Finance Tips,Legal Tips

Tax Law Pitfalls to Avoid in Your Small Business

Being successful in business is, at least partially, about knowing when you’re over your head. And when we started hearing some of the tax law intricacies for small businesses – well, we were glad we had an expert on hand.

If you’re unsure of the tax laws surrounding Kit-Kat bars (seriously), you’ll learn a lot from our expert this week. Jennifer Karpchuk is a tax attorney who specializes in helping small businesses navigate the maze of red tape that is tax law. You can watch our entire webinar with her here. But for her main points (and for more on that Kit-Kat law), we put together a tip sheet below:

Engage an attorney as soon as possible.

If there was one piece of advice Karpchuk would give to small business owners, it would be to proactively talk to an attorney when you’re being audited. Often, tax attorneys can help you navigate the audit process before the situation ever reaches the assessment level. Hiring an attorney early on can be costly, yes. But it can save you potentially thousands of dollars down the road in either assessment or appeal costs.

If you look for the information yourself, “you’re going to get some broad principles,” Karpchuk said. “But it’s not going to apply it on a per-taxpayer basis and delve into every single situation you’ll be in.”

If you’re unsure of what’s taxable in your business, engage an attorney.

Small businesses can offer either tangible or intangible property, or services. Sometimes, though, businesses are a hybrid of all three. So what is taxable and what’s not?

“The biggest problem,” Karpchuk said, “is taxpayers not understanding what’s required of them.”

It’s not that small businesses avoid paying taxes on purpose: Often, owners just have no idea what they should be paying. An attorney can help you navigate that confusion, and clearly point to how much you need to pay, what documentation to keep, etc.

Don’t get comfortable.

Auditors are not your friends, Karpchuk says. They can be friendly. They can tone down the aggression in the situation. But at the end of the day, Karpchuk said it’s important not to be lulled into a false sense of security.
The “don’t get comfortable” philosophy extends back to the pre-audit phase, too. Don’t get lazy with your documentation and receipts. Stay organized and on top of this, so you’re not scrambling down the road.

Weigh the costs vs. the benefits of fighting an assessment.

Let’s say that after the audit phase, your business receives an assessment. The process of fighting an assessment can be lengthy and expensive. So be sure to do a cost-benefit analysis of engaging in that fight. Appeals processes vary by state, and can extend to four or five different steps – each of them costing more and more money.

If the cost of fighting the assessment is more than the actual assessment amount, you might be better off just paying what the IRS is asking for.

Be preventative.

Tax attorneys don’t just work with businesses when they’ve received the dreaded audit notice. They can also work with you on preventative measures.

“We’ll go through what’s important to have in possession,” Karpchuk said. “One of the biggest issues is lack of documentation. For whatever reason, they haven’t kept records – that’s where you can get in a lot of trouble. It’s your responsibility to maintain those records as a taxpayer.”

Don’t rely on yourself to learn all the silly nuances of tax law. Did we say “engage an attorney” yet?

At the end of day, tax law can be mind-bendingly complex. With everything else you’re responsible for in running your business, you can’t be expected to learn every weird twist and turn of tax law.

“There are just silly rules out there,” Karpchuk said. “There are some states that tax candy, but they won’t tax Kit-Kat, because there’s flour in it, and that makes it not a candy. There’s these nuances that make absolutely no sense, but if you don’t know the rules, you’re going to fall into that trap.”

To learn more about Jennifer Karpchuk or to contact her about your own tax needs, you can see her WMN/WRK profile here.