New Jersey presents unique challenges for small businesses, not the least of which are tax liabilities. The Garden State is home to 200,000 small businesses with fewer than 500 employees – along with some 600,000 self-employed workers – who are responsible for navigating the state’s array of taxes.
“I don’t think it’s much of a secret that New Jersey has gotten a bad reputation among small business owners,” says Jo Anna Fellon, senior tax manager for Friedman LLP, a New York City accounting firm with offices in New Jersey, New York and Philadelphia. Among the biggest challenges for small business owners in the state is juggling their day-to-day operations with the pressures of properly filing and paying their taxes in a timely fashion, in addition to staying on top of their personal tax requirements.
“Falling behind will only create more headaches, so organization and proper tax planning really is crucial for the small business owner in New Jersey,” she adds. “The last thing you want is to have a levy on your business because of failure to collect or submit sales tax.”
Among the biggest mistakes small business owners make revolves around filing their income taxes. “For rapidly expanding companies, sometimes it’s a challenge to pay their income taxes without borrowing,” says Ryan Malone, principal at Ridgewood-based Flackman Goodman and Potter LLC. Certain capital expenditures for businesses, such as machinery and equipment, require expense recognition over multiple years through depreciation. “Many new small business owners will ‘reinvest’ in their business’ capital equipment using the cash from operations, leaving the potential for a situation where there isn’t enough cash to pay the tax on the profits,” he adds. “The new business owner sees this as money spent. However, it doesn’t all reduce taxable income at the time it was spent.”
Another common downfall that business owners must be aware of is their responsibility to collect sales tax. “The burden of collecting that sales tax for the state falls on the small business owner at the point of sale,” Fellon explains. Unlike corporate income tax, sales tax is considered a trust fund tax and becomes a personal liability. According to Ronald J. Ruggeri, principal of Cranford-based MSPC Certified Public Accountants and Advisors, PC (additional offices in Manhattan), it’s likely that at least 90 percent of audits revolve around sales tax. “The state knows there’s a lot of money to be made from collecting sales tax,” he explains. “The audit can be very intrusive, and since there’s no statute of limitations on sales tax, they can go back as far as they’d like.”
Many small business owners don’t understand all of the nuances related to collecting and reporting sales tax – companies need to ensure that they’re paying use tax on equipment they buy on-line from out-of-state vendors, including major retailers like Overstock. If a retailer doesn’t charge sales tax at the time of purchase, it then becomes the business owner’s responsibility to voluntarily calculate and pay use tax to the state. “When you collect sales tax for the state and federal governments, it’s no longer the employer’s money … but, if the business is having cash flow issues, it may be the first source of money they draw from,” warns Gerard Bobal, partner at WeiserMazars. “You never want to use the State of New Jersey or the IRS as your personal bank.”
Companies that conduct business in other states may also be subject to additional tax requirements. “Nexus” is a term that relates to companies conducting business in more than one state, such as if a New Jersey-based consultant travels to New York or Pennsylvania to work on a project for a client. The business owner will then be responsible for filing returns – and paying taxes – in those other states. “It’s another area of tax liability that we see as a challenge for the small business owner,” Bobal explains.
Another complexity related to sales taxes for small business revolves around online sales – a significant source of revenue for many of today’s small businesses. When it comes to on-line sales, “click-through nexus” will also impact the business owner’s tax returns. If a New Jersey business advertises the link to their website on a New York-based website – and then makes sales via that link – they may be responsible for collecting sales taxes from customers who are based in New York. “Every state is hungry for money, and if they can collect taxes from out-of-state businesses, that’s less money they have to raise in their own state by taxing their own citizens,” Bobal adds.
Some of New Jersey’s other taxes aren’t quite as complicated for small businesses. “While New Jersey has some of the highest tax rates among all the states, income tax reporting for entities operating in the state is fairly straightforward,” Malone says. States such as California and Pennsylvania charge franchise taxes – which is basically a fee for the right do business in a state, he notes. “I think most small business owners are more than competent to actually conduct their business, but the fear of getting swallowed up in the world of compliance can be very taxing,” says Phil Drudy, an accountant at Smolin Lupin, which has offices in Fairfield, Red Bank, New York and Florida.
Additionally, New Jersey isn’t known for offering small businesses much in the way of tax incentives. According to Ruggeri, many of the options that can be used to lower federal taxes don’t benefit small business owners in New Jersey. “On the federal side, there’s always been the incentive to accelerate depreciation and completely write off the cost of certain assets, giving the small business owner the opportunity to reduce their taxable income and therefore pay lower taxes … but those incentives don’t exist in New Jersey,” he explains.
Malone notes that bonus and special depreciation has mitigated this problem over last few years from a federal tax perspective. “New Jersey – and other states – have muddied the waters by decoupling from the federal depreciation rules and creating situations when a company is breakeven for federal income tax purposes, but profitable for state income tax purposes,” he says. “Federal and state profitability evens out over time, but cash flow management for income taxes is very important … and often overlooked.”
A business’ location within the state will also play a role in its taxes; whether they’re located in a major city of a small local township, they’ll be subject to different levels of tax compliance and benefits. “If you’re conducting business in certain parts of Newark, you’ll have access to a sales tax benefit,” Drudy explains. Businesses that locate themselves within Urban Enterprise Zones can also take advantage of benefits such as tax exemptions. “It’s something unique to the state of New Jersey, and sometimes small business owners who don’t have a large influx of capital, but are looking for space and wanting to really grow their business, might be able to take advantage of incentives to help lower their taxes,” Fellon adds.
The way a small business is structured will have a significant impact on its tax liability. In New Jersey, business owners are typically free to choose to operate their business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. That structure may decide whether a business owner or the business pays income taxes on the business income. According to Malone, if a small business is structured as a C corporation, it will pay income tax at the company level, while the owners of LLCs, S corporations and partnerships report income and pay taxes on their proportionate share of the entity’s income on their individual returns.
An upside of being a partnership, LLC or S corporation business owner in New Jersey is that the rate for individual returns has remained at a relatively low rate over the past decade, Fellon notes. “We don’t really see too many C corporations these days; that way, if you operate at a loss in any given year, you get to carry that loss forward to reduce future taxable income or be entitled to a refund,” Ruggeri says. “New Jersey looks at each year in a vacuum; whatever happens in that year happens in that year, and it can put small business owners at a disadvantage.”
The Affordable Care Act has also instilled fear in the hearts of many of the state’s small business owners. “It has a lot of businesses in a panic about how they’re going to comply without being subject to penalties, and there’s still a lot of confusion,” Drudy says. Another hurdle for small business owners is navigating the changes that have been made to the requirements; as of 2016, another filing burden will be placed on small businesses. The Affordable Care Act mandates that once applied to businesses with 100 employees or more will drop down to 50 employees. “We’ll likely see more and more small businesses falling into that reporting requirement, and having to meet the minimum health benefit requirements for their employees as stipulated by the Affordable Care Act,” Fellon notes.
Unfortunately, business owners may be subject to a $2,000 penalty per employee for failing to provide the proper mandatory healthcare coverage for full-time employees, or for not reporting specific information on the type and amount of coverage provided to each individual employee, Ruggeri adds. “It’s going to become a tremendous burden for the truly small business owner who only has 50 employees,” he says.
Fortunately, New Jersey is home to a host of tax professionals who can help small business owners meet their tax requirements and continue to grow their businesses in the Garden State. “The absolute best thing any business owner can do is sit down with an accountant, plan for their tax liabilities in the year- ahead, and map out exactly where the company is going to ensure their continued success,” Bobal concludes.