Introduction
Publications
Forms of Business
First Steps to Take
Applications for Tax Identification Numbers & Licenses
Accounting Setup
Listing Business Assets
Vehicle Expenses
Home Office
Business Expenses
Travel, Meals & Entertainment
Inventory
Payroll
Federal Tax Requirements
Ohio Tax Requirements
Disaster Recovery Planning
Closing Remarks
Appendix A - Publications Listing
Appendix B - Federal/State Agency Addresses
Glosary of Accounting & Tax Terms
Sample Forms

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INTRODUCTION

More and more people today are starting their own business. Some are looking for extra income to supplement their current job while others want to be their own boss and be rewarded based on their own hard work and experience. Whatever the reason you have for going into business for yourself, many people will need assistance concerning what accounting and tax requirements they must follow. This booklet was written to help those who want to start their own business but need guidance as to what they need to do in the area of bookkeeping, payroll, inventory management, and tax requirements at the federal, state, and local levels. This booklet will give you practical guidelines to follow to get this worry "off your back" since we are not all accountants or tax specialists.

The information being provided is geared toward a sole proprietor form of business. Most home business start ups will be this type of business, however, the information given will also in many cases apply to partnerships and corporations as well. This booklet will give you a thorough overview of what you need to do to satisfy accounting and tax needs but does not claim to give you everything you need to know. The nature of your business and individual circumstances may call for additional accounting and tax requirements which you will find out about as you follow through the steps in setting up your business.

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PUBLICATIONS

There are a number of federal and state publications that will give you valuable information concerning your business. Some of this information is given throughout this booklet. In order to get a more thorough understanding of what is expected of business owners, you should obtain copies of this information as you research the business requirements for your product or service. Listed in Appendix-A are publications you can obtain free of charge. The most beneficial publications to order first and study as you begin to start your business are:

Publication 454, Your Business Tax Kit - Call 1-800-829-3676

Publication 334, Tax Guide for Small Business - Call 1-800-829-3676

Business Tax Guide For Ohio - Call 1-614-466-3960

Your Business Tax Kit is an assortment of IRS publications that concern new business owners. Pay particular attention to Publication 583, Starting a Business and Keeping Records. This publication provides the best overall information that you need to know in starting your business. The Business Tax Guide For Ohio is the best single source of information regarding Ohio tax requirements. It is a MUST for you to obtain and follow the guidelines set forth in these publications! You can branch off into the various other free publications if and when the need arises.

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FORMS OF BUSINESSES

When you start a business you need to decide what form of business to setup. Legal and tax considerations enter into this decision. The most common forms of business are sole proprietorship, partnership, and corporation. The advantages and disadvantages of each legal form of ownership are given below:

SOLE PROPRIETORSHIP

Advantages
1. You're the boss
2. It's easy to get started
3. You keep all the profits
4. Income from the business is taxed as personal income
5. You can discontinue your business at will

Disadvantages
1. You assume unlimited liability
2. The investment capital you can raise is limited
3. You need to be a generalist
4. Retaining high-caliber employees is difficult
5. The life of the business is limited

PARTNERSHIP

Advantages
1. Two heads are better than one
2. It's easy to get started
3. More investment capital is available
4. Partners pay only personal income tax
5. High-caliber employees can be made partners

Disadvantages
1. Partners have unlimited liability
2. Profits must be shared
3. The partners may disagree
4. The life of the business is limited

CORPORATION

Advantages
1. Stockholders have limited liability
2. Corporations can raise the most investment capital
3. Corporations have unlimited life
4. Ownership is easily transferable
5. Corporations utilize specialists

Disadvantages
1. Corporations are taxed twice
2. Corporations must pay capital stock tax
3. Starting a corporation is expensive
4. Corporations are more closely regulated

In order to avoid double taxation (once to the shareholders and again to the corporation) a corporation may elect to become an S corporation if they meet certain requirements. Owners of the S corporation enjoy the advantages of being a corporation and are treated tax wise as a partnership. A corporation elects to become an S corporation by filing Form 2553, Election by a Small Business Corporation.

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FIRST STEPS TO TAKE

After you have decided what form of business ownership to use, you will be faced with a number of accounting related questions to answer in setting up your bookkeeping system. It would be advisable to consult with an accountant or tax professional to help you in making these initial decisions. Professional help will ensure a system is designed that specifically meets your bookkeeping needs.

You can either pay someone else to keep your books and file the required tax forms, or you can do this work yourself. If you decide to maintain your own books, you will be faced with either using a manual system of keeping your accounting records (a sample is given in IRS Pub. 583, Starting a Business and Keeping Records), or you can purchase one of a number of excellent accounting software packages that are on the market today. Using a computer in your business will help you be more efficient by reducing the chance of errors, in saving you time, and providing more accurate and detailed accounting information. The better a record keeping system you put into place, the better you will be able to measure the profitability of your business. This will have an impact on decisions you make that will affect your bottom line (net profit).

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APPLICATIONS FOR TAX IDENTIFICATION NUMBERS & LICENSES

Employer Identification Number (EIN): You will be required to apply for a Federal EIN if you (1) have employees, (2) have a Keogh Plan, (3) operate your business as a corporation or a partnership, or (4) file any of these tax returns - Employment, Excise Tax, or Alcohol, Tobacco, and Firearms. You can apply for an EIN by mail by completing Form SS-4, Application for Employer Identification Number, or by calling the TIN phone number for your state (Ohio businesses call, 1-606-292-5467). SS-4 forms are processed in 4 to 5 weeks, or you can obtain your EIN immediately when applying by phone.

Ohio Withholding Agent: If you are required to withhold Federal taxes, you will also have to apply for an Ohio Withholding Account Number. For your convenience, the Ohio Department of Taxation will register your business by telephone. Seller's Use accounts (UT-1000), Consumer's Use accounts (UT-1008), and Employer Withholding accounts (IT-1) may be registered as well as activating School District Withholding accounts. Call 1-888-405-4089 and press #1 after the message.

Ohio School District Withholding Agent: Included with the Ohio Withholding registration process you can register for a School District Income Tax number. You must obtain this number if you have employees who reside in a school district which has enacted an income tax.

City Income Tax Withholding: If your business is located in a city or municipality that imposes an income tax (there are approximately 510 in Ohio), you need to contact the City Tax Department to obtain information on the tax withholding and remittance process in your community.

Vendors License: If you will be selling tangible personal property (including the rental of hotel rooms by transient guests), you will be required to obtain a vendors license and remit sales taxes to the State of Ohio. Contact your County Auditor where your business is located to obtain information and apply for a vendors license. You can also contract the Ohio Department of Taxation, Sales and Use Tax Division at 614-466-7350 for more information.

Zoning Permit: Zoning restrictions are imposed to protect the rights of people and property. These restrictions will vary from community to community. Contact your county/city zoning office for information. You may be required to fill out some applications and appear before the Zoning Board for approval. Zoning approval also applies to home based businesses.

Business License: Certain businesses may be required to obtain a permit or license by the city/county where the business is located. Contact your local county/city governmental offices for information or requirements regarding your circumstances. Call the Ohio One-Stop Business Permit Center at 1-800-248-4040 for information about Ohio permits and regulations pertaining to your business. They can provide information regarding health permits, zoning laws, building permits, vendor's license, registration of business name, and Occupational Safety and Health Administration (OSHA) regulations.

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ACCOUNTING SETUP

One of the first things you should do is open a business checking account at your local bank. Do not attempt to use your personal checking account to pay for various items concerning your business. You will want to keep a separation between your personal and business activities. You will no doubt deposit your own personal funds into the new business checking account to get yourself started. Money deposited into the account should be classified as "Contributed Capital" from a bookkeeping standpoint. Try to pay for everything with a check rather than cash since this will create a better audit trail. If there are items you want to pay for with cash, you should set up a Petty Cash fund and keep all receipts. This will enable you to properly record and classify your business expenses.

For tax purposes, you will have to determine what is your Tax Year. There are two kinds of tax years:

Calendar Year - Is 12 consecutive months beginning January 1 and ending December 31

Fiscal Year - Is 12 consecutive months ending on the last day of any month other than December 31

If you operate your business as a sole proprietor you will be using the calendar year as your accounting period. S Corporations and partnerships operate under special rules. For more information, see IRS Publication 583, Accounting Periods and Methods. Once you establish your tax year you will need permission from the IRS to change it.

Before you start keeping track of your bookkeeping transactions you will have to determine what Accounting Method you will utilize. There are three basic accounting methods:

1. Cash Method - Income is reported in the tax year that it is received, rather than when it is earned and expenses are recognized in the year they are paid.

2. Accrual Method - Income is reported in the year earned, whether or not received and expenses are deducted in the year incurred, whether or not paid.

3. Combination (Hybrid) Method - Generally, you may use any combination cash, accrual, and special methods of accounting if the combination clearly shows income and you use it consistently. If you have inventories, the accrual method must be used for purchases and sales, but you could still use the cash method for all other items of income and expenses.

Once you have set up your accounting method, you must get permission from the IRS before you can change to another method.

The basic unit of measurement in your record keeping system is an Account. Each account represents a single category of business transactions. You will need to set up accounts as you determine what accounting information to keep under the general headings of assets, liabilities, capital, income, and expenses. A title must be given to each account which identifies the nature of the financial data it records. The listing of accounts that you come up with will be called your Chart of Accounts. Spend some time and come up with a thorough listing of what items you want to keep track of in your business. A simplified chart of accounts is given below as an example of what you need to set up. Use this list as an initial base to set up your chart and add/delete accounts to suit your specific needs.

BALANCE SHEET

Assets
Petty Cash
Checking Account
Accounts Receivable
Inventory
Machinery/Equipment/Furniture
Accumulated Depreciation - Machinery/Equipment/Furniture
Land
Buildings
Accumulated Depreciation - Buildings

Liabilities
Accounts Payable
Notes Payable
Credit Cards
Sales Tax Payable
FICA (Payroll) Taxes Payable
Loans

Capital
Contributed Capital
Retained Earnings

INCOME STATEMENT

Income
Sales
Cost of Goods Sold (deduction to Sales)
Service Income
Other Income

Expenses
Advertising
Car & Truck Expenses
Depreciation Expense
Insurance
Interest Paid
Legal/Accounting Services
Office Expense
Repairs & Maintenance
Taxes & Licenses
Travel, Meals, Entertainment
Utilities
Wages
Other Expenses

To make it even more confusing, you can use a Single Entry or a Double Entry accounting system. In a single entry system, when you pay a bill, the amount paid is listed under the given account (category of expense) at just one location in your books. This system does not require you to "balance the books or record more than one entry for each transaction. Even though the single entry system is the simplest to maintain, the double entry system gives the greatest degree of accuracy through its use of checks and balances, but is difficult for someone to use who has no bookkeeping experience. In a Double Entry system, for every business transaction, two entries are required, a DEBIT and a CREDIT. If you have an accountant, then you will not have to worry about this. If you are using accounting software on the computer, the programs are designed in such a way that you do not have to understand debits and credits. Otherwise, you will probably be using a single entry form of accounting system. Here again, it pays to get professional help in this area so you can concentrate your effort on the nuts and bolts of your business rather than wrestling with record keeping requirements. If you choose to manually keep your books under a single entry system, a popular system is put out by the Dome Publishing Company.

There are basic accounting reports that are prepared by grouping certain types of accounts together. A BALANCE SHEET lists the ending balance in an account at a particular point in time (like at year end, 12/31). Accounts that are reported on a Balance Sheet are Assets, Liabilities, and Capital (sometimes called Owner’s Equity). An INCOME STATEMENT reports account activity for a given period of time (i.e., the total of transactions posting for the 4th quarter). The Income Statement (also called a Profit & Loss Statement) reports Income accounts representing money received from the sale of your product or service and Expense accounts which represent amounts that you paid out. The net total of income minus expenses gives you the net profit or loss for the period. The Income Statement is incorporated into Schedule C (for sole proprietors) to arrive at the business net profit or loss for the entire year which becomes part of an individual’s Federal Income Tax return (Form 1040). There are a variety of other accounting reports that are used to report various aspects of the business. If you are using an accounting software program on your computer, these reports are easily generated. If you are using a manual system of keeping records, you will have to gather the necessary information to produce the essential reports for tax purposes.

The accounting process can be summarized in this way:  (also see Accounting Cycle link)

1. Business Transactions: Transactions occur which are represented by a source document (cash register tapes, receipts, invoices, check stubs, petty cash receipts, bank statements, etc.). The source document is your written evidence that supports a transaction and is retained for tax purposes.

2. Journals: Transactions are recorded in chronological order in General or Subsidiary Journals. Examples would be a Sales Journal, Cash Receipts, Cash Payments, Payroll Journal.

3. Ledgers: Transactions are classified by type and recorded in separate ledger accounts.

4. Financial Statements: Account data regrouped and used to prepare Balance Sheet and Income Statement (Profit or Loss Statement).

Your accounting system will capture individual business transactions that are evidenced by various source documents, record them in date order in journals, summarize that information under the appropriate ledger account, and report that account information in different financial statements. This information is needed to report on the performance of your business and for preparation of various tax forms/returns. The best advice is to consult with an accountant to help you establish the necessary journals, ledgers, chart of accounts and record keeping procedures you need in order to maintain an accurate bookkeeping system.

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LISTING BUSINESS ASSETS

You will be acquiring various items of real and personal property in order to conduct your business. Examples would be land, building, machinery, equipment, vehicles, tools, furniture and fixtures, and office equipment such as a computer, printer, copy machine, fax machine, telephone system etc. Real Property includes land and buildings. Personal Property is any tangible asset that is not real property.

A list should be maintained of various forms of property that are acquired. This information is needed to prepare the Personal Property Tax Return (a new business must submit a New Taxpayer Personal Property Return within 90 days of starting the business, and annually after that) and for developing the depreciation schedule that is needed when preparing the Federal Income Tax Return. At a minimum you will need to record the date you acquired the asset and its cost. An example of a Depreciation Schedule can be found in the IRS Instructions for Form 4562, Depreciation and Amortization. If you start keeping this list from the start, you will save yourself, or your accountant/tax preparer some headaches when the necessary tax returns must be filed.

When you purchase real property and/or personal property for use in your business, you cannot deduct the entire cost of the assets in the year you acquired them. These types of purchases are considered Capital Expenditures. The amount paid to acquire an asset cannot be expensed in the year purchased, but must be capitalized and depreciated over the years of its useful life. This is why it is important for you to keep good records of business assets purchased on an ongoing basis. IRS Publication 551, Basis of Assets, and Publication 946, How To Depreciate Property, are good sources of information to help you understand how to determine the depreciable basis of an asset and to compute its depreciation.

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VEHICLE EXPENSES

Another piece of information you need to know in the early stages of setting up your business concerns vehicle expenses. If you use your personal vehicle in the course of your business, you will be able to take a tax deduction on Federal Schedule C (for sole proprietors) if you follow the necessary documentation requirements. The first thing you need to do is to start keeping a Mileage Log in your car or truck. Every time you use the vehicle for a business purpose, record the mileage information in the log. Your log should contain the following types of information:

- Date
- Odometer Reading (both the beginning and ending mileage for the trip)
- Number of Miles Driven

You will need to record the odometer reading for you vehicle at the beginning and at the end of the year. This will allow you to compute the total miles driven for the year. By adding up the business miles from the Mileage Log, you will have the total business miles driven. This information is needed to determine the percentage of miles driven for business purposes.

There are two methods for deducting car and truck expenses for tax purposes.

1. Standard Mileage: The number of business miles driven is multiplied by a pre-determined rate per mile (44.5 cents per mile for 2006 and 48.5 cents per mile in 2007) to arrive at the allowable vehicle expense deduction. Under this method, no deductions are taken related to vehicle expenses such as gas, oil, maintenance, repairs, insurance and depreciation since all these are built into the standard mileage rate.

2. Actual Expenses: The allowable tax deduction is determined by multiplying the total of actual vehicle expenses (gas, oil, maintenance, repairs, insurance, depreciation, parking fees, tolls etc.) by the business use percentage (business miles driven divided by total miles driven).

When you are preparing your federal income tax return, you should calculate your car/truck expenses under each method and use the one that gives you the largest deduction. One stipulation is, you must use the standard mileage rate for the first year that you used your vehicle for business purposes in order to have the option to choose the best method in succeeding years. Under each method, you still need to maintain written evidence (mileage log) to support your write off of these expenses for tax purposes.

If you own two or more cars that are used for business purposes at the same time, you cannot use the standard mileage rate for either car. You may be able to deduct part of the actual expenses incurred for each car. For more information obtain, IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.

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HOME OFFICE

If you are going to be operating a home business, you may be able to deduct expenses for business use of your home. There are some strict requirements you must meet in order to claim part of the expenses of operating your home as business expenses. For income tax purposes, the Home Office deduction can only be taken if part of your home was used regularly and exclusively as:

1. Your principal place of business for any trade or business, or
2. A place to meet or deal with your patients, clients, or customers in the normal course of business

The exclusive use requirement means you must use a specific area, or room in your home for business purposes only. You cannot use that space for personal reasons. The home office can be a separate structure (not attached to your home). The regular use requirement means that the home office must be used on a continuing basis, and not just occasionally. If you feel you may be able to meet the requirements to qualify for deduction of home office expenses, obtain IRS Publication 587, Business Use of Your Home for more information. There are some exceptions to the exclusive use requirement if you use part of your home as a day care facility, or for the storage of inventory or product samples. Publication 587 will give more details concerning these exceptions.

If you have more than one business location, your home must be considered the principle place of business in order to claim home office expenses. The principle place of business is determined by 1) the relative importance of the activities performed at each location, and 2) the time spent at each location. If this situation applies to you, the circumstances surrounding your business activities will be the factor in determining if you are eligible to claim home office expenses. If you are operating more than one business, the requirements for claiming the home office deduction must be applied separately to each trade or business activity.

These are the steps you can take to have the necessary information available to calculate the home office deduction when you prepare your federal income tax return.

1. Determine the total square footage of the space or room you are using for business purposes.
2. Calculate the total square footage of your home.
3. Divide the business square footage by the total home square footage to arrive at the business use percentage. If you are operating a day care facility that uses various rooms in the home, you will calculate the business percentage by figuring the total business hours and comparing it to the total hours in a year (8,760 hours).

The different types of expenses you can deduct are deductible mortgage interest, real estate taxes, casualty losses, insurance, repairs & maintenance, utilities, other expenses (includes rent if you do not own the home) and depreciation of your home. Some expenses will be directly attributed to the area used for business (like painting, carpeting, etc. in the room used) which are called Direct Expenses which are fully deductible as business expenses. Expenses that are for the entire home (for example mortgage interest, utilities, insurance, etc.) are called Indirect Expenses. The total of your indirect expenses is multiplied by your business use percentage to arrive at the amount of your deduction. It is important for you to keep adequate records of these related expenses in order to justify your deduction.

For sole proprietors, the home office deduction is calculated on IRS Form 8829, Expenses for Business Use of Your Home. The allowable deduction amount from this form is carried over to Schedule C, Profit or Loss From Business.

The amount of the home office deduction may be limited. If your business is going to recognize a net loss for the year (expenses exceed income received), and many first year businesses will, certain deductions that are attributed to business use of the home will be reduced. In other words, these expenses cannot throw you deeper into the hole (net loss). The good news is, any unallowable deductions can be carried over to the next tax year. If this situation applies to you, Publication 587 will provide you with the necessary details on the amount of allowable expenses you can deduct and carry over amounts.

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BUSINESS EXPENSES

In order to deduct certain costs as business expenses, they must be considered both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be considered indispensable in order to be considered necessary. You will need to be able to distinguish between (1) business expenses, (2) expenses used to determine cost of goods sold, (3) capital expenditures, and (4) personal expenses.

You will incur costs as you go about the process of setting up your operations. These expenses will be paid before you actually open your doors for business. These costs are called start up costs and must be classified as capital expenditures (see explanation in LISTING BUSINESS EXPENSES). Some expenses that would fall into this category would be advertising, travel, utilities, repairs, or employee wages. Start up costs would also include amounts paid to investigate the possibility of creating or acquiring an active trade or business. In order to amortize these costs, they must (1) be a cost you would normally deduct in operating a business, and (2) be incurred before you begin business operations.

Start up costs (a capital expenditure) must be amortized for a period of 60 months or more. Once you determine the number of months for amortization purposes, you cannot change it. You determine the amortization amount by taking the total start up costs and dividing it by the number of months (60 or more). This will be the allowable deduction amount per month. The amortization period begins the month that you begin business operations. Amortization is reported on IRS Form 4562 Part VI as part of your Federal income tax return. A statement must be attached to this form that contains:

A. Total start up or organizational costs you will amortize
B. Description of what the cost is for
C. The date each cost was incurred
D. The date that your business began operations
E. The number of months in your amortization period (must be 60 or more)

As you can see, it is important to keep good records of start up expenses, even before you formally establish your bookkeeping system. A listing of these expenses should be kept in a similar fashion as was recommended for business assets and should include the items listed in A through E above. IRS Publication 535, Business Expenses will give you some good guidelines to follow in how to handle various business related costs.

There is usually no limit on the amount of business expense deductions taken if the amount is reasonable. If your expenses exceed your income, you will have a net business loss. It is common for many new businesses to realize a loss in the first few years of operations. There may be limits on the amount of losses you can deduct. Usually, a loss from a business activity is limited to the investment you have "at risk" in the activity. You are "at risk" in any activity for:

1. The money and adjusted basis of property you contribute to the activity, and
2. Amounts you borrow for use in the activity if; (a) you are personally liable for repayment, or (b) you pledge property (other than property used in your business) as security for the loan

Any losses could also be limited if your business is considered a passive activity, or an activity where you do not materially participate. You materially participate if you take a significant and active role in the business (usually requiring more than 100 hours in a year). Obtain IRS Publication 925, Passive Activity and At-Risk Rules if you need more information. Passive losses can only be offset against passive income activities.

The enactment of the American Jobs Creation Act of 2004 changed the rules for the amortization of start-up and organizational costs.  Effective for amounts paid or incurred after October 22, 2004, the new law allows taxpayers, including partnerships and corporations, an election to deduct up to $5,000 of start-up or organizational costs in the tax year in which their trade or business begins. The $5,000 amount must be reduced (but not below zero) by the amount by which the costs exceed $50,000. The remainder of any costs, those that are not deductible in the year in which the trade or business begins, must be ratably amortized over the 180-month period (15 years) beginning with the month in which the active trade or business begins.

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TRAVEL, MEALS & ENTERTAINMENT

It is important to understand when certain travel, meals, and entertainment expenses are deductible for tax purposes. When you incur these expenses in your business, you will create accounting transactions to these accounts as you pay these items. For tax purposes, you may not be able to write-off the entire amount of the expense as you calculate your net profit or loss on Schedule C (part of the Form 1040 Federal tax return). This section will explain what requirements you must meet in order to take tax deductions for these type of expenses. A major point needs to be emphasized here, no deductions for travel, entertainment, automobile expenses, cellular telephone charges, etc. will be allowed unless adequate records (a log) are kept. The requirement for a mileage log was mentioned in the section for vehicle expenses. The same documentation requirements carry over to the area of travel, meals, and entertainment expenses.

Travel Expenses

Travel expenses are ordinary and necessary expenses of traveling away from home for your business. You are considered traveling away from home if (1) your duties require you to be away from home substantially longer than a work day, and (2) you need to get rest or sleep to meet the demands of your work. The rest or sleep requirement does not mean you have to be away overnight, but a period of time is needed to be refreshed (napping in the car does not meet this requirement). Your travel needs to be away from what is considered your "tax home." Your tax home is your regular place of business, no matter where you maintain your family home. The tax home includes the entire city or general area where your business is located. This means you cannot take travel expenses for just going across town.

Some types of travel expense are fares (air, bus, rail, taxi), business costs associated with leasing a car, motel/hotels, meals (rules & limits explained later), dry cleaning and laundry, business telephone calls, faxes, postage, computer rental fees, and any other expenses related to your business travel. If your spouse, dependent, or employee goes with you on the business trip or business convention, you generally cannot deduct their travel expenses. You can deduct expenses for this individual if there is a bona fide business purpose for their travel and you would otherwise be allowed to deduct the travel expenses.

Meal Expenses

You cannot deduct the cost of meals if you do not meet the requirements for the deductibility of travel expenses (points 1 &2 given under travel expenses above) unless the meals meet the rules for business entertainment (see section below). For tax purposes, you can only deduct 50% of the cost of meals. You can use either the actual cost of the meals or use the standard meal allowance to figure your meal expenses.

The standard meal allowance permits you to deduct a set dollar amount for meals and incidental expenses (includes laundry, dry cleaning, pressing of clothing, fees for services or tips like food servers & luggage handlers) instead of keeping records of your actual costs. You still need to keep records to prove the time, place, and business purpose of your travel. For travel in 2004, the rate is $31 per day for most areas in the United States (some areas qualify for a higher rate).  For more information concerning the standard meal allowance, see Chapter 28 in IRS Publication 17, Your Federal Income Tax for Individuals. Even if you use the standard meal allowance, you will only be able to deduct 50% of the total amount.

Entertainment

Certain business related expenses to entertain a client, customer, or employee are tax deductible. Entertainment includes activities that provide entertainment, amusement, or recreation. Examples would be entertaining guests at nightclubs, sporting events, theaters, athletic clubs, hunting and fishing trips. Entertainment includes the cost of meals (even if expense incurred within your tax home), but you cannot deduct the meal twice (once as an entertainment expense and again an a travel expense). You can only deduct 50% of meal and entertainment expenses.

Local Transportation Expenses

Local business transportation expenses include costs necessary to (1) get from one workplace to another within your tax home, (2) visit clients or customers, (3) go to a business meeting away from your workplace, and (4) go to a temporary workplace from your home. These expenses do not fall under the category of travel expenses as discussed earlier. These costs include the cost of driving and maintaining your car as explained in the section for vehicle expenses on page 6. You cannot take transportation expenses to travel from your home to your regular workplace. These are considered commuting expenses. You cannot deduct parking fees for your vehicle at your place of business (considered commuting expenses) but you can if incurred when visiting a customer or client.

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INVENTORY

If your business will be selling some form of tangible product, you will be faced with the task of maintaining an inventory. An inventory is simply goods held for sale to customers in the normal course of business. It is very important to establish a good inventory control system. This system will (1) accurately account for items on hand, (2) provide a means to track the costs associated with acquiring the inventory, (3) establish an efficient means of valuing the inventory on hand, and (4) alert you when it is time to replenish items carried in inventory. As you gain experience in running your business, you will learn the optimum times to reorder items, how large of an order to place, and how to take advantage of purchase discounts which will help reduce your ordering costs.

There are two ways in which you can determine the number of items you have in your inventory. A periodic (physical) inventory is when an actual count of goods on hand is taken at a given point in time (such as at quarter end or year end). When this system is used, accounting entries are made after the physical count in order to adjust the inventory control account balance and cost of goods sold. In a perpetual or continuous inventory system, detailed subsidiary records are maintained for each item of inventory. The inventory control account is maintained on a current day-to-day basis. Thus the accounting records will give you the quantities of items on hand without having to do a physical count. Even under a perpetual system, physical counts are taken (at least at year end) and balanced back to the accounting records. Any differences identified must be adjusted so that the accounting records will be in agreement with the physical count.

Your inventory record keeping system will have an impact on the amount of profit (or loss) you realize from sales. As products are sold and removed from your inventory, the cost associated with acquiring them must be determined in order to calculate the gross profit from sales. Your inventory system will be designed so that you will be able to calculate the cost of goods sold. There are several inventory valuation methods available that are used to determine the cost of goods sold. Some of the methods used in inventory valuation are:

First In, First Out (FIFO) - Assumes the items you purchased or produced first are the first items sold. The items in inventory at the end of the tax year are matched with the cost of items of the same type that you most recently purchased or produced.

Last In, First Out (LIFO) - Assumes the items of inventory you purchased or produced last are sold or removed from inventory first. Inventory items on hand are valued at cost of the earliest acquired units.

Cost or Market, Whichever is Lower - Compares the market value of each inventory item on hand with its cost and uses the lower value as its inventory value. You cannot value the entire inventory at cost or market, each item must be valued separately.

Weighted Average Cost - The cost of items in inventory are based upon taking the cost of all items available for sale and dividing that amount by the total number of units on hand.

Each one of these inventory valuation methods will yield a different cost of goods sold figure which will affect the amount of sales income that you report. You will probably choose a method that is used consistently within your industry.

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PAYROLL

If you are going to have employees working for you, one of the most burdensome tasks will be setting up a payroll system and dealing with employment taxes. This section will step you through this process. Obtain IRS Publication 15, Circular E, Employer Tax Guide which explains your tax responsibilities as an employer. It also explains the requirements for withholding, depositing, reporting, and paying employment taxes. It will explain the forms you must give your employees and those your employees must give you. Contained in the publication are the withholding tables you need to figure the amount of withholding to take out of your employee's wages. Ohio withholding tables will be supplied to you when you receive your Ohio withholding agent information in applying for your Ohio tax identification number.

One thing should be made clear at this point. You will need to understand the difference between an employee and independent contractor. A person is your employee if you control what work will be done and how it will be done. As the employer, you must withhold for incomes taxes (Federal, state, in some cases Ohio school district, and city), withhold and pay social security and Medicare taxes, and pay unemployment taxes on wages paid to an employee. An independent contractor (someone who is self-employed) will contract to do work for you according to his own methods and who is not subject to control (how the work will be done) except as to the results of such work. Generally, you will not have to withhold taxes from the individual's pay. Examples of independent contractors would be lawyers and accountants who perform services for you, cleaning services, functions you outsource, etc. There are several categories of worker relationships (independent contractor, common-law employee, statutory employee, & statutory nonemployee) of which you should become familiar. Details of these working relationships can be found in Publication 15.

If you have an employer-employee relationship, it does not matter if you call it something else (independent contractor), the substance of the relationship, not the label, governs the worker's status.

As a business owner, it is less of a tax burden if a worker's relationship with you is that of an independent contractor, and not as an employee. Some may try and say a person is not an employee in order to avoid the tax requirements. If the conditions are met that establish an employer-employee relationship, you are liable for the various taxes. If you need more information, obtain IRS Publication 1779, Employee or Independent Contractor, or Publication 15-A, Employer's Supplemental Tax Guide.

Setting up payroll begins with the process of applying for your Federal Employer Identification Number (EIN) on Form SS-4 (form contained in the Your Business Tax Kit). Completing boxes 12 and 13 on the form will indicate that you need to receive a Federal Tax Coupon Book. This book contains 23-24 Form 8109 coupons with your preprinted name and EIN. These coupons are used when making tax deposits. When you receive your Federal EIN, you will need to apply for an Ohio Withholding Account Number (Form IT1) within 15 days of starting your business. If you have an employee who resides in a school district that has enacted an income tax, you will also have to apply for a Ohio School District Withholding Agent number (Form IT-1S). If your business is located in one of the 510 cities and villages in Ohio that have an income tax, you will also have to withhold taxes for that municipality. Contact the local tax department to set up the withholding process.

Our discussion will now focus on various aspects that applies to the payroll process.

Employment Taxes

There are taxes that you withhold from your employee's pay as well as taxes that your business pays as a result of having employees. Federal, State, and Local income taxes, social security, and Medicare taxes are withheld from an employee's wages. The employer is also responsible to pay social security and Medicare taxes (the employer pays half of these taxes, and the employee pays half), plus Federal and State Unemployment Taxes.

The Federal Insurance Contributions Act (FICA) established the Federal system of old-age, survivors, disability, and hospital insurance. The old-age, survivors, and disability insurance is financed by the social security tax. The hospital insurance is financed by the Medicare tax. Both the employer and employee pay the FICA tax (7.65% by the employer, 7.65 % by the employee). As the employer, you must withhold and deposit the employee's portion of the taxes and you must pay a matching amount.

The Federal and Ohio Unemployment programs, part of the Federal Unemployment Act (FUTA), pays unemployment compensation to people who lose their jobs. This tax is reported and paid separately from income taxes and FICA taxes.

In Ohio, new businesses must file certain forms relating to Unemployment Compensation and Worker's Compensation. These taxes, or contributions as they are called, are not withheld from the employee's wages. These are strictly amounts you as the employer must pay (but not with Ohio withholding for income taxes). Information concerning each of these is given below.

1. Ohio Unemployment Compensation: Employers must make contributions on the first $9,000 of each covered employee's wages for unemployment compensation. New employers contribution rate is 2.7% for non-construction and 5.2% for construction type businesses. After a certain amount of time, employers qualify for an experience rate, which can vary between 0.1% to 6.5%.

(a) New employers must file form UCO-1 to enable Bureau of Employment Services to determine liability as soon as the employer has one or more employees in covered employment.
(b) All employers required to file form UCO-2QR quarterly accompanied with their payment

2. Worker's Compensation: A state program to protect the employee and employer when a work related injury, occupational disease, or death occurs. All employers must pay premiums unless granted the privilege of self-insurance for liabilities associated with work related accidents. Ohio law requires every employer with one or more employees to obtain worker's compensation coverage.

(a) File Form U-3, Application for Coverage ($10 security deposit must be sent in with the application). Call 1-800-644-6292 to request forms.
(b) All employers files form DP-21 for reporting payroll for six months, the premium payment is sent in with this report prior to March 1st and September 1st
(c) Call 1-800-644-6292 to request information booklet CD-101, Acquiring Coverage

Depositing Taxes

The types of taxes deposited related to payroll include:

1. Federal income tax withholding and the employer and employee portion of social security and Medicare taxes (reported on Form 941 or Form 943 for farm employers)
2. Federal unemployment taxes (reported on Form 940 or 940 EZ)

There are two methods of depositing payroll taxes. There is the (1) Federal Tax Deposit (FTD) Coupon method, or (2) the electroic deposit method using the Electronic Federal Tax Payment System or EFTPS. A brief discussion of each method is given below.

Form 8109, Federal Tax Deposit Coupon is used to deposit employment taxes (and excise taxes). You will receive a coupon book of preprinted forms when you receive your Employer Identification Number (EIN). New coupons will be sent to you automatically when you need them since the IRS keeps track of the number of coupons you use. You will indicate on the coupon the type of tax you are depositing when making your payment by check or money order to a qualified Federal depository institution or Federal Reserve Bank servicing your area.

EFTPS is the Electronic Federal Tax Payment System developed by the U.S. Department of the Treasury’s Internal Revenue Service (IRS) and Financial Management Service (FMS), to enable taxpayers to pay their federal taxes electronically. The system allows taxpayers to use the phone, personal computer (PC) software (for businesses only), or the Internet to initiate tax payment reports to EFTPS directly. It’s convenient, secure, and timesaving. Any individual taxpayer making 1040ES, 1040-V payments, 706 estate and 709 gift taxes and installment payments can use EFTPS-OnLine.

For the year 2006, you are required to make electronic payments if your total deposits of taxes in 2004 were more than $200,000 or you were required to use EFTPS in 2005. Once you are required to use EFTPS, you must continue to use it in subsequent years, even if your annual tax deposits fall below $200,000. If you are required to use EFTPS and fail to do so, you may be subject to a 10% penalty. If you are not required to use EFTPS, you may participate voluntarily.

To enroll in EFTPS, call 1-800-555-4477 or 1-800-945-8400. You can also enroll online by visiting www.eftps.gov.

If you are not making deposits by EFTPS, use Form 8109.

Federal tax deposits are made on either a monthly or semi-weekly schedule. The deposit schedule used is based on the total tax liability you reported on Form 941 during a four quarter lookback period. New employers generally use the monthly schedule for the first year. These schedules do not apply to the Federal unemployment (FUTA) tax. FUTA taxes are deposited quarterly by the last day of the first month after the quarter ends. Penalties ranging from 2% to 15% may apply if you do not make the required deposits on time. Please refer to Publication 15 for further details concerning depositing taxes.

Form OHIO IT-501, Employer's Payment of Ohio Tax Withheld is used to make the state tax deposits. The payment schedule can be partial weekly, monthly, or quarterly depending on the dollar amount of withholdings for a 12 month period ending on June 30 of the preceding year. Payments must be made electronically if the 12 month withholding amount for an employer is $500,000 or more and they must also file a quarterly reconciliation form IT-942. All other employers must file an annual reconciliation report IT-941. Contact the Ohio Department of Taxation for more information at 1-800-282-1780. Information is also given in the Business Tax Guide for Ohio.

Filing Form 941, Employers Quarterly Federal Tax Return

All employers who withhold Federal income taxes and FICA taxes must file Form 941 on a quarterly basis. The due dates of these filings are April 30, July 31, October 31, and January 31. There are some cases where you do not have to file Form 941 such as (1) you are a seasonal employer and do not pay wages in every quarter, (2) you only have household employees (use Schedule H, form 1040), and (3) you are an agricultural employer and must use Form 943, Employer's Annual Tax Return for Agricultural Employees. If you do not have a reasonable cause for filing late, penalties of 5% of the unpaid tax is changed for each whole month or partial month the return is late. The maximum penalty is 25%.

Forms 941 that are filed with the IRS are reconciled with the W-2 and W-3 form filed with the Social Security Administration. If there are any differences, you may be contacted to resolve the discrepancies.

Beginning in 2006, the quarterly Form 941 does not have to be filed by employers who owe $1,000 or less in federal employment tax per year.  Instead, they will file a new Form 944, Employers’ Annual Federal Tax Return after the year closes.  The first returns are due January 1, 2007.

Filing Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

Form 940 is filed by January 31 on an annual basis to report this tax The IRS will mail you a preaddressed Form 940 (or 940-EZ) if you filed a return the year before. First time filers can get the form by calling 1-800-829-3676.

Ohio Tax Withholding Reporting Requirements

Reconciliation reports of taxes withheld must also be filed with the Ohio Department of Taxation. Monthly or quarterly withholding payments are reported on form OHIO IT-501, Employer's Payment of Ohio Tax Withheld. An annual report is filed using form OHIO IT-941, Employer's Annual Reconciliation of Ohio Tax Withheld.

Ohio payroll taxes including unemployment and worker's compensations contributions can be made electronically via the Ohio Business Gateway. Ohio Businesses are able to simultaneously report and pay liabilities associated with Workers' Compensation, Unemployment Tax, Employer Withholding Tax, Sales Tax, and Unclaimed Funds. You will need to register to be able to login and make these payments.

Hiring Employees

When you hire new employees there are several forms that they must fill out:

1. Form I-9, Employment Eligibility Verification: Verifies that each employee is legally eligible to work in the United States. Both you and the employee must complete the form. Call the Immigration and Naturalization Service at 1-800-755-0777 to obtain the form or request more information.

2. Form W-4, Employee's Withholding Allowance Certificate: Employee completes this form to designate their filling status and withholding allowances. This determines how taxes will be withheld from their wages based on the tables in Publication 15. The form remains in effect until the employee completes a new one.

You may have to file Form W-4 with the IRS when (a) the employee claims more than 10 withholding allowances, or (2) claims exemption from withholding and their wages would normally be more than $200 per week. Forms would be sent in with your quarterly Form 941 filing. Detailed instructions for completing Form W-4 can be found in IRS Publication 505, Tax Withholding and Estimated Tax.

3. Form W-5, Earned Income Credit Advance Payment Certificate: Completed by employees who are eligible to receive the earned income credit payments in with their pay during the year.

4. Form IT-4, Employee's Withholding Exemption Certificate (State of Ohio): Identifies withholding information for State and School District Income Taxes.

When the calendar year is over, you will be required to furnish form W-2, Wage and Tax Statement, to each employee. Copies must also be supplied to the Social Security Administration. The W-2's must be provided to each employee by January 31st for the prior tax year.

Family Employees

If you employ your spouse, child, or parent in your business, you may not have to withhold FICA taxes or unemployment (FUTA) taxes. Publication 15 provides information when income taxes, FICA taxes, and unemployment taxes apply.

Final Comments Concerning Payroll

As you can see, there is a considerable amount of record keeping involved when you start having employees. You may not need to hire employees when you first start up your business, however, somewhere along the line you may need to follow these steps when you have the need to hire additional help. If you use a computer in your business, the burden of the payroll task can be greatly reduced if you utilize a good payroll software package. Once you get each employee set up in the program, the computer will use the correct withholding tables and maintain all the necessary payroll information. The software package should generate the necessary Form 940, Form 941, and W-2s for you when they must be filed.

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FEDERAL TAX REQUIREMENTS

There are four types of taxes that you will have as being a business owner, (1) income tax, (2) self-employment tax, (3) employment taxes, and (4) excise taxes. A brief discussion of each is given below.

Income Tax

All forms of business must pay income tax. The manner in which taxes are paid will depend on the form of business you operate. Sole proprietors report their business income on Schedule C and the tax is calculated in their Federal Income Tax return using Form 1040. Partnerships and S Corporations do not pay income tax of themselves but supply their partners/shareholders a Schedule K-1 that reports their share of income or loss. The partner/shareholder then reports this income or loss on Schedule E and becomes part of their individual Federal Income Tax Return using Form 1040. Corporations pay income tax as a legal tax entity using Form 1120.

All forms of businesses must file an annual tax return as listed below:

Sole Proprietor - Form 1040, Schedule C, or C-EZ (Schedule F for Farm businesses)
Partnership - Form 1065
Corporation - Form 1120
S Corporation - Form 1120S

The federal income tax is a pay as you go tax. This means tax is paid as you earn the income during the year. For an employee who is paid wages, the tax is paid as the employer withholds the necessary taxes from their wage paid and deposits them with a Federal depository institution or Federal Reserve Bank. Self employed individuals pay this tax by making estimated tax payments.

Sole proprietors, partners, and S corporation shareholders pay estimated tax by making quarterly tax payments. If you expect to owe $500 or more when you file your Federal income tax return (this includes income tax and self employment tax), you are expected to make quarterly tax payments. Estimated taxes are figured using Form 1040-ES, Estimated Tax for Individuals. Payment coupons are supplied with Form 1040-ES to be used when making your payments. The due dates are generally April 15, June 15, September 15, and January 15.

Self-Employment Tax

Self-employment tax is the social security and Medicare taxes paid by individuals who have their own trade or business. When you are employed by someone else, social security (6.2%) and Medicare (1.45%) taxes are withheld from your wages. The employer pays a matching amount. When you are self-employed, you must pay the entire amount yourself which amounts to 15.3 % of your net income from your business activity. As an employee, this tax totals 7.65% of your earnings, but as a self-employed person, you will be paying the full 15.3%. This is an added expense for the privilege of working for yourself. These tax payments contribute to your coverage under the social security system and are included the calculation of your retirement benefits, disability benefits, and medical insurance (Medicare) benefits. You must pay self-employment tax if (1) your net income from self-employment is $400 or more (not including church employee income), or (2) you have church employee income of $108.28 or more. Obtain IRS Publication 533, Self-Employment Tax if you desire more information.

Employment Taxes

This subject was thoroughly covered under the PAYROLL section of this booklet. We can summarize in saying employment taxes are Federal/State/City income taxes, social security, and Medicare taxes that are withheld from your employee's pay that you must, as the employer, deposit with an approved financial institution. In addition to this, you as the employer pay a matching amount of social security and Medicare taxes, plus federal and state unemployment taxes. You do not withhold any unemployment taxes from your employee's wages, but you as the employer pay these taxes. You are also required to file a quarterly tax return (Form 941) for income tax and FICA tax withholding and an annual return for Federal Unemployment Tax (Form 940 or 940-EZ).

Excise Taxes

An excise tax is an internal tax levied on the manufacture, sale, or consumption of a certain commodity within a country. There are several broad categories of excise taxes, (1) environmental, (2) consumptions, (3) fuel, (4) manufacturer's, (5) heavy trucks, trailers and tractors, and (6) luxury tax on passenger cars.

Registration is required for certain excise tax activities. Obtain Form 637, Application for Registration (For Certain Excise Tax Activities) and see the instructions for the form for the list of activities for which you must be registered. Form 720, Quarterly Federal Excise Tax Return is used to report most excise taxes. There are some other excise taxes that are not reported on Form 720. These forms and taxes are:

A. Form 2290, Highway Use Tax
B. Form 730 and 11-C, Wagering
C. ATF Form 5300.26, Firearms
D. ATF Form 5630.5, Alcohol, Tobacco
E. ATF Form 5630.7, Firearms

A number of the taxes applying to alcoholic beverages, tobacco products, and firearms are filed with the Bureau of Alcohol, Tobacco, and Firearms (ATF). If any of the excise taxes apply to your business, or if you need more information, obtain IRS Publication 510, Excise Taxes.

If you will be selling distilled spirits, wine or beer in your business, you must file ATF Form 5630.5 and pay the required taxes. Ohio businesses can call 513-684-3335 to obtain the form. Every retail dealer must pay a special occupational tax and obtain a special tax stamp (receipt) before commencing business and on or before July 1 thereafter, if you continue in business. If you deal in alcoholic beverages, the special tax rate is $250 per year. If you sell alcoholic beverages in more than one location, you must pay the special tax and receive the special stamp tax for each location. Every retail dealer must keep a record in book form showing the date and quantity of all alcoholic beverages received on his premises, and from whom received or keep all invoices and bills for all alcoholic beverages received. You may be subject to inspection by Alcohol, Tobacco, and Firearms officers having proper credentials.

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OHIO TAX REQUIREMENTS

There are a variety of taxes associated with Ohio's tax law. This booklet will highlight which taxes will require you to do something as a new business owner. You should definitely get the Business Tax Guide for Ohio for a more thorough review of the state's tax requirements. A listing of Ohio's business taxes are as follows:

General Business Taxes Other Business Taxes

Corporation Franchise Tax
Motor Vehicle License Tax
Municipal Income Taxes
Personal Property Tax
Real Estate Tax
Real Estate Transfer Tax
Sales & Use Taxes
School District Income Taxes
State Income Tax
State Income Tax Withholding
Unemployment Compensation Contributions
Worker's Compensation Premiums

Other Business Taxes

Admission Excise Taxes
Alcoholic Beverages Taxes
Cigarette Excise Tax
Dealers in Intangible Tax
Grain Handling Tax
Horse Racing Tax
Insurance Company Taxes
Lodging Excise Taxes
Manufactured Home Tax
Motor Fuel Use Tax
Motor Vehicle Fuel Tax
Public Utility Excise & Property Taxes
Replacement Tire Tax
Severance Tax

The forms of business structure in Ohio are (1) sole proprietorship, (2) partnership, (3) corporation, (4) limited liability company, and (5) limited partnership. If the business being formed is a corporation, limited liability company, or a limited partnership, you must register with the Ohio Secretary of State. If your business is operating under a fictitious name (not an individuals name), that name must also be registered with the Secretary of State.

Our discussion will focus on the different returns or filings you must make under the general business heading. Some of these taxes do not require you to file a return (for example, property owners are billed for real estate taxes by the County Auditor). Some of these taxes will require the business to obtain a license or permit. Again, the Business Tax Guide For Ohio will cover the various requirements for all the taxes listed above.

Ohio Income Tax / Estimated Tax

This tax is paid by individuals residing in Ohio or earning or receiving income in Ohio. Business income or loss for sole proprietors is not reported separately on the Ohio Individual Income Tax Return (Form IT-1040). Schedule C is used on the federal return (Form 1040) to report your income or loss from self-employment which is included in the Federal Adjusted Gross Income (AGI) total. The federal AGI amount is carried over to the Ohio return to determine the state income tax calculation. If you expect to owe $300 or more in Ohio income tax when the return is filed, you will need to make estimated tax payments. The estimated tax payment amount is calculated by completing form IT-1040-ES. Quarterly payment coupons are included with the form to be sent in with your payment.

Corporate Franchise Tax

Ohio imposes an excise tax on all corporations doing business in the state. Exempt corporations include insurance companies, public utilities (except long distance phone companies), credit unions, S corporations, limited liability companies, and most non-profit corporations. The first franchise report (FT-1120) is due in the year following incorporation of the business. S corporations do not pay tax but must file FT-1120-S, Notice of S Corporation Status by June 30.

Personal Property Tax

All tangible personal property used in business is subject to this tax. Tangible personal property includes machinery, equipment, inventories, furniture, fixtures, and other similar types of property. The tax does not include real property items such as land and buildings. You should maintain a listing of all your personal property items as mentioned under the LISTING BUSINESS ASSETS section of this booklet. New business are required to file Form 920-NT, New Taxpayer Property Tax Return within 90 days of the first day of business. If you have property in more than one Ohio county, you will need to file Form 945. Tax rates are determined locally and will generally carry a different rate for each township. The return must be filed even if no tax is due. Contact your County Auditor for information or forms.

Sales & Use Tax

The retail sale, lease, and rental of tangible personal property, and the sales of certain services are subject to the Ohio sales tax. The Ohio use tax applies to the purchase, lease, or rental of tangible personal property from outside of Ohio for use in Ohio, as well as certain services in Ohio by out-of-state firms. The state rate for both taxes is 5%. Counties and regional transit authorities may add additional taxes on top of the 5%.

New businesses must file for a vendor's license (form ST-1) with the County Auditor where the property is located. There are some service related businesses that also must have a vendor's license. These types of businesses include lawn care and landscaping, private investigation and security, automatic data processing, computer services or electronic information services, employment, employment placement, exterminating, building maintenance and janitorial services, and telecommunication services.

Sales and use tax returns on due either on a monthly or semiannual basis. The return along with the payment is due on the 23rd of the month following the reporting period . If payments are made by the due date, a discount of three-quarters of one percent of the tax liability may be taken.

All sales are presumed to be taxable unless there is an "exception" which excludes the transaction from being taxable. If you are making a sale to a customer to which an exemption is available, the customer must provide a properly completed exemption certificate in good faith. You at that point would be relieved of the duty to collect sales tax on any sale covered by the certificate and the purchaser is responsible for any tax found to be due. A unit exemption certificate should be used to cover a single purchase and must be maintained with the primary purchase record. A blanket exemption certificate should be used to cover all purchases made on or after the effective date and must be kept in a separate exemption file (or it may be included in the customer's file). Exempt sales would include sales under 16 cents, sales in interstate commerce, sales to holders of direct payment permits, and sales exempt by nature, such as food consumed off premises, newspapers, motor vehicle fuel, and sales covered by valid exemption certificates.

State Income Tax Withholding

Information concerning state income tax withholding is covered throughout the PAYROLL section. These taxes include withholding for state income tax and school district income tax.

Unemployment & Worker's Compensation

Information for unemployment and worker's compensation contributions can be found in the PAYROLL section under the heading of Employment Taxes.

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DISASTER RECOVERY

One area many business owners may overlook concerns actions to take to protect your business from devastating loss in the event of a disaster. You may think that certain types and amounts of insurance coverage would provide adequate protection should something happen to your place of business (like a fire, flood, tornado, vandalism, etc.). Business insurance is a necessity, but what have you done to protect yourself if a fire suddenly destroyed all your records? Many businesses could go under if a disaster destroyed all of their accounting records. Creditors would remind you of amounts due them, but losing your accounts receivable records would leave you at the mercy of your customers' honesty in helping you reconstruct your files. Another problem you could face is meeting your insurance adjuster's requirements of providing adequate proof of what was lost. Most insurance companies are quite willing to pay up but they demand proof of your loss and that is where the problem begins.

Steps to take to enable your to recover from a disaster:

1. Maintain a file of original dated invoices of the various assets owned by your business. If modifications or upgrades have been made to an item (like a computer), you need original dated proof of the modification. Copies of invoices are usually not acceptable, only originals. This helps the insurance agency know that you owned legitimately purchased items that belong to you and that you are not padding the claim.

2. Maintain an off-premises storage site. When new business assets are purchased, make a copy of the receipt and use that as your business copy for tax purposes. Take the original and file it somewhere else. File receipts of expensive items in a fire-resistant cabinet in your basement or rent a storage locker. If you have no receipts, hire an appraiser to examine your more expensive items and estimate the current replacement value for them.

Copy your accounts receivable records at least on a weekly basis and take the copies to your off-site storage facility. Other accounting records (payroll records, inventory records, etc.) should also be copied on a periodic basis and stored off-site to serve as a back up to your bookkeeping system. If you have a computerized accounting system, file backups should be made daily, or at least weekly. Backup disks of your data files should be kept off-site as well as important paper files. A computer system crash can be as damaging as losing you records in some form of natural disaster.

3. Conduct an insurance policy review. You should review your insurance coverage to make sure it is adequate. Meet with your agent and gain an understanding of their documentation requirements. You may desire to consider business interruption insurance to protect you from the loss of business suffered during the recovery period.

The thing to remember is, documentation is a critical step in surviving a business disaster. Some suggest using a video camera and going through your office taping everything - furniture, copiers, computer equipment, supply cabinets and their contents, pictures on the wall, rugs, and anything you would have to replace if you had a major loss. Single out each item and make a comment on its replacement value, or its cost if you know it. Even though this tape would not provide proof of purchase, it will provide proof that the item actually existed in your office at the time of the taping.

Even if you have a home based business, you still need to do adequate disaster recovery planning. These same steps apply to home based businesses, the only difference is in how you are covered. Contact your insurance agent covering your home to see if they even cover a home based business because some do not.

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CLOSING REMARKS

The objective of this booklet was to pull information from various sources to give you a cross section summary of information new business owners should know. Even if you are hiring an accountant or tax preparer to handle these needs, you as a business owner should have a basic understanding of these areas. It would be impossible for any one document to give you all the information you need to know when starting up your business. Hopefully, this booklet has raised your awareness level of different accounting and tax issues while serving as a guide to point you in the right direction to get further detailed information in areas that apply to your circumstances.

Click on New Business Check List with your right mouse button to download a Microsoft Excel file to guide you through the steps you should take in the area of taxes and bookkeeping. Some basic Sample Forms have been made available for downloading to help you get organized if you are going to be using a manual accounting system, or they can serve as additional supporting information even if you are using an accounting software package. A sample record keeping system can be found in IRS Publication 583 using the forms supplied with this booklet. This sample illustrates a single entry accounting system. You can make copies of these forms and follow the instructions given in the publication to get yourself started.

I strongly suggest you take adequate time to research all the angles associated with your line of business including the development of a business plan. This will play a large part in the success of your business. The two principle reasons for new business failures are (1) they do not start with enough money to survive the first few months of operation and (2) poor record keeping. That second reason is why this booklet was written.

I want to wish you the best in your efforts in becoming a self-employed individual.

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Appendix A - Publications

Federal Publications (Online Version): To order Publications & Forms, call 1-800-TAX-FORM (1-800-829-3676) or go to the IRS Publications or IRS Forms websites to download the documents.

Your Business Tax Kit (an assortment of IRS forms & publications)

- Form SS-4, Application for Employer Identification Number
- Form 1040-ES, Estimated Tax For Individuals
- Form 9779, Electronic Federal Tax Payment System (EFTPS) Business Enrollment Form [For Information Purposes Only] and Instructions for Form 9779
- Pub. 509, Tax Calendars for 2006
- Pub. 583, Starting a Business and Keeping Records
- Pub. 594, Understanding the Collection Process
- Pub. 910, Guide to Free Tax Services
- Pub. 1544, Reporting Cash Payments of Over $10,000 (Received in Trade or Business)

Publication 15, Circular E, Employer's Tax Guide
Publication 51, Circular A, Agricultural Employer's Tax Guide
Publication 334, Tax Guide for Small Business
Publication 463, Travel, Entertainment, Gift, and Car Expenses
Publication 505, Tax Withholding and Estimated Tax
Publication 517, Social Security and Other Information for Members of the Clergy
Publication 527, Residential Rental Property
Publication 533, Self-employment Tax
Publication 535, Business Expenses
Publication 536, Net Operating Losses
Publication 538, Accounting Periods and Methods
Publication 541, Partnerships
Publication 542, Corporations
Publication 544, Sales and Other Dispositions of Assets
Publication 551, Basis of Assets
Publication 560, Retirement Plans For Small Business (SEP, Keogh, and SIMPLE Plans)
Publication 587, Business Use of Your Home (Including Use by Day-Care Providers)
Publication 911, Direct Sellers
Publication 925, Passive Activity and At-Risk Rules
Publication 926, Household Employer's Tax Guide
Publication 946, How To Depreciate Property
Publication 1518, Tax Tips Calendar for Small Businesses
Publication 1779, Employee or Independent Contractor

State of Ohio Publications
Business Tax Guide For Ohio
Guide to Organizing a Business in Ohio - Information Pamphlet

Worker's Compensation Information:
CD-40, Worker's Compensation Guide for Self-Insuring Employers and their Employees
CD-50, Worker's Compensation Guide for State-Funded Employers and their Employees
CD-102, Sole Proprietors or Partners
CD-103, Managing Costs
CD-104, Reporting a Claim
PA-960, Ohio Industrial Commission and Bureau of Worker's Compensation Laws of Ohio
PA-970, The State Insurance Fund Manual

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Appendix B -Federal/State Agency Addresses

FEDERAL AGENCIES		STATE AGENCIES
Internal Revenue Service		Ohio Department of Taxation
Cincinnati, OH 45999		Income Tax Support Division
800-829-1040 Questions		1030 Freeway Drive North
800-829-3676 Forms		P.O. Box 2476
http://www.irs.gov		Columbus, OH 43140
		800-282-1780
Internal Revenue Service		Ohio Department of Taxation
EFTPS Enrollment Processing Center		School District Income Tax Division
P.O. Box 4210		830 Freeway Drive North
Iowa City, Iowa 52244-4210		P.O. Box 2476
800-945-8400 or 800-555-4477		Columbus, OH 43266-0076
		800-282-1780
Superintendent of Documents		Contributions Department
U.S. Government Printing Office		Ohio Bureau of Employment Services
P.O. Box 371954		P.O. Box 923
Pittsburg, PA 15250-7954		Columbus, OH 43216-0923
http://www.access.gpo.gov		614-466-2319
Social Security Administration		Public Information Services
300 North Greene Street		Bureau of Workers' Compensation
Baltimore, MD 21201-1581		246 North High Street
http://www.ssa.gov		Columbus, OH 43266-0581
		800-686-3676
Small Business Administration		http://www.bwc.state.oh.us
409 Third Street S.W.
Washington D.C. 20416
800-U-ASK-SBA		State of Ohio Internet Home Page
http://www.sbaonline.sba.gov		http://www.state.oh.us
Bureau of Alcohol, Tobacco and Firearms
AFT Tax Processing Center (TI)
P.O. Box 145433
Cincinnati, OH 45203
513-684-3351
http://www.atf.treas.gov

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GLOSSARY OF ACCOUNTING & TAX TERMS

 

Accounting Method - The method under which income and expenses are determined for tax purposes. Major accounting methods are the cash method and the accrual method. Special methods are available for the reporting of gain on installment sales and the valuation of inventories.

Accounting Period - The 12 month period which a business uses to determine federal income tax liability. Normally the accounting period is the calendar year.

Accounts Payable - Amounts you owe to vendors that have not been paid but have been expensed on the general ledger.

Accounts Receivable - Amounts your customers owe you that have not been received but have been recognized as income in the general ledger.

Accrual Method of Accounting - An accounting method where income is reported in the year earned, whether or not received and expenses are recognized in the year incurred, whether or not paid.

Adjusted Basis - The cost or other original basis of property reduced by adjustments such as depreciation allowed and increased by capital improvements and other adjustments.

Amortization - The deduction of certain capital asset expenses over a fixed period of time. Includes items such as business start up expenditures, goodwill, franchises, trademarks, and trade names.

Asset - An item of useful or valuable property. Examples of assets would be cash, bank account balances, accounts receivable, inventories, investments, land, buildings, machinery and equipment.

Balance Sheet - Is a snapshot statement in that it presents the financial position of a business at a specific date or point in time. The account classifications that are reported on the balance sheet are assets, liabilities and capital (owner's equity).

Basis - The cost incurred to acquire an asset.

Capital Expenditure - An expenditure made for assets with useful lives of more than one year. The amount paid to acquire an asset cannot be expensed in the year purchased, but must be capitalized and depreciated over the years of its useful life.

Capital Improvement - An improvement made to extend the useful life of a property or add to its value. These costs must be capitalized and depreciated.

Capitalize - To treat the cost of additions and improvements to property as a capital improvement (which is subject to depreciation). These costs add to the basis of property since they extend the life of the property.

Cash Method of Accounting - An accounting method where income is reported in the tax year that it is received, rather than when it is earned and expenses are recognized in the year they are paid, rather than when they were due and unpaid.

Chart of Accounts - The various accounts that a business uses to categorize financial transactions.

Corporation - A group of people having a legal charter that empowers them to transact business as a single body or entity.

Cost Method of Inventory Valuation - Pricing goods on hand by matching the inventory with specific invoice prices less any discounts.

Cost of Goods Sold - Your cost to acquire and prepare a product to be sold. Calculated by adding beginning inventory , purchases, direct labor costs, and overhead costs less withdrawals for personal use and ending inventory.

Cost or Market, Whichever is Lower - An inventory valuation method which compares the market value of each inventory item on hand with its cost and uses the lower value as its inventory value. You cannot value the entire inventory at cost or market, each item must be valued separately.

Credit - A bookkeeping transaction in a double entry system that increases the balance in a liability, capital, and income account, and decreases the balance in an asset and expense account.

Debit - A bookkeeping transaction in a double entry system that increases the balance in an asset and expense account, and decreases the balance in a liability, capital, and income account.

Depreciable Asset - Tangible personal property or real property used in business or held for the production of income with a determinable useful life of more than one year.

Depreciation - The deduction of a reasonable allowance for the wear and tear of assets (excluding inventory) used in a trade or business or held for the production of income.

Employee - One who is subject to the will and control of the employer not only as to what shall be done but also as to how it shall be done.

Employment Taxes - Taxes the business pays because it has employees. These taxes include the employer's portion of Social Security & Medicare Tax and Federal & State Unemployment Taxes.

Excise Taxes - Taxes that a business pays when it manufactures or sells certain products, operates certain kinds of businesses, or uses various kinds of equipment, facilities, or products. Several broad categories of these taxes include; 1) environmental taxes, 2) facilities and services taxes, 3) fuel taxes, 4) manufacturer's taxes on the sale or use of different products, 5) tax on the first retail sale of heavy trucks and trailers, and 6) luxury tax on passenger cars.

Expense - Anything requiring an outplay of money, costs or charges of something.

Fair Market Value (FMV) - The amount at which property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of the relevant facts.

Federal Unemployment (FUTA) Tax - A tax that is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs.

First In, First Out (FIFO) - An inventory valuation method which assumes the items you purchased or produced first are the first items you sold. The items in inventory at the end of the tax year are matched with the cost of items of the same type that you most recently purchased or produced.

Franchise Tax - An Ohio excise tax imposed on domestic and foreign corporations for the privilege of doing business in Ohio or owning capital or property in Ohio. The tax is levied on the value of the corporation's issued and outstanding shares of stock. S corporations are not subject to this tax but must file form FT-1120-S.

General Journal - Is an all purpose book of original entry that can be used to record all transactions of a business in chronological order.

Goodwill - Intangible property that represents the advantage or benefit acquired in a business beyond the value of its other assets. In the purchase of a business, goodwill represents the difference between the purchase price and the value of the net assets.

Income - Moneys that are received as a result of a trade or business from the sale of a product or service.

Income Statement - A financial report that reflects the amount of income and expense recognized by a business for a given period of time. Income minus expenses equal net profit or loss.

Income Tax - Tax imposed on income earned.

Independent Contractor - One who contracts to do work according to his own methods and who is not subject to control except as to the results of such work.

Intangible Property - Property that cannot be perceived by the senses such as goodwill, patents, copyrights, etc.

Inventory - Items held for sale to customers in the regular course of a trade or business. Various inventory valuation methods are available to determine the cost of items being held in inventory. The selection of the valuation method used will have an impact on what is reported as net income or loss.

Journal - A chronological record of your business transactions. Each entry contains the date the transaction occurred, the specific accounts to be debited and credited, and the amount of the debit and credit.

Keogh Plan - A self-employed retirement plan that permits a taxpayer to deduct a portion of his compensation from his total income.

Last In, First Out (LIFO) - An inventory valuation method that assumes the items of inventory you purchased or produced last are sold or removed from inventory first. Inventory items on hand are valued at cost of the earliest acquired units.

Ledger - Is a group of accounts. If only one ledger is maintained, it is called the general ledger. If several ledgers are maintained, the principal is known as the general ledger and others will be known as subsidiary ledgers. The ledger summarizes the detailed transactions recorded in the journals.

Liability - In the accounting sense, it is moneys due to creditors (those you owe money to but have not paid).

Life-Kind Exchange - An exchange of property held for productive use in a trade or business or for investment (except for inventory and stocks and bonds) for property of the same type. Unless different property is received, the exchange is nontaxable. Like kind-exchanges are reported on IRS Form 8824.

Like-Kind Property - Business or investment properties that are the same type.

Liquidation - (1) The process of converting securities or other property into cash. (2) The dissolution of a company, with cash (remaining after sale of its assets and payment of all debts) being distributed to the shareholders.

Nonrecourse Debt - An obligation for which the endorser is not personally liable.

Outsourcing - Contracting with an outside vendor to perform a service. Examples would be having an accountant keep your books, using a company to perform the payroll function , having an collection agency collect past due accounts, etc. Business functions are outsourced because an outsider can perform the function cheaper than you can, or because the skills are not present within your business to perform these tasks.

Partnership - A form of business in which two or more persons join their money and skill in conducting the business as co-owners. Partnerships are not taxed directly but pass income, expenses, gains, and losses on to the partners to be reported on their personal income tax returns.

Personal Property - Property, such as machinery, equipment, or furniture, that is not real property.

Prepaid Expense - To capitalize, or hold as an asset on the books, amounts prepaid (paying for items now that have benefits into the future) such as rents, insurance, etc., that cover more than one year. Deductions (amortization) are taken for the period during which the benefits are received.

Real Property - Land and generally anything erected on, growing on, or attached to the land, for example, a building.

Reconcile - To bring into agreement, or balance, two difference recordkeeping sources. An example would be balancing your checkbook with the bank statement, verifying that the Accounts Receivable control account is in agreement (showing the same grand total) with the subsidiary ledger (listing of individual customers).

Repairs - An expense that does not increase the value of your property, make it more useful, or lengthen its life. These are costs that restore property back to its normal condition. Putting on a new roof is not a repair but a capital improvement. To repair a small section on one corner of a roof, the cost is treated as an expense.

S Corporation - Eligible domestic corporations may elect special income tax treatment in order to avoid double taxation (one to the shareholders and again to the corporation). Its shareholders include on their tax returns their share of the corporation's taxable items (tax treatment similar to that of partnerships).

Sales Tax - Tax that applies to the retail sale, lease, and rental of tangible personal property (and sales of selected services in Ohio).

Section 179 Deduction - An election to treat the cost of certain qualified property as a current deductible expense rather than as a capital expenditure. For the 1998 tax year the limit on the amount that can be treated as a Section 179 Deduction will be $18,500.

Self Employment Income - Self-employed individuals are taxed on their net income from self-employment and are entitled to social security and Medicare benefits through the payment of self-employment tax.

Self Employment Tax - Is the Social Security and Medicare tax for individuals who work for themselves. These payments contribute to your coverage under the Social Security system.

Statutory Employee - A worker who is treated as an employee for social security and Medicare tax purposes and as self-employed for income tax purposes.

Subsidiary Ledger - Provides additional detail supporting the balances of specific control accounts in the general ledger. For example, a subsidiary ledger would be used to carry the individual accounts of every creditor. The Accounts Payable account, in this case is the Controlling Account that is found in the general ledger, and its balance should equal the sum of balances of the individual creditors in the accounts payable subsidiary ledger.

Tangible Personal Property - Property, other than real property, that has physical existence and an intrinsic value. Examples are livestock, machinery, equipment. and vehicles.

Tangible Property - This is property that can be seen or touched, such as furniture and buildings.

Use Tax - Tax that applies to the purchase, lease, or rental of tangible personal property from outside of Ohio for use in Ohio and the provision of selected services in Ohio by out-of-state firms.

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SAMPLE FORMS

The following forms are available in a Microsoft Office 97 Excel format for you to copy and use if desired. They follow the format presented in IRS Publication 583, Starting a Business and Keeping Records. Several other forms are included that you may find useful. Click on the filename Forms.xls with your right mouse button and follow the instructions given in the window to download the file to your computer.

Form

Daily Summary of Cash Receipts
Monthly Summary of Cash Receipts
Check Disbursement Journal (2 pages)
Employee Compensation Record (2 pages)
Annual Summary
Depreciation Worksheet
Business Start Up Costs
Bank Reconciliation
Inventory Record

Forms not in the Microsoft Excel file that you need to obtain:

Form SS-4, Application for Employer Identification Number (instructions not included)
Application for Registration as an Ohio Withholding Agent
Registration for Ohio School District Withholding Agent
Form W-4, Employee's Withholding Allowance Certificate (Federal Form)
Employee's Withholding Exemption Certificate (Ohio Form)
Form 920-NT, New Taxpayer Return, County Return of Taxable Business Property
Form 921-NT, Ohio Balance Sheet
Form 937, True Value Computation

State of Ohio - Sales and Use Tax Unit Exemption Certificate
State of Ohio - Sales and Use Tax Blanket Exemption Certificate