Basic Tax Facts

December 2005
by John Thaler

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Your business needs to pay
many different taxes, including income taxes, sales taxes, and city taxes.
Failure to pay these taxes or failure to pay them on time can result in
penalties and interest on the sum that should have been paid. And some states
charge additional penalties. For example, the California Labor Board charges
$1,000 per employee not currently covered by Worker’s Compensation insurance.
While the states and the federal government can be forgiving and willing to
provide payment plans, why would you want to tie up your operating capital in
back tax payments with exorbitant penalties and interest rates?

Computation Choices

All forms of business entities
must decide whether to account on an accrual or cash method.

The cash method is the most common. Using
it, you count revenue when you receive it. You get paid $100. You then book
that amount of revenue. If you don’t get paid, you have no income.

Using the accrual method,
you book revenue at the time services are rendered or the time goods are
provided, regardless of when and whether payment is received.

For most small businesses, the
cash method is the best way to account for revenue. It’s simple to use, and at
the end of your tax year, you know what your business made.

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