If you are a small business owner in Georgia, you are in good company. Even in the midst of an exceptionally painful recession, new businesses continue to spring up all across the State, and particularly in Metro Atlanta. According to the most recent edition of the Kaufmann Index of Entrepreneurial Activity 1, published in April of 2009, Georgia led all states with an average of 590 per 100,000 adults creating a new business each month during 2008. The national average for all states was 320 per 100,000 adults. Metro Atlanta was far ahead of all other Metropolitan Statistical Areas with an average of 740 per 100,000 adults creating a new business each month.

What is so special about Georgia? The answer begins with Metro Atlanta. According to Entrepreneur Magazine’s August 2009 issue, “There’s a simple formula that defines the Atlanta small-business scene: Big growth equals big opportunities. Service and retail businesses are in constant demand all across the metro area to serve the city’s expanding boundaries, and…combined with a low cost of living, makes Atlanta prime real estate for entrepreneurs…”

The relatively low cost of living and significant growth potential undoubtedly make Metro Atlanta attractive to entrepreneurs. However, the culture and characteristics common to the Metro Atlanta population may have more to do with what truly sets it apart. According to U.S. Census Data, from 1990 to 2000, the population of the 20-county Metropolitan Atlanta area grew by 38.9 percent from just under 3 million to over 4.1 million people. 2 As of 2009, the population is estimated at more than 5 million people. Many of these new residents moved to Georgia from other regions of the country seeking greater economic opportunities. A cursory assessment could be that persons who are willing to transplant their lives and families to another region might also be more likely to have a greater proportion of entrepreneurial personality traits such as personal initiative, independence, risk-tolerance, persistence and flexibility. That may be a partial answer, but there other factors as well that help set Georgia apart.

On pages 52-53 of his 2007 work, Entrepreneurship in the United States: The Future Is Now, Paul Davidson Reynolds 3 describes the following special characteristics of geographical areas in the U.S. which tend to be particularly conducive to births of new businesses:

• “Increases in demand, reflected in human population growth and greater levels of income”
• “More highly educated population of young adults”
• “Larger proportion of small firms in the business population”
• “More volatile economic sectors; greater sector diversity”
• “Flexible policies regarding the hiring and firing of employees”

(Interestingly, and counterintuitive as it may be, Reynolds’ statistical analysis indicated that a higher unemployment rate does not tend to be a factor resulting in a net increase in new business formations in the United States.)

What does all of this mean for the entrepreneurial future of Georgia? If those five factors listed by Reynolds are correct, the future for small business start-ups in Georgia is bright and it should remain that way for quite a while. Human population growth… “Check.” Highly educated population of young adults… “Check.” Larger proportion of small firms in the business population… “Check.” Greater economic sector diversity… “Check.” (This means that the economy does not rely on a select few key sectors such as agriculture or coal mining or automobile manufacturing, etc. Rather, there are many economic sectors, particularly a broad service industry sector, in which demand for certain services can ebb and flow and sectors can become obsolete.) Flexible policies regarding the hiring and firing of employees… “Check.” (Georgia is widely recognized as an extremely employer-friendly state that provides little protection for employees when compared to many other states.) So, based on Reynolds’ criteria, Georgia is an entrepreneur-friendly State.

Georgia entrepreneurs are uniquely positioned to play an important role in the economic recovery over the next few years. One major reason is that Georgia needs new jobs. A highly popular political and economic sound bite at present is that small businesses will be the “major engine of job creation and economic growth” as the national economy moves out of the current recession. On March 16, 2009, President Barack Obama spoke to this point as he addressed small business owners, calling them “the heart of the American economy.” He also declared that “they’re responsible for half of all private sector jobs and they create roughly 70 percent of all new jobs in the past decade. So small businesses are not only job generators, they’re also at the heart of the American dream.” 4 If this is true, and it is this author’s personal belief that it is, Georgia’s entrepreneurs are poised to make a vastly significant contribution in the coming years to the economic recovery of Georgia, the southeast, and the nation.

In summary, if you have seriously contemplated starting a Georgia business, this may be a good time to evaluate your options. It may seem risky to start a business in a down economy, but that is often the best time to do it. Google, Microsoft, Apple, Cisco and Starbucks, among many others, all started during economic downturns. In an economy such as this, although there are significant challenges in raising capital, many other costs for a new business owner are lower than usual (such as office space, highly qualified employees, and technology). Many employees work harder, there is generally less turnover, and potential customers are feeling economic discomfort which can lead them to seek out new suppliers and service providers.

Any potential entrepreneur should obtain professional advice and carefully weigh the potential risks and rewards prior to starting a new business. Notwithstanding the inherent risks, the opportunity cost for many entrepreneurially-inclined Georgians may presently be at a low point for a number of reasons. If you decide to make the leap, you will be in for a challenge, but at least you can be assured that as a Georgia entrepreneur, you will also be in good company.

1) The 2008 Kaufmann Index of Entrepreneurial Activity was published in April of 2009 by the Ewing Marion Kaufmann Foundation. The study was conducted by Robert W. Fairlie, Professor of Economics and the Director of the Master’s Program in Applied Economics and Finance at the University of California, Santa Cruz. The complete study may be found at http://www.kauffman.org/uploadedFiles/kiea_042709.pdf (accessed August 24, 2009).

2) U.S. Census Bureau, Census 2000 PHC-T-3, Ranking Tables for Metropolitan Areas: 1990 and 2000

3) Paul Davidson Reynolds is a professor at Florida International University and the recipient of the 2004 International Award for Entrepreneurship and Small Business Research provided by Swedish Foundation for Small Business Research and the Swedish Business Development Agency (the “Swedish Prize”).

4) Barack Obama, “Remarks by the President to Small Business Owners, Community Leaders and Members of Congress” (White House, Washington, DC, March 16, 2009), available at www.whitehouse.gov/the_press_office/Remarks-by-the-President-to-small-business-owners (accessed August 24, 2009).”

C. David Rowe is a business and tax attorney serving clients in Atlanta, Athens, and throughout Northeast Georgia. He works with a number of Georgia entrepreneurs and provides counsel concerning many small business and tax-related matters.

This article addresses the top five small business tax pitfalls observed by the author in his tax and business law practice. Each issue is followed by suggestions and techniques to help the reader manage the problem area appropriately.

1. Poor Bookkeeping Practices.
Business owners run into major problems when they do not track business income and expenses on a regular basis. A business should have a system for tracking income and expenses by category. This system should be reconciled to the business’s bank statements each month. Each transaction should be categorized using categories that (a) will be useful to help the owner to manage and evaluate the company’s progress, and (b) match up reasonably well to deduction categories on the business’s tax return. When these items are not tracked, the owner will not have timely financial information to make good management decisions. In addition, the tax return preparation process becomes much more difficult, overwhelming, and expensive. In extreme cases, business owners become so overwhelmed that they may fail to file returns for a number of years.

2. Commingling Business and Personal Bank and Credit Card Accounts.
One of the most prevalent issues observed in small businesses is commingling of business and personal bank and credit card accounts. This creates a number of problems. First, if the business is incorporated or set up as a limited liability company, the liability protection offered by the entity is jeopardized when funds are commingled and the business is treated as the owner’s “alter ego” instead of respected as a separate legal entity. Second, this practice often results in deductible expenses being understated or overstated on tax returns because business expenses are forgotten and omitted or personal expenses are improperly included. Third, it becomes more difficult to accurately include all income and expenses in the business’s regular financial reports, so the owner does not have correct, timely information to gauge the business’s progress and identify opportunities or make course corrections. The proper way to address this problem is to run all business income and expenses through the business’s bank accounts and business credit card accounts (or credit card accounts that are used only for business expenses). These are the only statements that need to be included in the monthly bookkeeping. Any expenses that are paid personally or on a personal credit card should be reimbursed from the business account, categorized appropriately, and the receipt for the business expense should be kept on file by the business. Similarly, any personal expenses that are paid from a business account should be reimbursed by the owner or categorized as a distribution to the owner. This should not happen with regularity. Generally, checks should be written to the owner who will then pay his or her own personal expenses out of personal funds.

3. Failing to Handle Employment Taxes and Sales Taxes Appropriately.
Falling behind on employment taxes and sales taxes is one of the top reasons that small businesses fail. These taxes should be highly feared and respected by every owner of a business with employees and/or retail sales subject to sales tax. The penalties for failing to meet required deadlines are severe and can accumulate very rapidly. In addition, many of these taxes can be fully or partly assessed against the owners and officers of the business even if the business shuts down. Unfortunately, many business owners view payment of these taxes as a last priority compared to other creditors. For the reasons listed above, these taxes should be considered top priority. In fact, the moment a business hires employees, a critical decision should be made concerning whether the business will hire a payroll company or professional to administer its payroll. Due to the potential penalties and personal liability involved, obtaining this assistance is highly advisable and in most cases, should be considered an additional implicit cost of hiring employees from day one. If a business owner intends to tackle this on his own, an exceptionally high level of organization and discipline is required. One final note on this point: care should be taken to make sure that (a) the business correctly reports payments to independent contractors; and that (b) employees are not mischaracterized as independent contractors. If persons who would be considered employees under applicable law are treated as independent contractors, a significant potential liability is created for the business, particularly if the relationship sours and the “non-employee” challenges the way the business handled its payroll.

4. Failing to Pay Reasonable Wages to an S Corporation Shareholder.
This can be a tricky one. For all of the sole proprietorship filers out there (Form 1040, Schedule C), feel free to skip ahead to Issue 5 below. But for all S corporation owners and LLC owners who have elected S corporation status, this is an important issue. If the S corporation owner-shareholder is actively involved in operating the business, which is almost always the case, the corporation should pay a certain amount of wages (reported on Form W-2) to the shareholder that is “reasonable” in light of a number of factors. A tax professional can be very helpful in assisting with determining reasonable wages for a specific business. If the S corporation fails to pay reasonable wages to an active shareholder, particularly if the business was profitable and non-wage distributions were made to the shareholder, this can create substantial additional tax liability exposure in the event that the tax return is selected for examination.

5. Missing out on Valid Tax Deductions.
Under the Internal Revenue Code, a business may deduct “ordinary and necessary” business expenses. The costs a business incurs in its efforts to earn a profit are generally tax deductible. Business expenses are deductible in the tax year incurred; however, “capital expenses” are treated differently. Capital expenses are the costs of purchasing assets with a useful life exceeding one year, such as property or equipment. These assets are generally depreciated over a certain number of years and care should be taken to distinguish between ordinary business expenses and capital expenses and to report them properly. There are a number of ordinary business expenses that business owners occasionally forget to include at tax time. The following is a list of some of these expenses. Remember, these are not all “ordinary” and “necessary” for every business. It is the business owner’s responsibility to ensure that only valid business expenses are deducted on the business’s tax returns:

a. Bank charges (account fees and credit card merchant charges)
b. Charitable donations (cash or non-cash donation of goods)
c. Computer and Internet Expenses
d. Contract labor (non-employee labor) – report on Form 1099-MISC if necessary
e. Dues and subscriptions
f. Education, business-related (such as continuing education classes, etc.)
g. Interest (business loans and business credit cards – not personal debt)
h. Laundry and cleaning (including business dry cleaning)
i. Licenses and permits
j. Meals and entertainment (documented as business-related – 50% deduction)
k. Mileage reimbursement for business-related travel
l. Organizational expenses (start-up expenses before business technically opens)
m. Parking and tolls
n. Postage
o. Printing
p. Rent (on real property and personal property such as equipment)
q. Repairs and maintenance
r. Security
s. Taxes – Employment and Sales taxes (if included in gross receipts)
t. Telephone
u. Travel
v. Uniforms
w. Utilities
x. Website hosting fees

As far as catching all of a business’s tax deductions goes, a business owner who fails to plan, as they say, “plans to fail.” If a business is able to appropriately handle Issues 1, 2 and 3 listed earlier in this Article, its accuracy with respect to this Issue 5 will be greatly enhanced. Please refer to IRS Publication 535 entitled “Business Expenses” located at http://www.irs.gov/pub/irs-pdf/p535.pdf or consult a professional tax preparer if you have questions about whether any of the above expenses are deductible for your particular business. Many of these expense categories have additional rules, requirements, and limitations which must be observed before deductions can be taken.

Estate planning is the process of planning for an efficient disposition of assets following a person’s death. This process varies significantly for residents of different states. Our firm assists Georgia clients in reviewing and evaluating the tax issues and non-tax issues related to their estate plans.

This process typically involves preparation of wills with trust provisions (and sometimes revocable “living” trusts), powers of attorney, and advance directives for health care. The process also frequently involves retirement and income tax planning, reviewing insurance policy and retirement plan beneficiary designations, reviewing property ownership, estate tax planning, lifetime gifting strategies, and planning for the most efficient transfer of assets to intended beneficiaries in accordance with the unique needs and circumstances of the client’s family.

Our firm provides advice and assistance in business entity selection and formation. We regularly help clients establish and operate LLC’s, corporations, non-profit organizations, and other business entities. We also provide advice concerning all aspects of starting a new business.

Our services for businesses include: establishing new businesses (LLC, S-Corps, Partnerships, and Non-Profits), forming operating agreements, shareholder agreements, partnership agreements, business contracts, internet based businesses, and aiding in buying and selling businesses.

There is a lot that goes into properly setting up your business, from taxes to operating agreements to business contracts. Get the expert help you need in organizing your business with C.David Rowe, PC.

Our firm assists clients in researching and resolving tax-related questions and issues. We advise clients concerning tax issues for individuals, businesses, non-profit organizations, trusts and estates.

Our tax law related services include: preparing federal and state taxes, resolving tax controversies, and all other Georgia tax related matters. We assists clients in controversies with the Internal Revenue Service and/or Georgia Department of Revenue. We can help taxpayers who need to catch up by filing past-due tax returns. We assist taxpayers who owe past-due tax balances in evaluating their options. We also help clients establish installment agreements or file offers in compromise with tax authorities when appropriate.