America runs on the work ethic, innovation, and persistence of business owners and leaders who propel ideas forward. Running a business is hard work, and tax season adds a lot of tension as businesses must ensure accuracy and compliance with the complicated tax rules.
For smaller businesses, in particular, the tax code can place a burden on the owners, soaking up time and resources that could be better spent elsewhere. So while we don’t have much say over the tax law here at Sovereign CPA, we do keep on top of it to ensure we keep our hard-working business owners in full compliance without buckling to the pressures and confusion of an ever-changing legislative landscape.
#1) The Cost of Compliance
One of the biggest hurdles that small, mid-sized, and large corporations face as they file their taxes is the cost of compliance. According to the Kansas City Business Journal, small business owners spend $12,000 on regulations compliance every year. The numbers also suggest that small business owners can spend up to $5,000 on direct and another $5,000 on indirect costs for federal regulations. Start-up costs can also add up quickly, making the first year of keeping a business afloat a challenge on multiple fronts.
That is not including small businesses that might make a mistake and inadvertently file incorrectly, often leading to regulatory fines. One in ten small businesses were fined for regulatory noncompliance with an average citation cost of about $30,000. Research by the Small Business Administration has led to findings that show compliance burdens can be more significant for smaller business entities. These disparities are often connected with the business size and the filing regulations for different business structure types.
As a small business owner, these costs in the first year and beyond can become a major hindrance to new investments, innovation, or hiring that might help the company grow and become more robust. The same article outlined how forty-four percent of small firms claim to spend 40 or more hours trying to understand federal regulations and/or making changes.
Dealing with the tax code presents major obstacles to many first-time business owners or struggling corporations. More than a third of business owners foresee that recent tax policy changes will affect them negatively.
#2) Properly Choosing Business Structure
When opening a new business, one of the biggest hurdles is properly assessing your business goals, vision, and potential growth to find the right business organizational structure for you. Understanding the options is critical to businesses that are just starting out or growing.
Each organization’s structure is designed as such to fit a variety of unique business sizes. From running a small retail store to managing a mid-size corporation, evaluating the right structure for your operation is necessary to maximize tax opportunities and minimize burdens. If a company chooses the wrong organizational structure for them it may cause tax compliance issues down the road.
The main tax structures with their leading attributes are as follows, although there is often a lot more to these than meets the eye:
- Sole proprietorship: Known as the simplest form of a business entity. All company debts and profits are the responsibility of one person, this structure maintains an easy setup, lower cost, and tax deductions. So when it comes to tax compliance issues, this might be the most straightforward. This structure is designed for companies starting out or for small side-businesses. Wal-Mart and JC Penny are examples of companies that began as sole proprietorships.
- Partnership: As the name suggests, usually this is owned by more than one individual. There are two main categories here that include a general partnership and a limited partnership. Giants like Google once began as partnerships. This allows the partners to share profits and losses, but it also means both partners are liable for decisions made within the business.
- Limited liability company: Known as a popular hybrid structure that allows business owners flexibility and liability protection. Big companies that have used the LLC structure to grow their business include Sony, Nike, and the Anheuser-Busch beer company.
- Corporation: This structure makes the corporation a completely separate entity from its owners and can be filed under various subcategories including an S corporation, C corporation, and B corporation. Morgan Chase & Co., for example, is known as a c corporation, as the entity is mostly owned by shareholders.
#3) Underpaying Taxes
Another major issue companies face when it comes to tax compliance is ensuring that they are paying the right amount and not miscalculating their expenses. This can be complicated for new companies or ones that deal with many transactions. Federal income tax due dates for corporations and companies can differ from the tax deadline we all know as April 15th. For example, an S Corporation’s tax return deadline is the 15th day of the third month after the end of the tax year.
The IRS will impose penalties and fees for companies that fail to meet the deadlines that correspond to their business structure. When a small business fails to pay the proper amount by the end of the year, the IRS may tack on a penalty.
Not only that, but they may also add interest on that unpaid tax amount. That interest will typically begin to accrue on your due date. Companies can sometimes avoid paying that interest if they pay on time after receiving a letter of underpayment from the IRS.
Ensure Tax Compliance for Your Business Without the Headaches
Sovereign CPA supports business owners and the work they do every day. We work with all sizes of businesses to help them stay in compliance and expend the least amount of resources, time, and headaches that are necessary.
We take care of the complicated stuff and make sure you’re good to grow. Want to know more about how we help corporations and small businesses with tax compliance? Call us today and find out!