The Tax World for Businesses
No Avoidance of the Taxing Authorities.
If you believe that you know all of the taxes your business may be exposed to, you will probably be wrong. Is it 4, 5, more?
The best way to minimize the impact of taxes on your business is to develop an overall tax strategy plan. This plan will help you and your tax adviser to anticipate the tax or filing requirement before it comes up. Planning also allows you to plan to take advantage of every possible legal reduction of your taxes.
All Businesses will have Certain "Basic" Taxes.
Even if your business is not "profitable" and will not pay income taxes, you will be paying some kinds of taxes. Some of these taxes are: sales tax on equipment and supplies used in the business, personal property taxes on vehicles and business equipment, and possibly payroll tax on wages, even your own. And there are some disguised taxes; the annual renewal fee on your limited liability entity, occupational privilege taxes, use tax on items delivered from out of state, etc.
All Business Decisions Have Tax Consequences.
The best design and operation of your business will take advantage of every legal tax "loop-hole". But you are no tax expert and will likely not know where to look for these tax breaks or how to apply them to your business.
This is a problem you may not be able to resolve by yourself. Not knowing could result in taxes that you should not have to pay. You need to talk with a competent tax adviser to find the best way to structure your financial decisions. These advisers can be quite expensive. However, the very survival of your business could depend on some early tax decisions. So, budget in some funds for this process.
Some tax advantages are only possible by proper structuring: of the way you acquire equipment and other assets; of when you acquire business assets; how you sell an asset; how you bring in a new partner or investor. Other high tax impact situations occur: when you hire employees; when you use other companies to do certain functions; when you must file tax reports; when you start your business; and, when you end or sell your business.
A Summary of Types of Taxes Business May Encounter.
A description of the taxes your business is likely to encounter, when they will need to be paid, how they are paid, and what your responsibilities are in reporting those taxes (What tax reports to file).
Personal Property Tax
In Colorado there are two types of personal property taxes.
a. The first is on motor vehicles of all types, which are likely to be using the streets and highways, need to be licensed. This tax is included in the amount you pay each year for the license plates for each vehicle. This tax is paid along with the "fee" for the license registration. You are not required to file any reporting form as the tax is collected directly by the Division of Motor Vehicles through the county where the vehicle is licensed.
b. The second personal property tax is charged on tangible personal property (Furniture, Fixtures, Equipment, Signage, and other non-real estate property) owned and used by a "business". Personal property tax is assessed by the county in which the property is located. It is determined by multiplying a "mil" levy amount times the "assessed value" of your personal property. This "assessed value" is determined by the county assessor's office from information supplied by you!
Your company is charged with providing the schedule of personal property once each year before March 15 or April 15 depending on the county. You are required to tell them what personal property your company owns, when it was acquired by your company, whether it is new or used, and its “installed” cost to your business. Failure to file the property declaration timely will result in a "penalty" or increase in tax assessed. You must also keep track of any of this type property that was sold or otherwise disposed of during the year, because you need to tell the assessor’s office which properties were sold in order to not pay the tax on it the following year.
You are billed each year for the personal property tax of the prior year. You may elect to pay this tax in one or two payments. If you chose two payments, they will be due March 1 and June 1, if one April 30.
Sales and Use Taxes
Sales taxes are charged on the sale price of tangible personal property, sold to its "ultimate" user. The definition of sales taxable items is long and sometimes can include the labor used to produce the finished product. Taxable products run from prepared ready to eat foods (the tax charged at restaurants) to any item that is not real estate.
The government requires the “retailer” to collect sales tax. Sometimes there will be more than one taxing authority, the state and a city. Collected sales taxes are remitted to the government(s) on an annual, monthly or quarterly basis. The form used to report this tax is the sales tax report prepared each time the tax is sent to the taxing agency. The retailer is required to keep accurate records of sales for a period of years after the transactions are completed, in case the government wants to check (audit) your reporting accuracy.
The State government publishes at least 60 separate guidelines for the preparation of the sales tax reports and the requirements for the collection of sales taxes. Many of these publications are for special situations, however, to properly prepare the sales tax reports and to properly collect sales tax you should read at least the basic 5 or 6 publications.
The difference between sales and use taxes is only who collects and reports the tax.
Use tax is sales tax collected by the buyer (ultimate user) on items acquired by itself from a seller who did not collect the sales tax at the time of sale. Use taxes follow the same basic rules that apply to sales by a retailer. This tax is remitted on a use tax report form (which may also be the businesses sales tax report) and which could be required monthly, quarterly, or annually. Items usually subject to use tax are, items brought into the taxing area from outside. These can be items purchased from out of state, by mail order, or merely moved from one locality to another.
Real Estate Taxes
Real estate tax is assessed against real property. Real property is land and any structures that are in some way attached to land. That is land itself, buildings (permanent or temporary) that sit on the land, condominiums which are a part of some building but which may not directly "touch" the land itself, etc.
Real estate taxes are assessed by the county in which the property is located. The tax based on some guess as to the value of your real property. The tax is computed by multiplying the assessed value of the property by a set tax rate (set by the county government), also known as a mil levy. The tax bill is mailed out in the latter part of each year for that year. Therefore real estate taxes are always paid "in arrears." This means the tax paid in any year are the taxes for the prior year.
Real estate taxes may be paid in one lump sum or in two installments. Failure to pay real estate taxes will result in a county lien against the property and if not paid for long enough could result in loss of the property at a "tax sale".
Payroll related taxes fall into four groups, taxes withheld, matching taxes, unemployment taxes (actually insurance), and occupational privilege taxes.
a. Of the four groups, the taxes withheld are for two separate governmental programs. Taxes are withheld for the pre-payment of income taxes (federal and state), and for the employee's contribution to the social security and Medicare programs.
When a business has employees, it is required by law to withhold the above two tax assessments from gross pay. If the employee will not be liable for income tax (federal or state) the employer must still withhold the assessments for social security and Medicare. The amount to be withheld for these taxes is a percentage of the "gross" wage paid.
Income tax withholding is based on information given the employer by the employee on his/her form W-4. In some cases, a copy of the W-4 form received by the employer may need to be sent to the government for verification. Employers may be required by the Internal Revenue Service to send them copies of W-4. This action must be requested by the Service.
WARNING! An employee who gives his/her employer a "false" W-4 form, that is a W-4 that claims excess dependent deductions or "exempt" status (no withholding for income tax) could be subject to substantial penalties.
The deduction for social security (FICA) and Medicare is a set percentage of the gross wage. Presently the FICA percentage is 6.2% of gross wages up to a maximum wage amount that changes from year to year. The percentage for Medicare is 1.45% of all gross wages with NO upper limit.
b. The matching taxes are exactly equal to the amounts withheld for social security (FICA) and Medicare. That is, the employer must "match" the withholding for FICA and Medicare and pay this amount over to the federal government along with the income taxes withheld from the employee pay.
Deposit and filing requirements
Federal Payroll Taxes
The deposits for Social Security, Medicare and Federal withholding taxes may be due annually, quarterly,monthly or Semiweekly depending on the total amount due for a given payroll. The IRS will notify you each November whether you are a monthly or semiweekly depositor for the coming calendar year.
- Annual depositors are those who have liability of less than $2,500 for the entire year, or those who only pay payrolls in December of each year, and domestic payroll payers.
- Quarterly depositors are those whose liability for all payrolls for the quarter are less than $2,500.
- Monthly depositors are those with total tax deposit liabilities of $50,000 or less per year. The employer and employee's share of Social Security and Medicare as well as the Federal income tax withheld from the employee must be deposited by the 15th day of the month following payment of wages.
- Semiweekly depositors are those with more than $50,000 tax liability per year. Employment and other taxes withheld on wages made on Wednesday, Thursday, and/or Friday must be deposited by the following Wednesday. Amounts accumulated on wages paid on Saturday, Sunday, Monday and/or Tuesday must be deposited by the following Friday.
State Payroll Taxes
- Colorado Withholding Taxes are due quarterly, monthly or weekly.
- Quarterly Filers are employers whose Colorado wage withholding reported was less than $7,000 per year. Due date will be the last day of the month following the close of the calendar quarter. Quarters end on March 31, June 30, September 30, and December 31.
- Monthly Filers are employers whose Colorado wage withholding reported was at least $7,000, but not more than $50,000 per year. Due date will be on or before the 15th day of the following month.
- Weekly Filers are employers whose Colorado wage withholding reported was more than $50,000 per year. Weekly filers must remit any Colorado withholding taxes accumulated as of any Friday on or before the third business day following that Friday. Employers who withhold more than $50,000 annually must file all payments by electronic funds transfer (EFT).
Other Payroll Related Taxes
The Colorado Unemployment Compensation form and tax payment are also due on or before the last day of the month following the end of a calendar quarter. You are required to file the report even if no tax is due or you had no payroll during that quarter.
Federal Unemployment Compensation tax deposit is due on the last day of the month following the end of a quarter if the amount due is $500.00 or more.
Unemployment insurance tax is assessed to the employer on gross payroll up to pre-set limits. This tax is paid in two segments, the larger portion directly to the state and a smaller portion directly to the federal government. These unemployment insurance taxes, by law, may NOT be withheld from the employee's wages.
This is an employer tax used to supply unemployment insurance to all wage earners in the event they become unemployed.
In Colorado, the unemployment is based on individual gross wages up to a maximum of $11,700 per year. The base rate for Colorado is 2.4%, or up to $240 per employee per year. This base rate is adjusted annually by the State based on its experience rate for claims against your account. Accounts which show delinquent balances or penalties will be assessed some penalty rate increase.
The federal rate is normally 0.8% per year per employee on all gross wages up to $7,000. This 0.8% rate is derived by assessing the maximum rate of 6.2% less a credit of up to 5.4%. This credit is computed from your state experience rate and is diminished if state payments are not made timely.
The tax is paid quarterly to the state by completion and submission of a form UTI1 and annually to the federal government on a form 940, Employer's Annual Unemployment Report, due by the end of January.
Failure to file and pay unemployment tax reports can result in very substantial penalties, and can even result in forced payment at higher assessed rates.
Occupational privilege tax
The "Occupational Privilege Tax". The OPT tax, commonly referred to as the "head Tax", is assessed by three cities in Colorado, Denver, Aurora, and Greenwood Village.
In Denver, this tax has two parts, the employee contribution, $5.75 per month, which is withheld from the gross wages on all employees who earn gross wages of $500 or more per month. The employer must contribute $4.00 for each eligible employee and each active owner or partner.
The tax in Aurora and Greenwood Village is a flat $2.00 per month per employee that is matched by the employer.
The tax is reported on and paid with the quarterly report that is prepared by the employer, and is due by the end of the month following the end of the quarter.
Workman’s Compensation Insurance
The other payroll related expense is really insurance and not tax, worker compensation insurance. Although not a tax, it is required by law that employers carry this insurance on their workers. All workers, employees or independent contractors, must be covered. The only workers that are allowed to “elect out” of coverage are those who own at least 10% of the employer company. Many business owners delay acquiring this insurance to keep their costs down, however, the penalties for non-compliance are very high, $150 per day. The election to forgo coverage by owners is not effective when that person provides labor at another business’ location.
All businesses which make a profit, as defined by the Internal Revenue Code, will be liable for income tax on those profits, federal and state. Determination of "taxable" profits for a business can be as simple as the gross income, in cases where a business has NO expenses, to a very complex set of rules based on the Code as to the types of income deemed taxable and the types of expenses allowed in determination of "net taxable" income. Although the expenses for a hobby that produces an income are deductible up to the amount of income, it is likely that you will be unable to deduct those expenses as they must be included as miscellaneous itemized deduction subject to the 2% of adjusted gross income floor and requiring the use of schedule A.
For federal purposes your corporation will file a form 1120 or 1120S (in cases where the shareholders elect to be treated as a Subchapter S corporation). These 1120 and 1120S forms are complex and multi-page documents. A corporation that files its FIRST income tax return has to make as many as 20 "elections", some of which are permanent and may not be changed without the written permission of the Internal Revenue Service. These elections range from choosing an accounting method, to choosing a fiscal year, to some exotic options for specific businesses. “S” corporations are like partnerships, they are pass-through entities. That means that the results of corporate operations are passed through to the shareholders on a For K-1 and become a part of the shareholder’s personal returns.
Each form 1120 or 1120S has many blanks and boxes that require a response. Leaving even one of the blanks or boxes empty could allow the IRS to determine that an "incomplete" return was filed. In extreme cases this could mean the return was not filed timely or not filed at all. If a return is never filed, that tax year remains "open". This means that the statutes do not run and the Service can cause all sorts of problems for your company. It pays to seek competent assistance in filing these returns.
Sole proprietorship businesses file a Schedule C form and a schedule SE form, both of these are attached to the taxpayer’s form 1040. Schedule C tax forms can be nearly as complex as corporation forms, especially when there are business assets acquired or sold.
Partnerships file a form 1065 and its attached schedules. Part of the 1065 form is a form K-1 for each partner. The information on the schedule K-1 is entered in various parts of the partner’s personal 1040 and its attached forms. Partnership income tax returns are among the most complex in the income tax system.
Taxes not called taxes.
There is a vast number of “taxes” we pay that are not called tax. They are disguised by calling them fees or other names. Some of these are; business license fees, professional license fees, annual recording fees, government utility fees, and on and on. Of course there is the invisible tax cost that every business and individual must pay to prepare all of the required reporting forms and the costs to send these reports.