With the overwhelming amount of pressure and decisions to make when starting a small business, stress can cause even savvy industry gurus to fall for common startup mistakes. In the best scenarios, mistakes will set you back a bit, but in worst-case scenarios, they can hurt your potential and outlook for long-term success. Below are common startup mistakes that can have a negative impact on your small business.
Miscalculating Startup Costs
The perils of starting a business with an insufficient budget, or an underestimated one, can be a shot in the foot before you even get running. Plan to have at least six months’ worth of income in the bank before officially cutting the ribbon to open your business. This will give you some time to get up and going, garner some clients, and generate invoices and payment.
Neglecting to create a marketing strategy
Most new businesses are going to have to put some brain power and cash behind a good marketing plan, and this should be done well in advance of turning on the lights for customers and clients. These plans should include online, offline, social media, and any other means of marketing to get the word out. Will marketing and social media be outsourced, will you handle it personally, or will you bring someone on board to solely handle this task?
Failing to be frugal
Whether through a bank loan, a generous loan from a relative, sales of your own assets, or years of saving your own money, you’re going to have some capital to spend on rent, equipment, products, employees, etc. Keep in mind that profits won’t roll in overnight. Spend your savings wisely, do your research, and make your money stretch.
Thinking you can be a one-man operation
Even if you’re a one-man or one-woman business in the beginning, you’ll need people in your corner. You’ll inevitably want to shoot around ideas with someone; you may need someone, even on a very part-time basis, just to handle invoices and office files; you’ll want feedback, advice, and even potential contacts. Consider if it makes sense for your business to create a board of advisors.
The Internal Revenue Service (IRS) recently released a new document clarifying the new rules related to section 199A. If you’re unfamiliar with 199A, this section is a part of the tax code that references a new deduction of up to 20 percent of qualified domestic business income (QBI) for pass-through entities such as sole-proprietorships, partnerships, S-corporations, trusts, or estates. This section is extremely intricate, but the newly released regulations have cleared up many of the questions raised by the original legislation.
Like many of the other provisions of the Tax Cuts and Jobs Act (TCJA), the rules for 199A are effective for the tax year 2018. This particular deduction will go away unless further action is taken, expiring in 2025. This particular deduction allows business entities to take up to a 20% deduction of QBI. Qualifying for this particular deduction can be tricky as it is only for pass-through entities. Other information about your business (what kind of work you do, wages paid, etc.) may also preclude you from some or all of the deduction.
In order to be deemed a section 162 business that would qualify for the 199A deduction, you must be involved hands-on with the activity of your business on a consistent basis. Typically, if you think you’re running the business, you are most likely involved enough to be qualified. In regards to rental property, this gets a little more complicated. Under Revenue Procedure 2019-7, the IRS claims that rental property is a qualified business if 250 hours or more of rental services are provided for the year and separate books and records are kept for each rental. However, you can’t qualify and lose the deduction if you use the rental for yourself more than two weeks of the year. Matters get even more complicated when the IRS requires you to handle each business (even if operating under the same legal entity) separately with the ability to calculate a QBI for each individual business.
Furthermore, you must know the business owner’s taxable income. If the business owner’s income falls above the thresholds listed below, the next matter is determining whether the business is a specified service trade or business (SSTB).
Business Owner’s Income Thresholds
- 2018: $157,500 – $207,500
- 2019: $160,700 – $210,700
- 2018: $315,000 – $415,000
- 2019: $321,450 – $421,450
Many questions around the 199A deduction that remain unanswered. In the foreseeable future, the 199A deduction will require professional attention as we adapt to the new tax laws. According to the IRS, 95 percent of business owners fall below the threshold amounts and don’t need to worry about the limitations of the deduction. As always, it is crucial to work with tax professionals, such as MKR CPAs, to ensure that your business isn’t missing out on important deductions and properly filing for your business’ needs.
Amidst a strengthening labor market, rising economic activity, and a declining unemployment rate, the Federal Open Market Committee (FOMC) decided last month to raise the federal funds rate – the interest rate at which banks and credit unions lend Federal Reserve funds to other banks and credit unions overnight – by a quarter-point, from 1.75 to 2 percent. This is the second increase in 2018, and two more increases were suggested by year’s end.
To the average small business owner, the knee-jerk reaction might be a negative one. After all, interest rates do trickle down, affecting credit card balances, adjustable-rate mortgages, and variable loan rates. But the increase could potentially be good news for small businesses. Higher interest rates amid a strong economy mean more profitable deals for banks, which creates a greater motive to offer more financing options and approve loan requests.
Another potential long-term benefit to higher interest rates is a better cash flow. Because inflation is typically a motivator for rate increases, the cost of goods and services tend to escalate, effectively allowing small businesses to raise prices, improve margins, and enjoy more breathing room.
As with any change in the economy, however, the impact on small businesses could have negative consequences as well. One potential consequence of higher interest rates is the effect on consumerism. Because consumers with credit card debt will be paying higher interest rate charges, they’ll have less disposable income to spend, which could hinder sales and growth of small businesses. Additionally, companies that need to borrow money for growth can potentially incur a higher cost of capital when interest rates go up. This can affect new loans as well as existing loans with floating rates.
Because interest rates have been hovering near zero for the past several years in order to spur the economy, a move in the needle was inevitable, and we are unlikely to see rates that low again anytime soon. With the Federal Reserve’s suggestion of additional increases to come, small businesses that are contemplating applying for loans might want to do so sooner rather than later.
For some employees, simply opening a Roth IRA or another retirement account independent of your employer may be sufficient and necessary. But many employees should consider digging into the details of why your employer does not offer a retirement savings plan. And if you think your company is one of the few who doesn’t offer one, unfortunately, nearly half of U.S. companies don’t provide their employees with a 401(k).
When it comes to smaller firms, many avoid the offering simply due to high start-up costs and time commitments, as administering the plan and ensuring it meets regulatory requirements can take serious time and attention. Retirement offerings also present significant liabilities for firms, including civil or criminal penalties for plan administrators if legal and regulatory compliance is not met. According to the Census Bureau, the combination of fees, time and risk may be why over 90% of small businesses do not offer a 401(k). Others may simply not be aware their employees desire a plan.
Like your company, but want help saving for retirement?
If you would like to see your company add a 401(k) plan, the first step is talking to other employees to determine the collective interest in a plan and how many individuals would “buy in” if offered one. Your employer may not be persuaded by one employee’s desire for a plan, but a group request will likely garner more weight. Remind your employer they would also reap benefits from a business standpoint (lowering taxes) and a personal standpoint (their own retirement savings).
Step two involves doing your homework. Is your boss concerned about the risks involved? There are plans whose providers will share legal responsibilities, so research plans and present several options to your supervisor. Is time or added work/stress the issue? Talk amongst your co-workers and determine a strategy for divvying up duties so one person isn’t burdened with added responsibilities. Supportive plan providers can also help companies create a structured strategy to manage the extra work
Overcoming hurdles to a company 401(k)
What if cost is my employer’s biggest concern? Plan start-up fees can sound daunting to small firms, but consider the company’s spending and ways those costs could be mitigated or offset, such as through tax savings or by redistributing the holiday party budget to cover expenses. Inform your employer that many employees might prefer or expect a 401(k) over a holiday party, so using those funds could attract and retain quality employees.
Being prepared and showing your boss that the added time and effort is advantageous will go a long way. Offering a 401(k) can grow their business, supplement their goals and maintain and engage new employees, which is critical in today’s job market. Taking the time to research beforehand and help whoever is in charge throughout the process may seem like the last item you want to add to your plate, but the benefits are twofold for you as well. Not only will you be able to start saving for retirement in a tax-advantaged way, but your employer may also notice your strategic drive, organization and initiative, which could benefit you as new company opportunities or initiatives arise.
Millennials and Roth IRA’s: Why the Two Make a Perfect Pair
As of December 20, 2017, the new tax laws were officially signed into law, ushering in a variety of cuts and changes for individuals and businesses alike. While there has been much talk around how the new laws will impact individual taxpayers and families of all income levels, it is also vital to consider how small businesses, startups and corporations will be affected.
Individual taxpayers will see a decrease in their income tax rate, a reduction of itemized deductions, a doubling of the standard deduction, and changes to elder care, child and business taxes. The Alternative Minimum Tax will remain for individuals and corporations alike, but the affected income bracket has been raised: $70,300 for single filers and $109,400 for joint filers.
So the question remains, will businesses stand to reap tax benefits for the new code? Undoubtedly. The real unknown is what businesses will do with the benefits they may reap.
What tax deductions can businesses expect then? A main provision of the plan is the lowering of the corporate tax rate from 35% to 21% in 2018, as well as lowering the income tax at almost every level for now. Corporations will be able to deduct state and local taxes, and estate tax exemptions will double, assisting the 1% who pay estate taxes while providing roughly 17 billion in taxes. For small business owners, they will be able to deduct the cost of depreciable assets in a single year rather than amortizing them over several years, which will hopefully stimulate investment and growth.
Under our current tax system, multinational taxpayers are taxed on any income earned overseas when those profits are brought back to the United States. But, the new system will not tax foreign profit. The intent here is to motivate those business owners to bring that money back overseas, reinvesting it in the US economy rather than allowing it sit overseas and aid another nation’s economy.
The new code is operating under a supply-side economics theory, which strives to invigorate economic growth across the nation for both consumers and businesses. The objective is to provide various tax deductions, placing more money in consumer’s wallets and ideally stimulate spending. The combination of lower taxes and a swell in spending on products and services is designed to allow employers to strengthen their workforce and create more jobs.
If business owners do reap benefits from the changes, any increased income or an improvement in sales should be viewed as an opportunity to develop, diversify and enhance their businesses, which would support the greater American economy and our nation.
In the midst of identity scams and credit card hacking, the IRS has warned against another scam, this time targeted at businesses and employers. There is a growing W-2 email scam threatening sensitive tax information and the IRS wants to alert payroll and human resources officials so they can be on their guard.
A simple email beginning with a casual greeting has quickly become one of the most dangerous phishing attacks. Hundreds of employers fell victim to the scheme last year, which left thousands of employees vulnerable to tax-related identity theft.
Since there have been significant improvements made in curbing stolen identity refund fraud, criminals are now seeking more advanced personal information in order to fraudulently file a return. W-2’s contain a wealth of detailed taxpayer income and withholding information, which is exactly what frauds are searching for and why they are targeting employers to acquire such information.
The scam has only grown larger in recent years, attacking a variety of businesses, from public universities and hospitals to charities and small businesses. The IRS wants to educate employees and employers, particularly payroll and HR associates who are often targeted first, to hopefully limit the number of successful attacks.
The scammer will likely spoof the email of someone high up in the organization or business, sending an email to someone with W-2 access using a subject line similar to “review” or “request.” The “request” will likely be a list of all the employees and their W-2 forms, potentially even specifying the file format. Since the employee believes they are corresponding with an executive of some sort, they may send the information without question, meaning weeks could go by before it is even evident they have been scammed. This gives frauds plenty of time to file numerous fake returns.
Because this scam poses such a major tax threat at both the local and state level, the IRS has set up a specific reporting process to alert the proper individuals, which is outlined briefly below:
- Email email@example.com to notify the IRS of a W-2 data loss and provide contact information. Type “W2 Data Loss” into the subject line so that the email can be routed properly and do not attach any employee personally identifiable information.
- Email the Federation of Tax Administrators at StateAlert@taxadmin.org to get state specific information on reporting victim information.
- Businesses or payroll service providers should file a complaint with the FBI’s Internet Crime Complaint Center (IC3.gov). They may be asked to file a report with local law enforcement as well.
- Notify employees so they are able to take protective steps against identity theft. The Federal Trade Commission website, www.identitytheft.gov, provides guidance on steps employees should take.
- Forward the scam email to firstname.lastname@example.org.
Beyond just educating employees, payroll officials and HR associates about the scam, employers are encouraged to set up policies or practices to avoid being hacked. Suggested policies include requiring verbal communication before sending sensitive information digitally, or requiring two or more individuals to receive and review any sensitive W-2 information before it can be sent out. The IRS is fighting diligently to protect taxpayers and lower the number of tax-related scams, so employers are encouraged to be on the defense as well and safeguard their own tax paying employees.