Business Startup Frequently Asked Questions

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David M. Kaufmann, CPA

Voice: 720.493.4804

Email: contact2@kaufmann-cpa.com

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2831 Wyecliff Way
Highlands Ranch, CO 80126

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PO Box 632285
Highlands Ranch, CO 801
63-2285

Note: Some of these responses may be specific to Colorado new business startups. Also, this is not an alternative to good legal and accounting advice. We recommend that you talk these issues over with an attorney and an accountant.

What form of business should I operate?
Can I have independent contractors instead of employees?
What new business startup expenses can I deduct?
The bookkeeping software that I purchased has numerous charts of accounts. Can I choose one of those?
Can I have my corporation reimburse me for business expenses that I have paid for?
What type of system should I use to keep track of such business expenses?
How should I organize business bills to be paid?
What business taxes would my business be liable for?

When are taxes due for a sole proprietorship?
How much should each estimated tax payment be?
When are sales taxes due?
When are Federal payroll tax payments due?
When are Colorado payroll taxes due?
What about Federal unemployment taxes?
 Why can't I deduct my (passive) losses




What form of business should I operate?

This question should be discussed with a CPA and/or an attorney. We have created an Entity Choice summary that should help you get started.

Can I have independent contractors instead of employees?

Having employees causes a paperwork headache. This burden may be even harder on new business start ups than existing businesses. Having said that, is someone works for you. If he is an employee, you better treat him as an independent contractor, you could be looking at penalties and interested, in addition to back taxes. The IRS has put out 19 points to help determine whether someone should be treated as an independent contractor versus an employee.

What new business startup expenses can I deduct?

If you don't ever start the business, you don't get to deduct anything!

If you do start the business, you can deduct up to $5,000 of new business start up costs. Any amounts over $5,000 would be deducted over 15 years. These would be expenditures investigating the creation, acquisition or establishment of an active trade or business. These expenditures could include incorporation fees, legal fees, the cost of preparing a partnership agreement or an operating agreement, accounting setup fees, expenditures investigating new markets, office rents paid before the business starts, etc.

The bookkeeping software that I purchased has numerous charts of accounts. Can I choose one of those?

That is not a bad place to start. We have some other recommended accounts that should be added to the "canned" chart of accounts. While we are at it, Quickbooks is so easy to use that it gives you an opportunity to shoot yourself in the foot. One modification that you should consider to Quickbooks is to require the use of account numbers.

Can I have my corporation reimburse me for business expenses that I have paid for?

You can if you have an "accountable plan" and use that plan. An accountable plan is either oral or written. I recommend that it be written. The plan should include a statement that the company must reimburse ordinary and necessary expenditures made by an individual in behalf of the company.

What type of system should I use to keep track of such business expenses?

You could use a computer spread sheet. My recommendation for most start up businesses:

  1. Put the receipts in an envelope or folder.
  2. When you want to reimburse yourself, pull the receipts out of the folder.
  3. Separate the receipts by category, such as, postage, office supplies, entertainment, etc.
  4. Total the receipts by category.
  5. Enter the totals into your bookkeeping accounts payable system. You will be the vendor. List each category separately as an account.

How should I organize business bills to be paid?

If you are using a good small business accounting system like Peachtree or Quickbooks, you have a solid accounts payable (bill paying) system. These systems are designed to enter bills as they are received. The accounts payable (A/P) system will compute when the bill should be paid.

If you were running a large business A/P system, you would check every day what bills are due on this day.  That way you would pay each bill right before it became past due. For a startup business with only 10 to 20 bills per month, this is a major waste of time.

Start up business should arrange to pay bills two or three times a month. I recommend paying bills on the 1st and 16th of each month. This way you would print checks twice a month rather than every day.

Here is the system: 

  1. When a bill comes in the mail, put the due date in the upper right corner of the invoice. For example, if the invoice was due in June, you would either put 6/1 or 6/16 on it. Put the invoices into a manila folder.
  2. When you have about three or more new invoices in the manila folder, enter them into your A/P system. Put a check in the upper right of the invoice to indicate that it has been entered into the A/P system. Put the invoices back into the manila folder.
  3. On the 1st total all invoices in the manila folder that are due on the 1st. Print out the checks to pay the invoices. Make sure the total of the checks equals the total of the invoices.
  4. Mail the checks.
  5. File or scan the paid invoices.
  6. Printout or create a PDF file with the listing of checks paid today. File this report.
  7. Repeat the same process on the 16th of the month.

 Be flexible! If a very large invoice is due on the 20th of the month, pay that on the 20th, not the 16th!

When are taxes due for a sole proprietorship? 

In general, a sole proprietorship pays income and self – employment taxes in quarterly estimates. The due dates for the estimates are April 15, June 15, September 15, and January 15 of the next year. This payment schedule holds true for individual taxpayers that don’t pay a sufficient amount of tax through withholding.

How much should each estimated tax payment be? 

That depends! If your income is lower than last year or your income is quite high, you should make tax projections to determine how much should be paid each quarter. Otherwise, pay in the prior year’s taxes as this year’s estimates. What isn’t paid through estimates will be due on April 15th of the next year. 

I recommend setting up a money market account strictly for taxes. Whenever you receive taxable income, put some of it away in that money market account. When you need to pay taxes, it should come out of that money market account. If you follow this procedure, you will not get caught short and you will earn some interest income! A tax professional can give you guidelines on how much to put away.

When are sales taxes due?

In general, Colorado sales tax is paid in the month following the end of the quarter if the sales tax collected is less than $300 per month. Thus, sales tax collected from January through March will be paid in April.

If the sales tax collected is $300 or more a month, sales tax will be paid monthly.

If the business has problems paying the sales tax when due, the business should put the collected sales taxes into a money market account until the tax is due.

When are Federal payroll tax payments due? 

For most startup businesses, these tax deposits are due the 15th day of the next month. Thus, Federal payroll taxes for January’s payroll would be due on February 15. 

There are exceptions to this if unpaid payroll taxes exceeds $50,000. If this might be the case, check with your tax professional.

My recommendation is to never ever make a late payroll tax payment. Just because the payment is not due until the 15th of next month, my recommendation is to make the payroll tax payment the same day that you pay the payroll.

When are Colorado payroll taxes due? 

For most startup businesses, Colorado payroll taxes and the related payroll tax return are due in the month a following the end of the quarter. Thus, Colorado payroll taxes for the first quarter of the year are due in April. This holds true for Colorado unemployment taxes (SUTA) as well.

What about Federal unemployment taxes? 

Federal unemployment tax (FUTA) is due when the unpaid Federal unemployment tax exceeds $500. 

The FUTA tax return, Form 940, is due, generally,  in January of the following year.

What business taxes would my business be liable for?

  • If your business sells something that is subject to sales tax, you will need to collect and pay sales tax.

  • If your business has a payroll, you will need to pay payroll taxes. These taxes include state and Federal income taxes, Social Security and Medicare taxes, state and Federal unemployment insurance taxes. Depending on your location, you might have local or city taxes.

  • In addition to taxes, you will probably have a legal requirement to have workmans compensation insurance.

 Why can't I deduct my (passive) losses

Not all losses are deductible. If your business is considered a passive activity, you probably will not be able to deduct a loss. Thus, in most cases, you don't want to have a passive activity if it is going to have a loss. To avoid the passive activity loss problem, you want to "materially participate" in that activity. In general, to materially participate, you want to do one of the following:

  • Spend more than 500 hours in that business.

  • No one else spends time working in your business.

  • You spend more than 100 hours in your business, and no one spends more time in the business.

  • You spend no more than 100 hours in the business, but you spend more than 500 hours in all your business put together.

  • You have materially participated in 5 out of the last 10 years before this year.

  • You are in a service business and have materially participated in 3 years before this year.

  • You didn't qualify from any of the above situations, but you think you can prove that you materially participate. [Don't count on this one working!]

The above is an oversimplification! If your business is operating at a loss, consult your CPA!

If you have questions about this, do not hesitate to contact us at 720-493-4804.