In its 2016 New Jersey Small Business Profile, the U.S. Small Business Administration Office of Advocacy said there were 820,303 small businesses in the Garden State.
Owning a small business comes with numerous benefits. Between the independence, flexibility, power and personal fulfillment, it's an opportunity to put all of your energy into something you're truly passionate about. With so much power, however, there are tax implications that need to be recognized. This is especially critical in New Jersey, as the state has the highest property taxes in the nation, according to NJ.com. Beyond property tax, business owners in the Garden State should understand how other taxes can affect them.
What are some of the biggest mistakes made among business owners? Those involved with income tax, according to New Jersey Business Magazine. Ryan Malone, the principal at Flackman, Goodman & Potter, LLP, said some businesses find it challenging to pay income taxes without borrowing, especially when they're rapidly expanding.
"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 said. "The new business owner sees this as money spent. However, it doesn't all reduce taxable income at the time it was spent."
Our advice: Always budget and calculate your monthly income tax.
As a business owner, you must understand how your property taxes are determined. According to the New Jersey State League of Municipalities, there are six basic factors. Those include:
The cost of municipal and county programs and services.
Costs of local public schools.
Availability of other revenues to cover costs.
The presence of tax-exempt properties in your municipality.
The total value of all taxable proprieties in your municipality.
At some point, many business owners may consider renovations or additions on their current building to grow their business, accommodate more customers and increase the overall worth of the company. This makes the property more valuable, which then increases the property tax. Business owners need to keep this in mind when making such renovations, as it will impact spending and staying within their budget.
Business owners have a responsibility to collect sales tax. It's a personal liability that will impact the business as a whole. Ronald J Ruggeri, principal of Cranford-based MSPC Certified Public Accountants and Advisors, P.C., told New Jersey Business Magazine that nearly 90 percent of audits in the state arise due to issues with sales tax. Neglecting to collect and report sales tax at the point of sale can negatively impact the business.
"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."
New Jersey issues a use tax on goods purchased out-of-state or online that in-state business owners didn't pay sales tax on or they paid sales tax on at a lower rate than they would have if they had made the purchases in New Jersey. Therefore, if you're making any business transactions while you're traveling or if you’re shopping online to find the best prices or largest inventory, it's critical you're saving receipts or keeping track of your purchases otherwise, according to what Vinay Navani, a certified public accountant, shared with The Star-Ledger.
"Let's say you go to Staples and buy office supplies. You go to the cash register and they charge you sales tax," he said. "If you order something online, that vendor may not have a location in New Jersey and so they don't have to remit sales tax. But then the obligation flips and now you have to pay use tax to the state."
If you don't keep track of these out-of-state or online purchases, you'll be impacted in the event of an audit. Otherwise, the inspection should run smoothly.
Last October, Governor Chris Christie signed a bill to raise the gasoline tax 23 cents per gallon – the state's first tax increase on gas since 1988, according to NJ.com. By raising the gas tax, drivers are expected to pay more to fuel their cars - which impacts business owners who rely on drivers to deliver goods. Business owners will feel the impact as they reallocate budgets, setting aside more funds to make up for the gas tax.
It's not always easy running a business, but company owners can reduce stress and negative impact by complying with New Jersey tax regulations. Therefore, if you have any questions regarding New Jersey taxes or if you would like to discuss the matter further, please contact me, Amy Van Fossen, at 201-806-3364.