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William Manchee

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Blogs by William Manchee

Defending the Small Business - Part 15 - State & Local Taxes
11/22/2008 3:50:12 PM    [ Flag as Spam or Inappropriate ]

Small business owners often overlook state and local taxes to their great peril...
State and Local Taxes

Whereas state and local taxes arenít likely to put a small business under, they can cause the SBO a lot of grief if they are overlooked or ignored. Fortunately, in Texas there is no state income tax. For SBOs in other states, reporting and paying state income taxes can be nearly as burdensome as federal payroll taxes. The key, again, is to accept the fact that these taxes have to be paid, and withhold and make deposits each pay period so there is little opportunity to inadvertently spend that money.
In Texas and many other states, the state imposes a franchise tax. This is a very annoying tax that SBOs often ignore. The problem with ignoring this tax for a corporation or limited liability company is the fact that your corporate charter will eventually be revoked. This can be devastating if a SBO gets in trouble and needs to rely on the liability protection that a corporation or limited liability company will provide. Suddenly an SBO may find himself personally liable for all the company debts simply because he didnít file this return and pay the tax.
Another problem is that the company will not be allowed to prosecute or defend itself in court if these taxes are not paid and the charter is allowed to be forfeited. This can be remedied simply by filing the return and paying the tax, but many SBOs donít know this and let creditors take default judgments against them at will. Fortunately, the Texas legislature recently enacted a $150,000 income exclusion for small businesses that will eliminate the franchise tax problem for smaller SBOs. But for those outside Texas or with revenues over $150,000 the franchise may still be a problem.
Personal and real property taxes are almost always a line item in the bankruptcies I file. Since few taxing authorities vigorously prosecute those who donít pay them, they tend to be a low priority. Over time they can become quite large and difficult to pay. The best way to handle them is to establish an escrow fund. This can be done with the mortgage company or by creation of an escrow fund at a bank or savings and loan. Then each month you deposit one twelfth of the amount you will need for the year. This can also be done with insurance so that when the time comes to make the payment the money is in hand. Donít think you can pull these large payments from current cash flow. It just wonít happen and you will just end up paying late fees and penalties.
I have had one unlucky SBO in Chapter 13 for ten years simply because she didnít have the discipline to pay her property taxes. She was a self employed cleaning woman and barely made enough to survive. She owned her house outright so the taxes were not escrowed each month. When she was unable to pay the taxes for three years, the City of Dallas turned her over to an attorney and a suit was filed. She didnít hire an attorney to contest the suit, so before long the property was put up for sale at a tax auction. Without enough money to pay rent, if she had lost her house she may have ended up on the street. Thatís when she sought our help.
We put her in Chapter 13 and were able to stop the sale of her home. The problem was that she now had to make monthly payments to the bankruptcy trustee. This didnít leave enough money left over for her to escrow taxes for the following year, so she was always getting behind on her payments. When she got too far behind, sheíd get dismissed and weíd have to start over again. Unfortunately, repetitive bankruptcy filing is considered an abuse of the bankruptcy system, so two or three bankruptcy filings is the most anyone can hope to file. If our client lets this bankruptcy get dismissed, she will may end up homeless.
Sales and use taxes arenít as much of a problem for the SBO because a sales tax permit and a bond are usually required before a business can open. To get the permit, SBOs are given instructions as to what is expected of them. The SBO must remit the taxes periodically and, if they donít the taxing authorities come down on them quickly and effectively.
There are a myriad of other taxes and assessments state and local governments assess against the SBOís property. Assessments for street improvements is one that can be quite devastating to SBO. When you buy real property, be sure and find out if the state, county, or city plans to widen the road in front of your property. These assessments can be very large and jeopardize the unsuspecting SBOís ownership of the property should he be unable to pay it.
Finally, I have had many SBOs devastated when they purchase or lease property and find out that, in order to get an occupancy permit they must make thousands of dollars of repairs. I know of several instances in which businesses that were planning to make a quick move to improve business or get a better lease rate, ended up out of business for several months while required repairs or upgrades were completed. Compliance with the American Disabilities Act, environmental laws and local codes and ordinances are usually the sources of these types of costly delays and business interruptions. If you have a realtor he or she should check out all of this for you. If you donít use a realtor, you will have to do it yourself or hire an attorney to do it for you. But, whatever you do, donít ignore these most serious problems.

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More Blogs by William Manchee
• Why Many Intelligent and Talented People Fail in Business - Monday, May 07, 2012
• Getting the Mail Can Be Risky Business - Friday, May 04, 2012
• Consumers Suffer Grievous Injury When Creditors Improperly Report Their Credit after Bankruptcy - Thursday, May 03, 2012
• The Effect of Print on Demand to the Small Press Author - Monday, July 04, 2011
• Nine-Eleven's Impact on the Small Press Author - Sunday, July 03, 2011
• Has Your Mortgage Company Ripped You Off? - Saturday, August 07, 2010
• Wrongful Foreclosure - Tuesday, February 16, 2010
• Don't Throw Away The Evidence - Friday, January 15, 2010
• Brandy - Saturday, October 17, 2009
• Why I Write in Different Genres - Wednesday, August 12, 2009
• Cash for Clunkers Bad Idea for Many Consumers - Monday, August 03, 2009
• Beware of Debt Negotiators - Tuesday, May 05, 2009
• Top Ten Reviewers - Tuesday, April 28, 2009
• Debt Collector Put Out of Business In Texas - Sunday, April 26, 2009
• Defending the Small Business - Part 23 - Changing Your Ways - Tuesday, April 07, 2009
• What Every Bankruptcy Filer Should Know - Part 3 - Will Filing Bankruptcy Ruin Your Credit? - Thursday, March 19, 2009
• Defending the Small Business - Part 22 - Bookkeeping and Accounting - Wednesday, March 11, 2009
• Chill, It's No Big Deal - Sunday, March 01, 2009
• What All Bankruptcy Filers Should Know - Part 2 - Wednesday, February 25, 2009
• Defending the Small Business - Part 21 Form of Business - Thursday, February 19, 2009
• What Every Bankruptcy Filer Should Know - Saturday, January 31, 2009
• Defending the Small Business - Part 20, Getting an Attorney - Sunday, January 25, 2009
• Defending the Small Business - Part 19 - Employees, Double Trouble - Sunday, January 11, 2009
• Defending the Small Business Under Siege - Part 18, Loan Consolidations & Workouts - Sunday, January 04, 2009
• Defending the Small Business: Part 17 - Bankruptcy: Friend or Foe? - Monday, December 29, 2008
• Tarizon: The Liberator Launch Update - Friday, December 26, 2008
• Defending the Small Business - Part 16 - When the Constable Knocks - Friday, December 05, 2008
•  Defending the Small Business - Part 15 - State & Local Taxes - Saturday, November 22, 2008  
• Defending the Small Business - Part 14 - Dealing With IRS Collections - Wednesday, November 12, 2008
• Defending the Small Business - Part 13 - Uncle Sam, The Sleeping Giant - Thursday, November 06, 2008
• Defending the Small Business - Part 12 It's Not As Bad As It Looks - Monday, November 03, 2008
• Defending the Small Business - Part 11. Misfortune - Tuesday, October 28, 2008
• Defending the Small Business: Part 10. Competition - Thursday, October 23, 2008
• Defending the Small Business. Part 9. Theft & Embezzlement - Monday, October 20, 2008
• Defending the Small Business - Part 8. Greedy Lenders - Sunday, October 19, 2008
• 7 - Defending The Small Business: The Credit Conspiracy - Saturday, October 18, 2008
• 6 - Defending the Small Business - Giving it away. - Thursday, October 16, 2008
• 5. Defending the Small Business: Starting on A Shoe String - Wednesday, October 15, 2008
• 4. Defending the Small Business: Suffocation - Tuesday, October 14, 2008
• 3 - Defending the Small Business: Looting - Monday, October 13, 2008
• Understanding the Current Economic Meltdown - Saturday, October 11, 2008
• 2 - Defending the Small Business - Doomed From Day One - Saturday, October 11, 2008
• 1 - Defending the Small Business: Introduction - Friday, October 10, 2008
• The Stan Turner Mysteries - Sunday, March 25, 2007

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