TexasDesign.com

Today we’re going to be talking to Robert Gonzalez a partner at Henry, Held & Reilly, a CPA firm. And we’ll be talking about different aspects of how to properly run your business and set up your business. Robert has been a CPA for over fourteen years. Has a Masters in Taxation and has been working in Texas now for a couple of years.

How are you doing today, Robert?

Robert Gonzalez: I’m doing pretty good Dan, how about yourself?

TDc: Very good, thank you. I’m glad you’re here to talk to us. A lot of graphic designers when they start their businesses have questions on how to set up a business from a tax point of view. What are the concerns that people should have when setting up a business?

Robert Gonzalez: That’s a very good question. Basically, one of the fundamental questions that an individual will have when they start a business is should they form a corporation, should they operate as a sole proprietor that means without any legal entity, or should they form a limited liability company partnership. So, there’s quite a bit of different legal entities available whereby one can operate.

And there are some tax advantages and some disadvantages to all of these. So basically the best thing to do would be to consult with their tax adviser or feel free to give me a call or send me an email. And depending on your particular situation, there could be a recommendation as to what would be the best entity to operate under because there are tax implications.

For example, their particular situations were for example on S corporation would save you quite a bit of payable taxes as opposed to an LLP would not. So anyway, that’s a very important question that definitely needs to be analyzed by a tax professional.

TDc: Okay. What about being sole proprietor? You mentioned that there is not any legal net with sole proprietor. Why would anybody want to go with sole proprietor?

Robert Gonzalez: Well, a sole proprietorship is very easy business to start. So, for example, let’s say a person just says, “You know I wanted to start a business next week. I think I have some good connections and I can go ahead and do this.” Well, they could just basically could start the business just under their name or they could easily do a DBA, “Doing Business As” and they could create a business name and they could operate individually.

What that means is that all the revenues and all the expenses generated through that business will be reported in their individual tax return. So, therefore there will not be any business tax filing requirement. So, that makes it kind of easy and nice from that standpoint.

One negative, however on operating as a sole proprietor is that there’s no legal protection. So, in the event that anything would go wrong, there’s a legal action say from customers or vendors, well, they can go directly to that individual and there will not be any corporate shield to kind of minimize that issue.

TDc: Okay, so in other words as a sole proprietor, if you were to run a print job and the print job was not successful, then they can come and actually sue you personally.

Robert Gonzalez: That is correct. And that is one thing that has been the advantage of having a legal entity is that there is somewhat of a shield in there between the individual owner of the business and the person that is bringing the legal action. So, oftentimes it is recommended by attorneys that a corporation be formed. And to form a corporation is not extremely expensive and you get benefit for quite a number of years to come.

TDc: Okay. Are there any guidelines as to when somebody is trying to form a business that they might want to follow as to which entity that they would want to go to establish?

Robert Gonzalez: Well, the most popular legal entity for small to midsize businesses, probably home businesses is either an S corporation or a limited liability company. Those two entities are very popular. And on some particular circumstances an S corporation would be a little bit better than a limited liability company in the sense that for now through S corporation you could save quite a bit of tax dollars, possibly on payroll tax dollars.

So, what that means is that all the income or all the profit generated through a limited liability company will be subject to approximately 15% payroll taxes whereas through an S corporation if you do the right tax planning, you could save a few thousand dollars on payroll taxes.

TDc: What guidelines do people need to think about when considering tax implications?

Robert Gonzalez: Well, I’ll give you a few areas that are not as clear – let me back up one minute. When it comes to income taxes and reporting to the IRS, pretty much what the IRS said is all the casualties, all the income is going to be reported as gross revenues, for example.

That’s where you start. So, if you received a hundred thousand dollars, so that’s going to be your gross revenues.Then from there, the law allows certain deductions for ordinary and necessary business expenses. So, then of course let’s take for example if you have employees you would take a deduction for salary expense, if you pay your rent you’ll have rent expense and so on and so forth.

But there are certain IRS areas that are not as clear, for example, the use of automobiles. That’s always something that people get somewhat confusing - confused. And they did that confusing area. But there are situations where a company could pay for the automobile of a business owner where the automobile is used primarily for business purposes. There’s another way of deducting some of the automobile expenses where the business owner keeps track of the business miles and submits an expenses report to the company or to the business and the business would turn around and cut a check to the business owner and take the deductions for it.

So, I would say that the automobile is a little bit of a tricky area as far as deducting. The other one would be home office expense. There are some very narrow rules regarding home office expense. Another area that is a little tricky as well would be dispensing equipment. There are certain rules whereby you could by turning equipment, if the equipment qualified then you can write it all off at once.

And one last thing is that independent contractor versus employee issue that the IRS is looking at very closely. So, for example if you hire somebody the question that you have is should this person be an employee or should this person be an independent contractor. So, that’s something that needs to be looked at carefully because if you decide to call somebody an independent contractor and that person in the IRS’ eyes is truly an employee, there’s definitely penalty and interest implications if you don’t call somebody, if a person is not classified correctly.

TDc: Is there a guideline? Is there a - this is kind of where the exact – what are the difference between an employee and an independent contractor?

Robert Gonzalez: Well, that is a good question. There are certain factors that you have to look at and in fact there are circumstances. For example, let’s say that I hired somebody, right? And I tell that person when that person needs to be in my office. I provide a computer to that person. I provide an office to that person. And that person is under my direct supervision.

That’s going to be very hard to classify that particular person as an independent contractor. That person, if the IRS have seen him they’re going to say, “Oh, that person is an employee.”

On the opposite, for example if I hired an individual that does work for multiple companies and I’m just one of the companies that that person does work for and it’s more on the project basis where I just tell that person,”Look you need to finish this project,” and they can take that project home or they can do that on their own time, they’re more independent.

TDc: Right.

Robert Gonzalez: Then, you could probably classify that person as a 1099 independent contractor.

TDc: Okay, let’s jump over to collecting state taxes. In the state of Texas, how does one go about collecting state taxes and in an overview fashion, what is the business’ responsibility in that respect?

Robert Gonzalez: For example, in the state of Texas, what happens is primarily most of the services that would be rendered by a graphic designer or a photographer, illustrator, etc. the deep fold is that most of the services will be subject to sales tax, unless those services are provided to a company that issues a retail certificate.

You know how it works, that the customer will not be the ultimate consumer. So, basically if in the event that their sales tax report, the first step would be to speak to the state, the sales tax office and they will assign a sales tax number and they will advice as to the fine requirement. It could be on a monthly basis, it could be on a quarterly basis or on an annual basis depending on the questions that are answered on the sales tax application.

So, you know how it works, there’s a sales tax application that needs to be filled out and the state will inform the business as to their applying requirements and how they need to report and how they need to pay the sales tax.

TDc: Okay, if a designer or a photographer shoots something for a company and then that company then takes that photography and applies it to a product, where is the sales tax – and then that product is sold with that photography on it — where is the sales tax collected? Is it collected both, when the photographer sells it to the company and then also when it is sold at retail or is there something in between it that can be done?

Robert Gonzalez: No, in between the sales tax will be collected at the point when it is sold at retail. In your particular example, the photographer will request a sales tax, a retail certificate it is called, from that company, and once that retail certificate is issued from the company to the photographer, the photographer has no responsibility to collect the sales tax. The responsibility will lie with the company when they turn around and sell the ultimate product at the retail level.

TDc: Okay, great. Well, I think that’s all we’ll have for today. Again, Robert is with Henry, Held & Reilly- any last comments?

Robert Gonzalez: The way I work is I have a free half an hour initial consultation and if there’s any questions you can send me an email. So, please feel free to either call me ( 972-644-3167 ) or send me an email with any questions. Now remember that if you do have a tax adviser, I would recommend that before starting a business to sit down with that tax adviser to get in touch upon all these different issues that we’ve talked about so that with the right tax plan you are able to save quite a bit in taxes. So, it’s important to understand that. And please feel free to email me or call me with any questions that you might have related to operating any business.

TDc: Thank you so much for your time.

Robert Gonzalez: Thank you.