Making a loss less taxing
Dear Karen: I sold skin-care products at mall kiosks last year and wound up in debt with no income. Can I write off the loss?
Answer: You can report a net loss and it will offset your other income, said Jan Zobel, a San Francisco tax professional. “If you brought in $2,000 in sales but spent $15,000 on rent and display, you’d have a loss of $13,000. If your husband made $60,000 in wages, you’d be taxed on a combined income of $47,000.”
If you claim zero income with thousands in expenses, however, that could red flag your return.
“The IRS is concerned that expenses are being deducted for something that wasn’t legitimately being treated as a true business,” Zobel said. Also be aware that you can’t claim leftover inventory as an expense. You’d be smart to get professional help with your tax return this year.
Going with LLC or a corporation
Dear Karen: I’m starting a business. Should I form a corporation or LLC?
Answer: Generally, limited liability companies and corporations give business owners the same protection from liability and creditors. But because few start-up entrepreneurs know which legal structure will be preferable in the long run, Philadelphia tax attorney Gary Edelson typically recommends the LLC. “It’s easy to go from LLC to corporation should the need arise, but not so easy to go the other way,” he said. “Only in unique instances would you prefer the S-Corp. from the start.”
LLCs offer more flexibility than corporations because any person or entity can own an LLC interest, whereas in an S-Corp. -- a corporate election typically used by smaller businesses -- only individuals and selected types of trusts can be owners.
“You cannot have a foreign owner or entity or corporation as an owner of an S-Corp.,” Edelson said. “Also, an LLC is preferable if your exit strategy is a sale to a private equity fund or a competitor because with an LLC your buyer will get a step-up in basis for income tax purposes. If they buy stock in a corporation, the basis doesn’t move,” he said. Tax basis is the figure used to determine capital gains and losses for tax purposes.
“The bottom line is, if you start out as an LLC all your options are open,” he said.
Do I really need a business degree?
Dear Karen: I’m thinking of returning to college to finish my education. If I want my own company, would you recommend I get a business degree?
Answer: If you are motivated to get a college education and want to run a company, a business degree is the way to go. You don’t, however, need a business degree to be a successful entrepreneur.
“A college degree, from an entrepreneur’s perspective, is like any other investment of time and money. Ask yourself what kind of return you’ll get and whether this investment of time and money now will leave you with more time and money later on,” said Michael Lloyd, a coach for E-Myth, a small-business consulting firm.
You can take courses on business essentials such as marketing, finance, managing employees, business law, industry trends and other topics online, through a Small Business Development Center or at a community college. “Many college courses are presented from the viewpoint of the employee, not the business owner. To optimize the value of the course, be sure to view the content from a business owner’s perspective,” Lloyd said.
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