Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 3 down vote favorite

I'm nearly complete and preparing to launch my business. However, I've noticed that taxes aren't as simple as everyone makes them out to be. I'm mostly confused about cash vs accrual accounting for my situation.

I'm planning on calling the IRS tomorrow for more clarification, but I'd like some opinions from other people. Anyway, to my question -

I'm going to make my business a sole proprietorship. My business sells a single piece of software available only via download. The IRS however says that most businesses that sell things have an inventory. I don't understand how this would apply to me. I do not stock anything, the downloads are available free and the user is simply purchasing a license key from me. There's no stock of these either - they're generated on demand. Do you guys thing that I would be okay with cash based accounting?

share|improve this question

2 Answers

up vote 1 down vote accepted

IRS do not provide tax advice. You should call a tax adviser (EA or CPA) who can help you.

Taxes are significantly more complicated than TurboTax commercials make them appear. If you're starting a business you must have a reputable and professional tax adviser who will walk you through all the issues, educate you on how to manage your books, and will prepare and set up all the needed accounts and tables for you (capital and expense accounts, depreciation tables - these are needed for (almost) all businesses. Some businesses will require more, especially in a Corp or LLC (Partnership) settings).

One of the things you'll get educated about is the accounting methods. What is cash, what is accrual, when this one is better, and when that one is better. Maybe you don't have a choice? Maybe you can use hybrid methods? Talk to a pro.

Inventory may not apply to you, but capitalization of your development expenses certainly does. How do you do that? Talk to a pro.

IRS won't help you - they're not allowed anyway, and whatever they tell you will be the most conservative interpretation of the law. You don't have to follow what they tell you, different interpretations are available. At times, IRS interpretation contradicts settled law (existing Tax Court and Supreme Court precedents). Your tax adviser will guide you through the best interpretations, and best options available to you.

share|improve this answer
1  
That's sobering advice. I was hoping to launch this week, but if I absolutely must consult a CPA I'll have to save money. I bootstrapped this project hoping it wasn't going to be this complicated. Unfortunately, ignorance isn't a valid defense. Thanks. – asdaf3wq Dec 17 '12 at 5:39
2  
My Dad was a CPA. Don't become another beer and barbeque anonymous example of how not to do it. Get a professional and quick. Otherwise, you'll be getting someone to both set you up sanely and bail you out of your mistakes. Remember, it's not what you know that will hurt you the most, it's what you don't know. – Edwin Buck Dec 17 '12 at 15:29
up vote 0 down vote

It doesn't have to be as bleak as the other answer suggests. I've run several businesses over decades and the one time I hired a specialist accountant it went badly wrong. They kept making basic errors and even got their clients involved in a tax scam, which they said was perfectly legal and within the rules. When the tax authorities took them to court, they said their "advice" should have been checked by their clients, so the fines and penalties weren't their responsibility. Thousands of clients were each thousands of dollars out of pocket (big scandal). Not sure who they thought we should "check their advice" with though, as we'd hired them to be our accountants and handle our taxes.

Anyway, after that I realised I couldn't trust anyone with this stuff any more, so I learned to do all my business and personal taxes, financial statements, etc myself. Now I have a couple of spreadsheets and it is trivial.

Of course, I don't mean to imply that all accountants are incompetent, but you do have to be careful who you put your trust in. As always, IMHO, YMMV, etc.

share|improve this answer
   
Well, if the only person you've ever dealt with was a crook, no wonder you trust nobody. Of course one can learn everything, after all - most CPA's and EA's do, no-one is born with the knowledge. The question is whether one should. The way the OP asked the question shows that he hasn't got a clue. That's not a bad thing, most people don't. The question is what you do with it. – littleadv Dec 17 '12 at 9:58
@littleadv The firm I mentioned was an international firm of accountants, well known in the field, not some small time crook, as you suggest. – Steve Jones Dec 17 '12 at 11:02
@SteveJones Sorry to hear about your experience; however, in life and business there is no guarantee of success. I'd wager that those who seek professional tax advice generally obtain far better advice than they can generate working it out on their own. Of course, there are exceptions to every rule, but by the time you can provide tax advice that is on par with a professional, you have invested enough time in the effort to be a professional (or, you're just kidding yourself). – Edwin Buck Dec 17 '12 at 15:37
@Steve If the firm was well-known, I'm sure you can provide a link to the story, which there are plenty of. I'm not saying there are no crooks. I'm saying that those who don't live and breath the tax law won't know many of the things. Even those who do - specialize in some areas and don't go into others. So you may have learned the minimum required to do your own business, but you can't learn it all. 99% of non-accountants don't, and I'll tell you more: some of the CPA's don't either. Not all the CPA's are in tax area, many aren't at all. – littleadv Dec 17 '12 at 18:07
@littleadv Please keep our rules on civility in mind. It's perfectly fine to disagree with someone and explain why you disagree with what was said, but personally attacking someone is never acceptable. I've edited the offensive portions out of the previous comments. – Zuly Gonzalez♦ Dec 18 '12 at 2:14
show 11 more comments

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.