Entrepreneurs Must Consider New Tax Matters

Excerpt from an article in The New York Times
Sunday, February 12, 2012

Entrepreneurs Must Consider New Tax Matters 

By CONRAD DE AENLLE

TEPID economic growth has left many people out of work or underemployed. While some wait for a better job, or any job at all, to come along, others will try to create their own jobs from scratch by starting a business.

What budding entrepreneurs may not realize is that there is a fair chance of creating tax headaches for themselves, too. Going into business is likely to mean more forms to fill out, tax authorities warn, and more complexity because the paperwork often relates to obscure nooks and crannies of federal and state tax codes.

“Tax and compliance issues are more complicated than ever before,” said Warren Hudak, head of the accounting firm Hudak & Company in New Cumberland, Pa. “Virtually every new employer has difficulty getting used to withholding taxes and the sheer volume of work that’s involved.”

Between what they must send in on behalf of their workers and their own income, sales and payroll tax obligations, “employers could be filing tax payments three, four, five times a month,” Mr. Hudak said. “It makes it very hard for a small-business guy who understands widgets to keep up with those things.”

Laura Zander recalls the bewilderment that she and her husband, Doug, felt when they left their jobs as software engineers in San Francisco during the dot-com bust and set up their “little, teeny yarn shop” in Truckee, Calif., in 2001. The shop evolved into Jimmy Beans Wool, which does about $6 million in annual sales, mostly online, from the company’s new base in Reno, Nev.

“Things seemed overly complicated in the beginning,” she said. “There was a learning curve.”

One “unfortunate tax event,” she said, provided an expensive lesson. The couple mistakenly took a substantial write-off for the cost of inventory one year early on, when it turned out that the deduction was supposed to be taken gradually as the merchandise was sold. Correcting the error greatly raised their stated income and therefore their tax liability.

“The tax bill ended up being significantly more than we thought,” Ms. Zander said. “It totally smacked us in the face. It was something nobody told us, and I swear we asked four or five accountants.”