Taxes for multiple firms more complex

NEW YORK -- Taxes are complicated enough for one business, but for people who own more than one business, the problems can multiply quickly.

It's not just the extra paperwork. There are deductions that can cross company lines, and deciding how to handle them can be difficult.

It's fairly common for people who have started one business to go on and start another -- and maybe even another.

"Part of the unique nature of the business owner is the entrepreneurial spirit," said Paul Gada, a senior tax analyst with CCH Inc., a financial information firm. "We're talking about someone who has lots of irons in the fire, juggles lots of ideas and makes the ideas a reality and into a profitable business. It's not a stretch to have this kind of situation."

The downside of all this energy and initiative is more work and record keeping.

Most business owners who are sole proprietors file their company taxes on a Schedule C form included with their 1040s. Owning more than one business means filing separate Schedule Cs for each venture -- you can't just lump all your income and expenses into one.

A big reason for that requirement is the fact that the IRS, which is on the lookout for taxpayers trying to claim a hobby as a business, wants to prevent people from trying to offset income from an obviously legitimate business with a loss from an activity that's recreational and not likely to turn a profit.

In completing multiple Schedule Cs, you'll need to include the Principal Business or Professional Activity Code for each business. These are numbers listed on pages 7 through 9 of the instructions for Schedule C.

If you are required to have an employer identification number, or EIN, then you'll also need a separate one for each of your businesses.

Some of the pitfalls business owners encounter with multiple companies and tax filings is that some provisions of the Internal Revenue Code limit how much money a taxpayer, not a business, can deduct in some situations.

For example, the code allows a small business owner, not the business, to deduct upfront up to $25,000 of the cost of new equipment. Gregg Wind, a certified public accountant in Marina Del Rey, Calif., said some multiple-business owners mistakenly think they can take the $25,000 deduction for each of their companies.

Wind's suggestion is for business owners to take the full $25,000 deduction, and then depreciate the rest of the cost of the equipment.

Similarly, Gada said, IRS limits on business owners' contributions to their own retirement accounts is on a per-taxpayer, not per-company, basis, even if there is a separate retirement plan set up for each business.

Loans aren't income

Other problems can crop up when owners try to transfer assets or make loans from one business to another. Wind said he sometimes sees clients who will treat such a loan as income -- which isn't allowed under the tax laws, even if it all comes out of your pocket in the end.

Sometimes the problem is sloppy record keeping.

"You really should be maintaining separate sets of books and separate sets of bank accounts for all businesses and not mingling" the funds, Wind said. Owners also need to be sure that deductions and income are credited to the proper company.

Business owners need to be careful about cross-company transactions when their ventures are operated under different accounting methods. Each method has different rules for when a transaction must be recorded.

Gada said the extra complications of multiple businesses are inescapable, but he also suggested that owners "step back and look at your business structure and see if this makes sense, if there's some logical reason to maintain separate businesses."