benefiting small businesses. These and other measures are added together for an overall rating.

• The top 10 states most friendly to small businesses are: 1st) South Dakota, 2nd) Nevada, 3rd) Texas, 4th) Wyoming, 5th) South Carolina, 6th) Alabama, 7th) Ohio, 8th) Florida, 9th) Colorado, and 10th) Virginia.
• The bottom 10 jurisdictions that are the least friendly to small businesses are: 42nd) Massachusetts, 43rd) Minnesota, 44th) Connecticut, 45th) Maine, 46th) California, 47th) Rhode Island, 48th) Vermont, 49th) New Jersey, 50th) New York and 51st) District of Columbia.

Wouldn’t it be great if our state and local government representatives read the survey and worked to improve their state’s ranking? Unfortunately, this is not likely to happen, especially in the states down on the list:

• Gov. Cuomo of New York, the state in last place in the survey (followed only by Washington DC), has announced plans to call for comprehensive tax reform that includes a hike in the personal tax rates for wealthy individuals. Many of these so-called wealthy individuals are small businesses trying to generate jobs and stay in business; the tax hike will have an adverse impact on both of these goals and help New York retain its claim to last place (other than DC) in next year’s survey.
• Gov. Christie of New Jersey announced that he wants to cut tax rates but faces serious opposition in this effort. A Quinnipiac University poll of registered voters shows that 64% favor a tax hike on millionaires.

Come next November, when elections will affect the makeup of many state and local governments, there could be dramatic changes in some locations. The lesson from the Small Business Survival Index is that small business owners must be involved in politics at the state and local levels to ensure that their governments adopt or expand policies that create a business-friendly climate.

Suppose you want your employees to speak only English at work? You want employees to cover tattoos on necks? Or you want to ban the wearing of hats? Can you do these things without being charged as acting discriminatory? It depends.

The Equal Employment Opportunity Commission (EEOC) released its report on discrimination cases filed by employees for the 2011 fiscal year ending September 30, 2011. The report shows that claims continue to rise; in FY 2011 there was the highest number of claims ever filed in the EEOC’s 46-year history: 99,947. Claims are made on the basis of alleged discrimination for race, sex, age, disability, religion, or national origin discrimination. Religious discrimination complaints have more than doubled in the past 10 years.

Roundup of the impact of some business policies
The following are a couple of the answers to questions you may have about business practices and whether they are permissible or discriminatory:

• According to the EEOC, a rule requiring that employees speak only English on the job may violate Title VII unless you can show that the requirement is necessary for conducting business. If you believe such a rule is necessary, employees must be informed when English is required and the consequences for violating the rule.

• You are allowed to impose dress codes and appearance policies as long as they do not discriminate or hinder a person’s race, color, religion, age, national origin, or gender. One federal court said a policy requiring tucked in shirts was permissible.

Protecting yourself from discrimination claims
Make sure that your company’s policies are nondiscriminatory. Usually, if you have a sound business reason for the policy and you apply the policy to everyone, you may avoid discrimination claims. However, check with online government resources through the Department of Labor and its agencies as your first line of defense. Also, run proposed business policies before your lawyer; only use a lawyer who is knowledgeable in employment law.