The Tax Club Discusses the Revolution of Retail Business (The E-Commerce Way)

What is E-Commerce? E-Commerce consists of the buying and selling of products or services over electronic systems such as the Internet and other computer networks. There are numerous benefits of running an E-Commerce business including:

• Reduced Costs
• Increased Customer Satisfaction
• More Effective Data Management
• Potentially Higher Sales

So how do you start your online business?

There are the obvious steps (get a computer and connect to the Internet and Web). Make sure you build, promote, and manage your website. Establish computer and network security for your website and communicate online.

Electronic Data Interchange

Electronic Data Interchange refers to the transfer of data between different companies using networks, such as VANs (value added network) on the Internet. As more and more companies get connected to the Internet, electronic data interchange is becoming increasingly important as an easy mechanism for companies to buy, sell, and trade information.

Building and Managing a Virtual Team

If you are conducting business over the Internet, you'll use the Internet for most, if not all, of your communications with employees, suppliers, organizations, and customers.

Product Development

How a product is developed or managed depends on the nature of the organization and its products, for example, retail, manufacturing, wholesale, etc. The particular process you use to build your product or service depends on the nature of the product or service.

Development of Online Store

Set up your online credit processing. This refers to the ability to process credit card orders over the Internet is a major convenience to customers -- if they believe their credit card numbers will remain private to the transaction. You will also need merchant accounts.

Marketing

Inbound marketing includes market research including what specific groups of potential customers / clients (markets) might have specific needs, how those needs might be met for each group (or target market), which suggests how a product might be designed to meet the need, and how each of the target markets might choose to access the product. Additionally it is important to assess howmuch the customers / clients might be willing to pay and how (pricing analysis), who the competitors are (competitor analysis), how to design and describe the product such that customers / clients will buy from the organization, rather than from its competitors (its unique value proposition), and how the product should be identified, its personality, to be most identifiable (its naming and branding).

Outbound marketing, on the otherhand, includes: advertising and promotions (focused on the product), sales, public and media relations (focused on the entire organization), customer service, and customer satisfaction. Too often, people jump right ot he outbound marketing. as a result, they often end up trying to push products onto people who really don't want the products at all. Effective inbound marketing often results in much more effective, and less difficult, and outbound marketing.

Sales and Use Tax

A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax. The tax can be included in the price (tax-inclusive) or at the point of sale (tax-exclusive).

Under current state laws, companies are not required to collect sales taxes from consumers making out-of-state on-line or mail order purchases. Payment reponsibility falls solely on the customer and enforcement is difficult, creating a de facto tax-free environment.

If an online retailer has a physical presences in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax fro sales into that state. This rule is derived from a 1992 Supreme Court decision which held that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence.

IT is the consumers' responsibility to pay sales or use taxes. Consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet retailer doesn't collect it. When consumers are required to pay tax directly to the state, it is referred to as "use" tax rather than sales tax.

Nevertheless, for right now, all you need to worry about is collecting sales tax from customers located in the same states as your locations. If an Internet-wide tax bill is passed, there are other ways that you can entice your customers to purchase your products, such as offering an equivalent discount, free shipping, or free gifts.

Business Entity Structure

There are many advtanges of an S-Corporation. Corporate losses can be passed through to the shareholders, and as the owner (and shareholder), you may e able to take the loss against income that appears on your personal return. You can have the protection of limited personal liability without having to pay corporate taxes. You can minimize self-employment tax and FICA tax. Your profits, as a shareholder, are not taxed in this manner. It's easier to raise capital as a corporation than as a sole proprietorship or partnership.

There are also, however, some disadvantages of an S-Corporation. Numerous regulations and requirements must be upheld by an S-Corporation, including a limit on the number of shareholders. Close scrutiny by the IRS of shareholder-employees, who must receive reasonable compensation (subject to employment taxes) before any non wage distributions may be made to that shareholder-employee. All shareholders must be U.S. citizens. All shareholders must vote in favor of the S-Corporation. Benefits such as health or accident insurance for employee shareholders (with at least a 2 percent partnership) may not be deducted by the corporation.

Business Entities Breakdown Part 2

The previous post was a breakdown of different business entities. This post will go into specifics on business loans & financing, recordkeeping requirements, basic tax filing requirements, deductions, and various expenses.

Business Loans & Financing

Most business entities require a written business plan. This is essential in ensuring your loan provider that you have a solid business model. A loan can be obtained from small business investment companies, banks, federal grants, and direct loans from investors.

Recordkeeping Requirements

It sounds simple, but good bookkeeping is key. Consistency and attention to detail is highly important. Incorporation/organization papers should be updated regularly. Newly adopted plans need to be included in order to be valid. Record all corporate minutes and shareholder meetings.

Basic Tax Filing Requirements

Income taxes are required for sole proprietorships (filed on form 1040 - Sch. C), S-Corps & partnerships (file 1120S & 1065, but income report on 1040 through K-1), and C-Corporations (file 1120 and pay own taxes).

Sales taxes need to be filed with the state if taxable goods/services are sold

Payroll taxes need to be filed with the state and IRS if there are ANY employees.

Deductions

It is extremely important that you keep track of ALL expenses that you are incurring. Have a system / process in place. This will make it a lot of easier to ensure that you are constantly keeping an accurate record of your expenses. Make sure you that are consistent and regularly update. Why is this important? YOU CAN'T SAVE ANY MONEY ON TAXES IF YOU HAVE NO DOCUMENTED DEDUCTIONS!

A list of common business deductions:

• Office suppplies
• Telecommunication (Internet/Phone/Fax)
• Meals
• Travel (even seminars)
  
• Rent for outside office
• Payroll
• Legal and professional fees

The aforementioned examples are common business deductions, but what about the overlooked deductions? A list of commonly overlooked deductions:

• Costs to form your business
• Initial seminars and training
• Auto expenses
• Home Office
• Bank service charges/Credit card fees

When deducting auto expenses, there are two methods of deducting. The first method refers to "actual expenses". Actual expenses are exactly what it sounds like...expenses that have a direct monetary value. This is calculated by expenses x % Business use. Keep track of all auto related expenses, business & total mileage. The value of the car partially determines the total deduction. The vehicle should also be owned by the business entity. The second method refers to "standard mileage rate". This is calculated by Business Miles x IRS Rate. Make sure that you keep track of business & total mileage. The deduction is based on mileage driven only and the vehicle can be owned by anyone.

Retirement Plans

Retirement plans are an effective way of reducing taxable income. Keep in mind that not all plans suite all businesses. Business income, business structure, and desired amount to be contributed all come into play when determining the properly retirement plan. The most common plan types are:

• SEP IRA
• SIMPLE IRA
• 401(k)
• Defined Benefits/Defined Contribution

Documentation

All reimbursement plans should be in your incorporation/formation documents. Also keep logs of vehicle mileage. In regards to bookkeeping, hold on to all receipts, canceled checks, and bank / credit card statements.

Bookkeeping

You'll need to decide whether you want your bookkeeping to be done manually or by a software. Regular reconciliation and efficient organization is critical. It is better to have more documentation, rather than not enough. Regularly review your books to do a "reality check".

Ideas to Take Away

All expenses which are directly related to your business are deductible, but you need to keep track of all your expenses and have adequate documentation in order for the IRS to allow your deduction. Bookkeeping may be tedious, but it is a required part of being a new business owner.

Business Entities Breakdown

Blog post 1 of 2. This post will dive into the differences (from a tax perspective) of five different entity types. The follow up post will go into more detail aboust recordkeeping, expenses, and other finances associated with each entity.

In business, there exists five main types of entities: Sole Proprietorships, Partnerships, C-Corporations, S-Corporations, and the LLC.

Sole Proprietorships:

A sole proprietorship is a business of one without corporation or limited liability status. The pros of a sole proprietorship is that there are no formation costs, no yearly fees, full control to the owner, and minimal recordkeeping requirements.

The cons, however, are the self-employment tax which is 15.3% of income. Additionally there is no liability protection, can only involve one person, there are limited tax benefits, and any losses seem to generate IRS scrutiny.

Partnerships:

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business. The pros of a partnership is that it is very easy to setup, it can involve unlimited partners, it is extremely flexible (in terms of ownership percentage, general vs. limited partners, and asset protection), there is no need for payroll, and there is less record keeping htan corporations.

The cons, however, are the self-employment which, like the sole proprietorship, is 15.3% of income. There are also potential state fees and limited tax benefits.

C-Corporations

A C-Corporation is a legal form of business entity that may have an unlimited number of shareholders. The pros of this includes no self-employment tax and tax deductible benefits (i.e. reimburesement plans and medical). Additionally, this offers the strongest asset protection.

The conts, however, include the setup process that is required (a lot more of a hassle than your partenerships or sole proprietorships) as well as state fees, double taxation, the recordkeeping requirement, and the salary requirement.

S-Corporations

An S Corporation (Small Business Corporation) is a business elected for S Corporation Status through the IRS. This status allows the taxation of the company to be similar to a partnership or sole proprietor as opposed to paying taxes based on a corporate tax structure. The pros of an s-corporation include the associated strong asset protection along with the no self-employment tax and lower payroll taxes. S-Corporations also have some tax deductible benefits.

The cons, however, include the setup process, state feeds, recordkeeping requirements, and the salary requirements.

The LLC (Limited Liability Company)

A limited liability company in the law of the vast majority of United States jurisdictions is a legal form of business company provides limited liability to its owners. This is the most versatile entity and can be taxed as any of the four.

This is essentially "an insurance policy" that is sold by the state. An LLC offers liability protection in registered states. Yearly fees and filing requirements do vary by state.


Entity Setup Steps

Your entity first needs to be formated with the state. Incorporation/organizational papers need to be filed with the Secretary of State. The entity also needs to be registered with the IRS. With the process, a Federal ID Number is obtained. To become an S-Corp, you will need Form 2553 and to establish taxation type for an LLC you need Form 8832. It is also essential to establish a business plan in relation to your entity.


Establishing a Bank Account

Requirements to open an account vary by bank. However, there are a few guidelines that most, if not all banks, utilize for a business to open a bank account. These include having a Federal ID Number, Articles of Incorporation/Organization, and a state business license. All entitles should have their own bank account. This is not required, however, for sole proprietorships.

Business Plans

When creating your business plan, your mindset should be "What is my business going to do and how will it go about it?" This includes creating a msision statement, establishing organization & management, and all financials. Clearly outline your benefits as well. Include your competitive advantage as well as your goals and projections. This will make it easier to obtain a business and will help you track your business progress. Keep in mind that this is not set in stone as it is to be expected that you will change some aspects of your business.


The next blog plost will discuss business loans & financing, recordkeeping requirements, basic tax filing requirements, deductions, and various expenses

Tax Credits for Home Energy Efficieny Improvements Increase

Homeowners can get bigger tax credits for making energy efficiency improvements or installing alternative energy equipment.

The IRS also announced homeowners seeking these tax credits can temporarily rely on existing manufacturer certifications or appropriate Energy Star labels for purchasing qualifying products until updated certification guidelines are announced later this spring.

“These new, expanded credits encourage homeowners to make improvements that will make their homes more energy efficient,” said IRS Commissioner Doug Shulman “People can improve their homes and save money over the long run.”

ARRA provides for a uniform credit of 30 percent of the cost of qualifying improvements up to $1,500, such as adding insulation, energy-efficient exterior windows, and energy-efficient heating and air conditioning systems. The new law replaces the old law combination available in 2007 of a 10-percent credit for certain property and a credit equal to cost up to a specified
amount for other property.

The new law also raised the limit on the amount that can be claimed for improvements placed in service during 2009 and 2010 to $1,500, instead of the $500 lifetime limit under the old law.

In addition, the new law has increased the energy efficiency standards for building insulation, exterior windows, doors, and skylights, certain central air conditioners, and natural gas, propane or oil water heaters placed in service after Feb. 17, 2009.

IRS guidance issued before the enactment of ARRA will be modified in the near future to reflect the new energy efficiency standards. In the meantime, homeowners may continue to rely on manufacturers’ certifications that were provided under the old guidance and on Energy Star labels for exterior windows and skylights in determining whether property purchased before
June 1, 2009, qualifies for the credit. Manufacturers should not continue to provide certifications for property that fails to meet the new standards.

The new law also eliminates the cap on the 30 percent tax credit for alternative energy equipment, such as solar water heaters, geothermal heat pumps and small wind turbines, installed in a home. The cap generally has been eliminated for these improvements beginning in the 2009 tax year.

Funding Options for Renewable Energy Power Plants

Business taxpayers who place in service facilities that produce electricity from wind and some other renewable resources can choose one of three options to fund the project: a tax credit based on the amount invested, a tax credit based on the energy produced or a grant.

The flexibility to choose among these options was enacted as part of ARRA. Taxpayers may opt to claim the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects, instead of the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources.

Taxpayers making qualified investments that are placed in service after 2008 and before 2014 (or 2013 for wind facilities) can make an irrevocable election to claim the energy investment tax credit instead of the renewable electricity production tax credit. IRS will issue guidance explaining how to make the election.

Taxpayers also can claim a grant once the property is placed in service instead of claiming either the energy investment tax credit or the renewable energy production tax credit. For qualified renewable energy facilities, the grant is 30 percent of the investment in the facility as long as construction begins in 2009 or 2010 and the property is placed in service before 2014
(2013 for wind facilities). The Treasury Department will issue guidance explaining how the grant works and how to apply.

Taxpayers electing to receive the grant, created by the ARRA, will not be eligible for either of the tax credits. Proceeds from the grants are not includible in the taxpayer’s gross income, but the grant amount is subject to recapture if the property is disposed of or otherwise ceases to qualify

The Impact of Sales Tax on E-Commerce

A sales tax is a consumption tax charge dat the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax. The can be included in the price, called "tax-inclusive", or can be added at the point of sale, called "tax-exclusive".

In recent research, Austan Goolsbee, an associate professor of economics at the University of Chicago Graduate School of Business, examines the effects of sales taxes on e-commerce. The central issue of sales taxes is a a criticall one. In the current tax-free e-commerce world, consumers do not pay slaes tax, which directly affects the price of goods on-line. "Charging sales tax is the same as increasing the price of a product or service," says Goolsbee. "If you increase prices, people will stop buying." If sales taxes were charged, according to Goolsbee, Internet retail sales could decrease by up to 24 percent. Therefore, businesses looking to expand their markets need to think twice before setting up shop on-line. Given the current tax situation, retail companies that feel the need to establish an on-line presence will not benefit from integrating their operations, says Goolsbee.

Under current state laws, companies are not required to collect sales taxes from consumers making out-of-state on-line or mail order purchases. Payment responsibility falls solely on the customer and enforcement is difficult, creating a de facto tax-free environment.

Wal-Mart, the nation's largets retailer, announced in January the spin-off of Wal-Mart.com. The new company, jointly owned with Accel, is an independent e-commerce retail entity. By establishing a separate company, with physical operations only in California and Arkansas, Wal-Mart will be able to avoid collecting sales taxes for most of its on-line transactions.


Tax Tips on Sales

If an online retailer has a physical presence in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales into that state. This rule is derived from a 1992 Supreme Court decision which held that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence.

Consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet retailer doesn't collect it. When consumers are required to pay tax directly to the state, it is referred to as "use" tax rather than sales tax.

Nevertheless, for right now, all you need to worry about is collecting sales tax from customers located in the same states as your locations. If an Internet-wide tax bill is passed, there are other ways that you can entice your customers to purchase your products, such as offering an equivalent discount, free shipping, or free gifts.

How Long to Keep Tax Records

When it comes to keeping tax records, a lot of people are unsure of the proper amount of time to hold particular information before disgarding it. Some people will keep all records permanently, but this can be more of a hassle than anything else...and things do tend to get lost in the clutter. So how long should you hold onto your records? Here is a list of seven different situations and the length of time you should hold onto your records for.

1. You owe additional tax and situations (2), (3), and (4) below, do not apply to you; keep records for 3 years.

2. You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.

3. You file a fraudulent return; keep records indefinitely.

4. You do not file a return; keep records indefinitely.

5. You file a claim for credit or refund after you file your return; keep records for 3 years from the date you fild your originial return or 2 years from the date you paid the tax, whichever is later.

6. You fild a claim fo ra loss from worthless securities or bad debt deduction; keep records for 7 years.

7. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Minimizing Your Audit Risk

An audit can be scary for anybody who has experienced them. In order to avoid an audit it is essential to understand what causes them to occur. This blog serves as an overview of what can cause an audit and how you can prevent one.

2008 IRS Audit Statistics

How often does a business / individual get audited? Here are the stats from 2008.

• Simple Individual Returns - 0.4%
• Individuals with Rental Properties or Unreimbursed Employee Expenses - 1.3%
• Sole Proprietors Earning less Than $25,000 - 1.2%
• Sole Proprietors Earning Between $25,000 and $100,000 - 1.9%
• C-Corporations - 1.0%
• S-Corporations and Partnerships - 0.4%

Why Do Returns Get Audited?

Each return is examined by a computer. The computer uses a program called Discriminant Inventory Function (DIF) System which assigns a score to each individual return that helps assess the likelihood that an audit will lead to a tax change. Details of this scoring system has not been made public by the IRS.

What Causes Red Flags?

While the DIF system scoring remains a secret, there are still known factors that can cause an audit including:

• Incomplete or Illegible Returns
• Mathematical Errors
• Income Other than Basic Wages
• Unusually Large Charitable Donations
• Large Casualty Losses
• Low Income and High Deductions
• Claiming Dependents Other Than Children
• Hobby Losses
• Large Business Meal and Entertainment Deductions
• Excessive Business Auto Usage
• Home Office Deduction

How to Avoid Red Flags

Make sure that you are honest. This might sound like an obvious tip, but it is not uncommon for business and individuals to keep an income source a secret to avoid additional taxes. Make sure you report cash prizes and alimony. Keeping good records is also vital. Remember, the IRS has up to three years ot audit your return so save all of your information. Additionally, use EXACT amounts. Never round off any numbers.

Tax Preparation Tips

MSN released an article back in January that serves as a 15-point tax-return checklist. Although filing your tax return is probably the last thing on your mind right now, it is always good to be prepared well in advanced.

You can read the full article here: http://articles.moneycentral.msn.com/Taxes/PreparationTips/DoItRightYour15pointTaxChecklist.aspx

This is a highly valuable checklist and often stresses that if this too much to handle you should seek help from a professional.

I recommend checking out this informative article when you have some downtime. As always, you can ask the experts at The Tax Club for a free consultation.

The Tax Club

The Tax Club is an innovative financial firm that specializes in personalized tax plans for both the individual and small business owners. When you become a member of The Tax Club, you benefit in a variety of different ways including:

• Unlimited year round access to a Personal Tax Advisor.
• Evaluation and implementation of an in depth tax reduction strategy for the current & upcoming tax year.
• Corporate and personal tax preparation, and ease of access to all pertinent tax data.

The purpose of this blog is to provide you with some valuable insight on The Tax Club and information pertaining to the tax industry. The main purpose, however, is to help deliver immediate benefits to YOU.