Nolo's Small Business Legal Blog

President Obama has announced a new lending plan which would provide smaller community banks with new capital to lend to small businesses. Under the proposal, which will require Congressional approval, the government would use $30 million it receives back from Wall Street banks repaying bailout loans under the Troubled Asset Relief Program (TARP) and set up a new Small Business Lending Fund. This fund would be available to banks with assets under $10 billion--primarily smaller community banks. These banks account for 50% of all small business loans.  

"These are the small, local banks that work most closely with small business -- they're usually the ones that provide them their first loan, and they watch them grow through good times and bad," Mr. Obama said. . . "The more loans these banks provide to creditworthy small businesses, the better deal we'll give them on capital from this fund that we've set up."

President Obama has also proposed continuing other small business lending incentives such as waiving fees and increasing guarantees for loans backed by the Small Business Administration. In his State of the Union address, President Obama also said he will be proposing new tax breaks for small businesses that create new jobs or increase hours and wages on existing jobs.

The IRS announced the 2010 standard mileage rates for the use of a car (including a van, pickup, or panel truck). Effective January 1, 2010, the standard mileage rates are:
50 cents per mile for business miles driven 
16.5 cents per mile driven for medical or moving purposes 
14 cents per mile driven in service of charitable organizations 

The 2010 rate for business miles is lower than the rate that was in effect for 2009, which was 55 cents per mile. According to the IRS, the lower rate for business use of a vehicle for 2010 reflects "generally lower transportation costs compared to a year ago," such as the cost of gasoline.
Self-employed people can choose either the standard mileage rate with the rate set annually by the IRS or they can calculate their actual costs of operating a business vehicle. There are certain restrictions on using the standard mileage rate however. You must use that method the first year you use the vehicle in your business, and you can't have claimed accelerated depreciation deductions or have taken any Section 179 deductions for the vehicle.

If you learn only one number in the tax code, it should be Section 179. This humble piece of the tax code is one of the greatest tax boons ever for small business owners. Section 179 doesn't increase the total amount you can deduct, but it allows you to get your entire depreciation deduction in one year, rather than taking it a little at a time over the term of an asset's useful life--which can be up to 39 years. To qualify, the property must be long-term, tangible personal property that you purchase and then use in your business over 50% of the time.
In an effort to jumpstart the economy, the Section 179 limit was increased to a whopping $250,000 for 2009 (from $128,000 in 2007). It is scheduled to go back down to $133,000 in 2010 and then $25,000 in 2011. So if you're planning on purchasing more than $25,000 of eligible property for your business and want to deduct the cost in one year, you should make your purchase before 2011.

See Deduct It! by Stephen Fishman (Nolo) for more information on small business tax deductions.

More and more businesses are using Facebook to market and promote their business. As reported in a recent New York Times article "How to Market Your Business With Facebook," there are 300 million people on Facebook--a vast audience of potential consumers. By creating a Facebook Page, small businesses can build their own online communities of fans and customers through targeted marketing that reaches those most likely to be interested in their product or services. 

Clara Shih, author of "The Facebook Era" (Pearson Education, 2009) recommends that businesses start small and have a clear objective in mind--for example, getting more customers in the door. Then create a strategy to accomplish that goal. The owner of a cupcake bakery called Sprinkles increased its fan base and store traffic by posting a password on its Facebook page every day that could be used to redeem a free cupcake at the store. A simple, focused, and effective strategy.

Some other basic rules from the experts: Don't use Facebook just to market and push your product or services. Create a site that is inviting to users, reflects personality, and is interactive. Liven it up with news, useful information, and promotions--and keep it current. Also, be sure to listen to your users so you can see how you are doing and what changes you may want to consider based on the feedback you get from your online fans.

Most small businesses have at least some concern about the possibility of facing an IRS audit. You may be wondering how the IRS decides to audit, how likely it is that you'll be audited, and what you can do to avoid being one of the unlucky ones. Let's take a look at some of the things that are most likely to draw the attention of the IRS. That way you can take steps to avoid that unwanted attention--or come out of an audit unscathed if you find yourself in the government's crosshairs.
When auditing small business owners, the IRS is most concerned about whether you have done one of the following:
• Underreported your income. Unlike employees who have their taxes withheld, business owners who are not employees have no withholding--and many opportunities to underreport how much they earned, particularly if they run a cash business.
• Claimed tax deductions to which you were not entitled. For example, you claimed that nondeductible personal expenses, such as a personal vacation, were deductible business expenses.
• Properly documented the amount of your deductions. If you don't have the proper records to back up the amount of a deduction, the IRS may reduce it, either entirely or in part. Lack of documentation is the main reason small business owners lose deductions when they get audited.
• Taken business deductions for a hobby. If you continually lose money, or you are involved in a fun activity such as art, photo¬graphy, crafts, or writing and don't earn profits every year, the auditor may question whether you are really in business. If the IRS claims you are engaged in a hobby, you could lose every single deduction for the activity.

For more information on this and other small business tax deductions issues, see Deduct It, by Stephen Fishman.

When you're totaling up your business's expenses at the end of the year, don't overlook these valuable business deductions. Remember, the more tax deductions your business can legitimately take, the lower its taxable profit will be. It's that simple. But you need to know what is -- and isn't -- deductible, and pay careful attention to IRS rules. Here are some of the more common deductible business expenses that you won't want to miss.
1. Expenses of Going Into Business. The costs of getting a business started are capital expenses, $5,000 of which you may deduct the first year you're in business; any remainder must be deducted in equal amounts over the next 15 years.
2. Equipment Purchases. Under Section 179 of the Internal Revenue Code, you can fully deduct up to $250,000 of certain business equipment you purchase in 2009 (subject to a phase-out if you spend more than $800,000). There is also a first-year bonus depreciation deduction in effect for 2009 which allows you to depreciate 50% of the adjusted basis of qualified property purchased during the year. Take advantage of these tremendous tax savings if you can--the Section 179 deduction is scheduled to go down to $133,000 in 2010 and bonus deduction expires at the end of the year.  
3. Auto Expenses. If you use your car for business, or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Mastering the rules of car expense deductions can be tricky, but well worth your while.
4. Business Entertaining. If you pick up the tab for entertaining present or prospective customers, you may deduct 50% of the cost.
5. Travel. When you travel for business, you can deduct many expenses, including the cost of plane fare, taxis, lodging, meals, telephone calls, faxes, and tips.
6. Legal and Professional Fees. Fees that you pay to lawyers, tax professionals, or consultants generally can be deducted in the year incurred. However, if the work clearly relates to future years, they must be deducted over the life of the benefit you receive.
7. Bad Debts. If someone stiffs your business, the bad debt may or may not be deductible -- it depends on the kind of product your business sells. If your business sells goods, you can deduct the cost of goods that you sell but aren't paid for. If your business provides services, no deduction is allowed for time you devoted to a client or customer who doesn't pay.
8. Interest. If you use credit to finance business purchases, the interest and carrying charges are fully tax deductible. The same is true if you take out a personal loan and use the proceeds for your business. Be sure to keep good records demonstrating that the money was used for your business.
9. Taxes. Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax.
10. Advertising and Promotion. The cost of ordinary advertising of your goods or services -- business cards, yellow page ads, and so on -- is deductible as a current expense. Promotional costs that create business goodwill -- for example, sponsoring a peewee football team -- are also deductible as long as there is a clear connection between the sponsorship and your business.
See Deduct It! by Stephen Fishman (Nolo) for more information on tax deductions for your small business.

Having good business credit is essential for any small business trying to obtain financing, especially in today's tightened financial climate. There are steps that small business owners can take to improve their credit profile and put themselves in a better position with lenders. Businesses also need to establish their own separate credit history as opposed to relying on the personal credit history of the business owners as frequently happens with new or small businesses.

According to a recent Wall Street Journal article, the three most effective credit building strategies for small businesses are:
1. Keep good books and records. Get an accountant to review your finances. This adds credibility to your business and finances for lenders. Think about forming a business entity if you're a sole proprietor. Keep your business licenses up-to-date.
2. Build your business credit through your vendors. Do business exclusively with companies that can report your credit to credit-reporting agencies like Dun & Bradstreet. Register with these commercial credit agencies and check your credit report each year.
3. Be fiscally responsible. Always pay your bills on time. When you go to borrow money, do it for revenue generating items, like essential equipment and staff, not less essential or nonrevenue producing items.

Business owners who got extensions last April for their 2008 income tax returns must now face the music. October 15th is the final deadline for filing 2008 income tax returns. Don't have all the money you owe? It doesn't matter--business owners should file a return by this deadline even if they can't pay what they owe to the IRS.

It's always a good idea to make some effort to pay when you file your tax return, even if it's not the full amount you owe. First of all, this will reduce the penalty and interest charges you will incur for late payment. It also puts you in a better position to negotiate with the IRS for additional time. Depending on your circumstances, you may be able to reach an agreement with the IRS to "full pay" within 60 or 120 days--meaning you will come up with all the money you owe the IRS within a 60 to 120 day timeframe. This arrangement buys you a little time if that's all you need and the charges, penalties, and interest you incur during this period will be less than they would be if you have to do a longer term installment agreement.

If you can't do a full pay agreement and you still owe the IRS money, you will probably need to enter into an installment agreement. If you owe the IRS less than $25,000 in taxes, penalties, and interest, you can complete an Online Payment Agreement (OPA) on the IRS's website. Alternatively, you can download Form 9465 from the IRS website and mail it in. If you owe more than $25,000 in taxes, penalties, and interest, you made need to complete a Collection Information Statement, Form 433F, in addition to the installment agreement. This form requests some financial information to assist the IRS in coming up with a payment plan.

For more information on your late payment options, see "Filing Late and/or Paying Late" on the IRS website.  

If your business had a large loss in 2008 and any profitable years in the prior five-year period, you'll want to take advantage of a special one-time refund offer from the IRS. Under a new provision of the American Recovery and Reinvestment Act, small businesses that had a net operating loss (NOL) in 2008 can elect to carry back that loss for up to five years instead of the usual two. This extended NOL carryback can be used only once and is only available to businesses that average $15 million or less in gross receipts for the three-year period ending with the NOL carryback election year.

Eligible small businesses will need to act quickly to take advantage of this one-time offer from the IRS. Individuals--which includes sole proprietors, partners in a partnership, and shareholders in an S corporation--have until October 15, 2009 to elect the three, four, or five-year carryback period. The deadline for calendar year corporations ended on September 15, 2009. The deadlines for fiscal-year taxpayers vary depending on their year-end date. For more information, see IRS Issue Number IR-2009-072.

Prior to last March, SBA loans could be used to guarantee any amount of goodwill included in the purchase price of a small business. With certain business purchases, the value of goodwill (name recognition and customer loyalty) can be as high as 55% to 95% of the overall purchase price. Starting in March of 2009, however, the SBA placed a cap on the amount of financing for goodwill that it would guarantee--$250,000 or 50% of the loan amount, whichever was lower. The new rules were meant to prevent sellers from overvaluing their company's goodwill or intangible assets.

The changes resulted in a tightening of capital and a 33% drop in business acquisitions from the prior year. As reported in a Wall Street Journal article, "It was the antistimulus." After a study finding that $400,000 was the average for goodwill financings, the SBA decided to raise the cap to $500,000 starting in October. Under its new guidelines, the SBA also recommends 25% in equity from the purchaser in goodwill financings over $500,000. Hopefully, the new rules offer a reasonable compromise between unlimited financing for goodwill (which can cause problems for purchasers) and overly restrictive terms that inhibit business acquisitions.

Do you need a basic bookkeeping program for your small business--something more sophisticated than a pencil and paper system but less complicated than a full-blown accounting program? There's a relatively new online bookkeeping service called Outright that may be just the thing you are looking for. An article in Small Business Trends describes how easy the program is to use. You are asked to track only two things--earnings and expenses. You provide this information and the program helps you figure out your quarterly estimated taxes and business deductions. For many small businesses, it may be the perfect bookkeeping solution, providing essential bookkeeping services while avoiding the headaches and hassles of a program that offers more than you need. It's designed for sole proprietors and single-member LLCs, and it's free (at least for now).            
           

After first appearing on the scene last spring, the H1N1 virus--also know as swine flu--is back. Small businesses are scrambling to figure out how to cope with what promises to be a challenging fall and winter. Aside from employee absences and staffing issues, concerns about a flu epidemic raise a host of other issues for small businesses, like maintaining employees' health privacy and creating effective sick policy rules. A recent Wall Street Journal article provides advice and resources for businesses trying to figure out how to best prepare for this year's flu season.

The article discusses some preventive measures businesses can take, such as offering flu shots or time off so employees can get flu shots. Another is to keep the workplace more sanitary by frequently cleaning surfaces and having hand sanitizers available. Businesses may need to review their sick policies or create new ones, possibly adding more sick time so employees don't come to work sick. And businesses may want to cross-train employees or offer telecommuting as on option for employees who are home with a sick family member.
For more information, see Planning for 2009 H1N1 Influenza: A Preparedness Guide for Small Business. The Centers for Disease Control and Prevention also has information for businesses on its website at www.cdc.gov/h1n1flu/business/toolkit/.