It’s no rumor, but I’m not getting too excited just yet.  Allow me to explain.

Currently, in general, a company must issue a 1099-misc to any company that provides services, that is not a corporation, that is not an employee (W-2 should be used), and the dollar amount is over $600.00.

Most common examples are accountants, lawyers, consultants – those individuals that provide your company with some type of service – no tangible goods.  Other uses are for landlords, if you pay rent, you should issue a 1099 to the landlord for the amount of rent you paid that year.  Finally, the other common use is for medical payments.  If you pay a 3rd party provider for sick pay, or if you pay a company to do drug tests on new employees etc, you should issue them 1099s.

Simple enough.  Not too complicated, not too taxing…

Enter in the proposed laws effective with the calendar year 2012.

About the only thing that remains the same is the $600 threshold.  Current lawmakers want all companies to issue Form 1099 to any individual or company for any goods or services.

What that sentence just said was that your company must issue a 1099 to every single vendor they have regardless what they purchase from that vendor, regardless if they are a corporation or not.

This is huge!

Companies will go from issuing a typical 3, 4 or 5 1099′s to a hundred or more forms!

That’s the current proposed law to take effect in 2012.  I personally feel that changes will be made and the lawmakers will realize just how much of a burden this will be on the small business owner.  I hope that they will realize that every company will have to request a W-9 form (request for taxpayer identification number) from every vendor/supplier they do business with.

AND I hope the government will realize that same company will have to issue a like W-9 form and issue one to every one of their customers!  Not to mention that these 1099 forms are printed up special for the IRS so they can’t be simply printed off your computer printer.

AND that’s assuming that your accounting software can even print them.  Many software packages won’t allow printing of 1099′s unless you subscribe to a “service” or their “maintenance plan” costing again the small business owner more money that they don’t have.

Let’s hope I’m right and changes will be made prior to the 2012 deadline.  If not, you better get ready for issuing and collecting more useless government paperwork!

Enjoy your end of year, this may be the last “easy” one!

Thanks for reading!

Mark

There is a common misconception in business that when you purchase something and the vendor/supplier does not charge you sales tax for whatever reason, the business is not responsible to pay the sales tax.  They treat it like a discount, a bonus, yippee – I screwed the MAN.  Well, sorry folks, businesses ARE responsible to pay sales tax (retail and manufacturing exemptions noted).  If sales tax was not previously paid, and the purchased was being used in a taxable manner USE tax is due.  Here are a few common examples of USE tax:

RETAIL – A business that purchases and re-sells items is called a retailer, or wholesaler, depending on exactly who they are selling products to.  If the business sells “Widgets”, they do not pay, nor are they required to pay sales tax from the entity that sold them the Widgets (supplier, vendor, and distributor).  The business must provide a Certificate of Exemption in order for the supplier not to charge sales tax.  When the business then sells the individual Widgets to the public, sales tax is charged, collected and paid to the state.  This is all fair, common and straight forward.  The problem however comes in when the business USES the Widgets for either themselves, or “samples” out the widgets to prospective customers.  Let’s use copy paper as an example for the above Widget.  A copy store purchases a lot of paper to resell to the public.  However, there is going to be some paper that the company uses itself right?  Now a business does not have to go crazy to the page tracking, but some amount should be used.  This same store may give reams of paper out to prospective customers as samples in hopes that the customer will purchase many cases of that paper.  These are two situations when USE tax comes in.  Companies sometimes get into the habit that they are automatically tax exempt because the bulk of their business is reselling items that they purchase.  However, you can’t simply provide a tax exemption certificate to every one of your suppliers and not pay sales tax.  Office supplies, office furniture, uniforms, shipping supplies, tools etc.  These are all common items that are used in a business in a taxable manner and yet sometimes they are not paying sales tax on those purchases.  Being Tax Exempt because you are a retailer is much different than being Tax Exempt for being a Charitable Organization or a Non-Profit.

MANUFACTURER – Another area where Use tax comes to play is in the manufacturing arena.  Again, as with a retailer the bulk of your vendors or suppliers were probably provided a Certificate of Exemption since when you purchase raw materials, or materials that your business will manipulate into another product to sell, are not required to pay sales tax.  The sales tax is paid when the manufacturer sells the product.  However, not all purchases are considered tax exempt, depending on how they are used within the company.  For example, I once worked for a manufacturer that painted metal parts and pieces that eventually made up office workstations.  The metal parts were certainly exempt.  The paint was certainly exempt, but what about the masking tape used while painting?  What about the stretch wrap used when delivering the parts to the end user?  All actual questions that came up during an audit of my records.  In the end I was allowed to purchase the stretch wrap without paying sales tax, but not the masking tape.  The tape was not entirely used in the manufacturing process – it was like a tool that was used in the process, but not in the actual end product.  Another area that was caught during this audit was on purchases from the local hardware store.  When we opened up a commercial account with the hardware store, it was set up as being tax exempt.  We provided our exemption certificate that showed our “sellers permit” number and we were good to go.  The account was set up for us to purchase a case of primer in spray cans that we used now and then.  We didn’t use a lot of them, but when we needed them, we would just typically run down to the hardware and grab a case or two.  This is all fine and completely legal.  However, this account was also used to purchase miscellaneous items that our company used in the day – to – day operations.  Floor cleaners, small tools, light bulbs etc would be purchased on this account with no sales tax being paid.  BAM – you have USE tax, plus penalty due when the auditor comes around.

ONLINE – Out of State – This is a very common area that both businesses and as tax payers, we as individuals are forgetting about Use tax.  If your business purchases office supplies from a cheap, out of state supplier, they may not be required to charge sales tax.  If they don’t, you are responsible to pay Use tax on those items.  I believe the rule is that if you sell via e-commerce you are not required to charge sales tax unless you have a brick & mortar operation in that state.  So if you happen to purchase an office chair from a guy out in California who has no other presence in your state, he is not obligated to charge you sales tax.  You, has the end-user however, are obligated to pay USE tax on that purchase.

Why do we pay USE tax?  Simple, if we did not have to pay USE tax, everyone would simply purchase items out of state to avoid paying the sales tax on those purchases.

Use tax is a simple amount (exact same rate as applicable sales tax) that can easily be tracked and paid right along with your sales tax on a monthly/quarterly/yearly basis.  It is “due” when your sales tax return is due.  If you are a retailer or a manufacturer and never have any USE tax, that would be a huge red flag and I would say you most certainly will be audited eventually by the state.

When business owners start up a new business one of the challenges for them is state sales tax.  What is taxable?  How much do I collect?  When do I have to send the tax into the state?  All good questions that a new business owner will have.

Chances are that if you will be selling products in the State of Wisconsin, the transaction will be taxable.  You are obligated to collect the correct amount of sales tax and remit it to the State.  When you have to remit to the state is determined by your registration form when you filed for a seller’s permit number.  The state may change your filing frequency if your sales change from the previous year of from the amount indicated on the BTR registration form.  Our state has a pretty good website that will answer most of the other questions of a new business owner.

After going through several sales tax audits for past employers and clients, I just wanted to bring up a few tips so that you may perhaps avoid a time consuming and expensive audit experience.

Trouble issues I have seen are:

Tax Exempt Customers

Selling items for “Cash” or nice even amounts

Collecting the correct counties tax

Use Tax

If your customer is tax exempt, you MUST obtain a sales tax exemption certificate from them.  If no form is on file, and you are audited, even if the name of the customer was St. Joseph of Israel, they are going to be considered taxable without proof otherwise.  If you sell products to another dealer, commercial account, or retail store etc., you again must obtain an exemption form from them as well.  Tax exempt organizations are used to being asked for a copy of the certificate.  Some sales folks feel that they are inconveniencing the customer asking for the form; however, it’s a much greater inconvenience for the business owner when they get audited and then have to go back and request certificates from these same customers for sales that were possibly made several years ago.

Sales tax is to be clearly identified on all invoices. Depending on your accounting system, this may or may not be a challenge, however sales tax should be clearly shown on invoices to first show the customer you are collecting sales tax and secondly to keep record of the appropriate amounts to remit to the state.

Laziness or the theory of “perceived discount” sometimes brings about a sale in an even amount to make it easy on the customer for the transaction to move forward.  “$10.00 cash gets you this widget”! Regardless if weather it’s a salesperson who does not want to count out or charge a customer change, or if the sales person is sending out a perceived discount to the customer, sales tax must be identified in each and every sale.

If you sell a product for $10.00 even, you still must record how much was in sales and how much was in sales tax.  For Milwaukee the sales tax is 5.6%, so the product sales would be $9.47 and sales tax would be $0.53 (Divide the sale amount by 1.056 to get the product amount).

New business owners sometimes are not aware how they should deal with county sales tax.  You need to account for all sales tax, separately by county, so that you will have that information for the ST-12 form you fill out for the state.  The general rule of thumb is where did the product or service “exchange ownership”?  If you have a brick and mortar store, this is easy, you sell widgets out of the store, and then whatever county your store is located in the county sales tax you should charge.

If you deliver product however and have a brick and mortar store, it’s the customer’s location to where you are delivering the product that must be taken into consideration when charging sales tax.  Example is your store is in Milwaukee, but you deliver, for a fee, the product to Waukesha County.  You should charge 5.1% and track those sales separate from the Milwaukee County sales.  “Ownership” was exchanged when it was transferred out of your delivery truck to the customer.  If this same customer came to your store and picked up the product, then they should be charged Milwaukee County sales tax.

Discounts the State allows you when you compile the sales tax return shall be considered income.

If the state has determined that you should remit the collected sales tax to them annually, I would recommend that you set up a second checking account or savings account if one would be available for your business and deposit on a monthly or quarterly basis the amount of sales tax liability that has been collected.  January 31 has a way of sneaking up on you and by not keeping the sales tax monies available may cause some issues and penalties if you don’t have it when the sales tax return is due.

The most common issue that comes from an audit is Use tax.  That will be the subject of my next post so please stay tuned!

I wanted to bring up common issues with sales tax; this post is by no means an all inclusive sales tax guide for the State of Wisconsin.  There are many industry, product and service-specific issues that should be researched by a new business owner.  I highly recommend a new business owner to contact the state and verify issues with them (take names, ID’s and phone numbers – all date stamped).  Another way is to simply do a little research on what your competition does.  Do all of your competitors charge sales tax for their IT services?  If so, you probably should too!

Once you have your business name and business checking account established you must register with the State of Wisconsin since you will be conducting business in the state, as well as possibly collecting sales tax.

If you are selling anything tangible you will be required to obtain a Seller’s Permit.  If you will have employees you are required to obtain a withholding number.  In both cases since you are also required to obtain a Registration Certificate you will be able to receive these numbers at the same time with the same application.

Form BTR-101 is the registration form that the state requires to be filled out.  It may be completed online or by the mail.  If you file the form online I highly recommend you print out a copy first since you will be doing some information gathering when completing the form.

Part A – New Business

Part B – Select all applicable areas

Part C – Depends on business structure you have chosen -If you choose an LLC, select both LLC and Disregarded as an entity separate from it owner.

Part D – NAICS codes can be found from my website here: http://www.naics.com/search.html

Part E – Estimate the date of when your first sale will be made (2 weeks from today).

Estimate your monthly sales – depending on your estimates you will be required to file a sales tax return either annually, quarterly, monthly or by the 20th of the following month.

Estimated monthly purchases subject to USE tax.  I will write an additional blog post on USE tax in the near future as this seems to be a trouble spot with new business owners that purchase products for re-sale.

Yes to business being operated all 12 months

Leave line 3 & 4 blank (your fiscal year ending date will be December 31)

Part F – Enter date of when you think your first payroll will be made.  Under Item #2 again they are asking what your estimated withholding tax will be, as with sales tax the report and deposit of the withholding will be contingent on your answer.

Part G – Your name address etc.  If you are an LLC, your title is Member

Part H – Fill in information about your business checking account you just opened up.

With the state’s new “My Tax Account”, they have made it very easy to file reports and deposit taxes due.

After the state receives your application, a Registration Certificate will be mailed back to you with your Seller’s Permit Number, your Wisconsin

COST = $20.00 (two years, $10.00 annual renewal afterward)

If expenses are paid out prior to the company being set up, a business owner just merely needs to track those expenses, and enter in a journal entry to accurately record what those expenses were for.  You may then cut yourself a check for the total of those expenses, enter the amount in as an owner’s investment, or treat it as a loan outstanding.  The main thing is to properly segregate business expenses from personal expenses.

The Company Checking Account

Now that you have made the previous decisions as to what type of entity you want, if you are going to form an LLC or not, and you have received your federal ID number if required, you can open up a business checking account.

A checking account strictly used for business transactions is highly recommended. – Avoid using cash to pay for any expenses and deposit all cash you receive into your business checking account – itemizing all deposits as to who or what they are from.

This new checking account is solely used for your new business’s financial activity.  You will record all income and expenses for the business.  You do not want to co-mingle personal funds in this account.

Personal funds going into a business checking account are called Owners Investment or Owners Contributions.  Funds going out of the business back to you are called Owners Draws*.  Your business’s financial statements must keep track of these transactions.  If you have personal bills being paid out of a business checking, you are opening up yourself to many potential errors and it can become a nightmare not if but when you are audited to provide explanations as to what every check was written for (many years later).

Any bank is fine; you may start with where you currently bank if this location is best for you or have established a banking relationship already.

US Bank – a good option for a new business checking, no monthly maintenance fees if you keep within certain limits (75 checks per month etc).  Watch the potential for fees however.

Normal check register as you have with your current personal checking account is fine; there are some advantages to having the 7-ring binder checking account.  Separate deposit book with duplicate copies is recommended.

If you find that you are paying for a lot of expenses using cash (a check card is preferred over paying cash) you may think about having a petty cash fund for these expenses.  Paying for cash does not exclude the need for obtaining a receipt.  A petty cash fund is like having another bank checking account that is reconciled on a monthly basis.

Your checkbook register (stubs) along with your deposit book will be used at a later date either by yourself or someone else when “doing the books”.

*I will discuss account names in further detail later.

In my current blog series of the list of items that one needs to do when starting up a business, we find ourselves with yet another question, do I need to have a federal ID number or not?  In my opinion, I don’t see any reason not to, but here is some information that may help your decision one way or the other.

Per IRS regulations you must have a federal EIN number if:

Your business structure is a partnership or corporation.

You have or will have employees.

You file any Employment, Excise, Alcohol, Tobacco or Firearm tax returns.

Have or will have certain retirement plans.

Are a Trust, Estate, Real Estate mortgage investment conduit, non-profit organization.

A Farmers coop or plan administrator.

Some banks also may require a FEIN to open a business checking account.

An LLC is not required to have a FEIN if the classification is sole-proprietor (Disregarded Entity). If you don’t have a FEIN, you MUST use your social security number on all forms.  It’s easy, it’s free and it may avoid ID theft, I highly recommend obtaining a federal ID number.

To obtain a FEIN you can apply online at https://sa1.www4.irs.gov/modiein/individual/index.jsp or call  800-829-4933 or complete and mail out form SS-4.

Things are happening now!  You are going into business, you have a killer company name, you have an LLC and you have a brand new federal ID number.  It’s now time to open up that company checking account.

As always, care should be given prior to completing the following tasks to avoid further cost and the hassle of correcting simple mistakes.  If you have decided to form an LLC, the following two steps are needed:

An LLC may be set up all on-line by simply clicking to the State of Wisconsin, Department of Financial Institutions at

www.wdfi.org/corporations

Here you can find out further information on the process, research existing names, and create your LLC.

LLC Name The first step is to think of a name for your business.  On the page listed above, click on “Corporate Registration Information System”.  From here you will be able to search the current businesses that have registered a name with the State of Wisconsin.  You must have a unique business name that is distinguishable from all others listed.

Distinguishable meaning you can’t use Best Oil, LLC (Best Oil Co. is already being used)

Do research – Internet search, Yellow/white pages make sure it’s a unique name.  See my previous post on business naming for ideas and suggestions.

Think of how you will be branding this name – business cards, advertising, web presents, ….

This is a good time to consider a domain name for your business.  You may be able to select ABC Oil, LLC in the State of Wisconsin, but www.abcoil.com is long gone….

Create the LLC The second step is the actual creation of the LLC – online.  From the page listed above, click on “Create an LLC or Business Corporation”, then select “Wisconsin Limited Liability Company”.  The following information will be required:

Name of the LLC

Registered Agent (YOU)

Management of the LLC (Typically management is vested in a member – YOU)

Organizers (YOU)

Drafter (YOU)

Contact (YOU)

You fill in your name and address over and over, enter in your credit card information and that’s it!

COST = $130.00 First year, $25.00/year renewal fee
Make sure to print off a copy of the “Articles of Organization” for your records.  After submitting the form and payment to the State of Wisconsin, you receive an email first confirming the submission, and then a second email stating that the LLC was approved by the state.  In that second email there will be a link to the “Filed” version of the “Articles of Organization” which will be needed when you set up your business checking account at the bank.  Print several copies to have available for future use.

As always, if you have any questions on the above, feel free to contact me directly!

Available Business Structures:

Sole Proprietorship

Partnership

Corporation

Limited Liability Company (LLC)

While you may be able change the business structure (there are limitations with corporations) at any time but to avoid additional costs you should try and set up your business structure based on your current need only.

A Sole Proprietorship is the most common type entity. It is the easiest to set up and least expensive option.  The owner operates the business and is personally liable for all of the business debts and actions of the company.  The owner will report all business activity on their personal tax returns.  You will need to file a form “Schedule C” along with your federal form 1040.  A drawback from operating a business as a sole proprietorship is the fact that the owner is personally liable for the company’s actions.

With Partnerships, you still have the liability issue as you do with a Sole Proprietorship, plus considerable time must be taken to establish the “Partnership Agreement” which must clearly stipulate every aspect of the business.  I’m not a huge fan of partnerships, I have seen life long friends and family members go into business together and end up having a battle over a business – their relationships were never the same afterward.

The “Partnership Agreement” will have to be written by an attorney and should describe with no uncertain terms how the partnership will handle profits, liability and the equity of each partner.  Great care must be made to also come up with a partner “buy out” arrangement.  Not something that folks who are going into business together will automatically think about at first, but certainly should.

Corporations are complex and expensive structures and are simply not appropriate for the bulk of new start up businesses.  Depending on some specific needs of the owners a corporation (keep in mind there are several types of corporations as well) is typically not the first option for a business entity.  There are several mandates that a corporation must follow and attorneys and CPA’s must be utilized to obtain all of the consideration and tax ramifications of each corporation type.  Obviously the “double taxation” theory comes into play where the corporation is taxed on the company profits and the owners are taxed on the income that they receive from the corporation on a personal level.

An LLC is the second most common structure, there is limited personal liability involved yet can operate as a sole proprietorship or partnership.  Depending on the type of LLC selected, all business activity can be reported on personal tax returns.  In a future blog post I will go into detail regarding the steps needed for you to become an LLC as this is what I believe to be the best option since it provides a “shield” from liability.

LLC Types:

Disregarded Entity (Sole Proprietorship) or Single-Member LLC

Partnership

Corporation

LLC’s are formed under the state and the above classification is required only for federal income tax purposes.  You may still have a business “name” with a sole-proprietorship; you don’t have to have an LLC or other type of entity to have an actual business name.  (D/B/A).  See US Small Business Administration’s website for additional information (www.sba.gov).

Please give me a call to discuss further the advantages and disadvantages to all business structures.

Over the past decade I have either set up myself, or helped set up numerous businesses in the State of Wisconsin.  If done correctly it’s a simple task that sets up the administrative blueprint for your company.  If not set up correctly it may be costly and time consuming – not the way you want to start off your new business.  While you don’t necessarily need an accountant to perform these tasks, it may behoove you to seek someone like myself out when setting up your business.  A little out of pocket costs up front can save you hundreds of dollars and a lot of frustration later on.

There are a series of simple tasks to be done when you start up a business, this post and much shorter ones to follow, will give you the chronological order of items to be done, and why they should be done in this particular order.  Before anything is “officially” done, you first must plan, brainstorm and plan some more the many attributes of starting up a business – the administrative side.

I can not stress enough the importance of planning the administrative side of starting up a business.  Most business owners spend a ton of time with the business idea, how to build it, how to sell it, how to market it, but just about the time the owner should write a killer business plan (which has all of the just mentioned items AND the administrative items as well), things start to fall apart.  Everyone is anxious to get out there and start selling, but a few simple tasks done correctly up front will get you off on the right foot.

Here is my list, in specific order, of items that must be done to set up your business:

• Planning the business
• Naming/Branding the business
• Type of Entity
• LLC Procedure
• Federal ID# (FEIN) or not?
• Checking Account
• State of Wisconsin Registration
• Sales Tax Issues – Seller’s Permit
• Accounting considerations

Long before the first administrative form is filled out, planning must be done to insure a smooth start up.  As I wrote in an earlier post -

What is a business?

some business owners start a business without knowing they have done so!  For the sake of this and those posts to come shortly I will assume that you have a legitimate business idea or plan, want to make a profit, and want to record your income and expense transactions correctly.

Another early planning stage item is naming.  The name of your business is huge – to some this is obvious, to others, please read:

What’s in a name?

Over the next several blog posts, I will go into greater detail of each of these remaining steps in starting up your business.

I feel like that old Charter Hospital commercial that aired in Milwaukee years ago, “If you don’t get help from Charter, get help somewhere”.  If you don’t get help (starting up your business – administratively) from Customized Business Services, LLC, get help somewhere!