NEW YORK -- Small business owners often learn some painful lessons at tax time, and not just about deductions or the mechanics of compiling a return. Some find themselves learning a few basics about running a business.
Shari Goldstein's lesson came from abandoning her practice of faithfully setting aside a portion of all her income to pay her taxes.
"I used to be very disciplined and every time a check came in, I took a certain amount," for taxes, said Goldstein, who owns a public relations business bearing her name and based in Melville, N.Y. "Last year, for some reason, there was no problem and I decided maybe I didn't need to be so strict."
The result is that she's paying a big tax bill for 2007, and because she's the sole owner of her business, the burden is hers to carry alone. "There's no room to fool around with this stuff," she said.
Her failure to put the money aside was compounded by the fact that Goldstein, who uses an accounting program to keep her books, didn't look at her year-to-date figures to see what her tax liability might be.
"It's really a function of looking at it, of financial mindfulness," she said.
Tax professionals say a lack of financial discipline or vigilance is often a problem for small business owners. Frequently, they're so busy with other aspects of running the company that they don't keep their books current, or, like Goldstein, they'll decide everything is well in hand and they don't have to pay such close attention. The answer for some is to get some help, either to keep track of your books, or to keep tabs on you, the owner, so you don't get into trouble.
Goldstein's solution has been the latter -- a new accountant who keeps after her.
Jaci Rae, an author and owner of several small businesses based in Salinas, learned a lesson that many other small business owners have had -- she had the wrong accountant, someone who knew all about personal returns, but not enough about a small company's needs.
The common wisdom among small business owners is to find an accountant or other tax professional who will understand the needs of your type of business or industry. Referrals from friends are one source, and that's the route Rae took, but your tax preparer still needs to be someone who can do a competent job when it comes to a small business return.
Rae said her former accountant missed a number of deductions that she could have taken, for example, for items the business had donated to a charity. She also missed some key deadlines that businesses need to abide by.
She discovered some of the problems when she went online to do some research.
"The lesson I learned is to check out at least two to three sources for an accountant," including current or former clients, said Rae, noting that many people would seek out a second opinion in medical situations, but fail to do so with a tax professional.
She also chides herself for not following her instincts -- she didn't feel comfortable with her former CPA on a personal or professional level, but stayed with him anyway. She realizes she should have found someone else much sooner.
Eileen Levitt's lesson was one that many owners have to learn after being in business for just a few years: income taxes aren't a one-year event, but rather need to be considered in the context of previous and subsequent years. She also discovered that tax events in her business could have a painful impact on her personal tax liability.
Levitt, president of HR Team, a Columbia, Md.-based human resources firm, found she'd overpaid her state income tax in 2005, so in 2006, she had a big refund. That might have been OK, but when that money was combined with her earnings from her company, it landed her in a situation where she was subject to the alternative minimum tax, which added significantly to her tax bill.
"The timing of things is key," said Levitt, who also reported that she had to pay taxes when she bought equipment in one year, but didn't put it into service until the next, thereby losing out on tax savings known as the Section 179 deduction. The deduction requires equipment to be bought and put into service in the same year.
"Sometimes you get deals at the end of the year," Levitt said.
But she realizes she could have had a better deal by taking that extra step required by the tax code.
Levitt says she's more careful about timing now: "Sometimes you don't know until the next year how things are going to turn out."
And, she's learned it's probably safer to have to owe the state government a few dollars in April rather than the IRS a huge amount next year at tax time. She's no longer overpaying her state taxes.