If you own your own company, you can skip a salary in favor of distributions, but the IRS still wants its share of the money you take home.

Erin, Kailua-Kona

Do shareholders have to take a salary in an S corp? Can they just take distributions? How about an LLC?

By Lenora Chu, CNNMoney.com contributing writer

In tackling your question, it’s important to first understand the difference between a salary and a distribution.

A salary is a payment by a business in exchange for services rendered. A distribution is a payment taken out of the profits or other assets of the organization.

There is no federal tax law requirement that shareholders of either an S corporation or an LLC pay themselves a salary, says Jonathan Moyer, an attorney at international law firm Reed Smith LLP.

Instead, they can decide to take only distributions, or even keep profits in the corporation as shareholders’ equity to be distributed at a later time, says Paul Jaskot, also a Reed Smith attorney.

However, payment of the federal self-employment tax — a Social Security and Medicare tax for individuals who work for themselves — should be weighed when considering how shareholders should take their compensation.

With an S corporation, salaries are subject to self-employment tax, but distributions are not. (Both are subject to regular federal income taxes.)

Even so, while it appears beneficial to take only distributions, many S corp shareholders elect to take at least a small salary, says Len Friedman, tax partner at the Bridgewater, N.J., accounting firm Rosenberg, Rich, Baker, Berman & Company.
Why? S corp shareholders who take only distributions must still pay self-employment tax on an “industry standard” amount of salary — or risk an IRS challenge, Moyer says.

“There’s the rub,” says Moyer, who suggests taking a salary limited to that industry standard to minimize self-employment tax liabilities. What counts as an "industry standard" is up to you to determine — but be prepared to back up your accounting if you set a lowball number. The IRS isn't shy about challenging salaries it deems too low.

With an LLC, owners whom the IRS considers to be self-employed must pay self-employment tax on all of their income — in other words, on both salary and distributions.

Thus, there is no salary requirement, because all income is effectively taxed as if it were a salary, Friedman notes.

So while LLCs provide more freedom for members to structure management operations and ownership of the company, they can generate higher tax burdens in certain situations, says Moyer.

There are many tax and legal implications involved in forming a business entity, so the experts advise discussing your specific situation with an attorney or tax professional.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

The fair way to set employee salaries

Fair pay for you and your partners

A dry cleaner considers turning customers' absentmindedness into a tidy tax break.

Taylor, Jackson, Miss.

I own a dry cleaning business and was wondering what to do with all the forgotten or left-behind clothes. They date back a few months or as far back as a year. I read that by donating them I could get a tax write-off.

By Kathleen Ryan O'Connor, CNNMoney.com contributing writer

You can donate them, but you might want to review your state's abandoned property laws — and at least one expert we spoke to says you can't take a tax write off.

Here's why: "A business charitable tax deduction has to have a tax basis," says Philip R. Lieb, an accountant in White Plains, N.Y. "The clothes cost the dry cleaner nothing. The cost of cleaning has already been expensed through the dry cleaner's business operation. The business charitable deduction would be nothing."

And, depending on the state, you also can't just dump them off at the local Goodwill and call it a day.

Many states place the disposal of forgotten clothes under abandoned property laws, and the guidelines can be quite specific, says Ann Hargrove, director of special events with the industry trade group the National Cleaners Association.

One New York cleaner ran into legal trouble for trying to sell clothes that had been left for more than six months, Hargrove recalls. In New York, the property cannot be sold, only donated to a charity.

And to give you an idea of the specificity of the law, at least in New York: Cleaners must give notice to customers that abandoned dry cleaning will be donated after six months, and "such notice shall be at a minimum 11 inches in height by 17 inches in length and the printed characters shall be 1.25 inches in height and at least .5 inches in width," the law decrees.

The cleaner must also keep the donation receipt, with the original receipt for the customer's drop-off, for a full three years after the donation.

Mississippi law is a lot less clear.

Kathryn Stewart, a Mississippi Treasury Department spokeswoman, says she can't find anything that places clothes left at a dry cleaner under the state's unclaimed property laws, which cover cash and securities.

Your fellow cleaners in Jackson seem to work under an informal guideline of considering items abandoned anywhere from 30 days to a full year after they're dropped off, says Ebony Beals, a clerk at Clark Cleaners, which has several locations in Jackson.

They wait a year and then donate the items. "We figure you either forgot or didn't want the items, but we do wait a full year," Beals says of her store's approach.

For additional advice on the tax implications of abandoned items, consider consulting your personal accountant.

Give us your advice: Check out recent “Ask & Answer” questions.

Tax tangle: Medical deductions for LLC owners

Starting a biz: What you can write off

My business failed. What can I write off?

Handling the client that wants the goods but doesn't want to cough up a check.

Susan Lewis, Lancaster, Calif.

Can we legally hold a client's paperwork if they haven't paid their bill? We do their bookkeeping and they haven't paid in months. We haven't done any additional work for about two months, and now they are asking for their paperwork back. If we send it to them, we will never get paid.

By Kathleen Ryan O'Connor, CNNMoney.com contributing writer

Sending the paperwork back likely won't make a check materialize, but there are ethical issues to consider with holding it hostage.

Let's start first with trying to get paid.

Sharon Means, a certified public accountant from Cleveland who also owns a bookkeeping business, just dealt with a similar situation.

“I didn’t send it back," she says. "I just kept killing them with kindness. Every week I would send an e-mail. 'Can you pay me some? A payment plan?' If you are going to have any work done in the future, they have to understand that you just can't keep dishing it out with nothing in return. It's the squeaky wheel that gets the oil, so you have to put yourself in front of this person."

Her tactic paid off. "We worked it out so he paid at least half, and then we set a schedule for paying the rest of it," she says.

The recession is making it hard for many people and businesses to stay on top of their bills, she acknowledges "That’s the thing. Everyone is cash-strapped, I understand, but you have to keep up communication.”

But do you have a legal or ethical obligation to return the client's work product, cash or no cash? Being a bookkeeper means you have little regulatory framework for your job — unlike CPAs, who are bound by the American Institute of Certified Public Accountants Professional Standards. Violating those standards can lead to membership termination and disciplinary sanctions against certified accountants.

The relevant section of the Institute's standards code says, in part, that any financial records the client has provided you with should be returned on demand. Records that you've prepared yourself should also be handed over on request unless there are fees due to you for the preparation of those records. Supporting records related to finished work can also be withheld if you're owed fees for that specific work product.

David Bybee is president and CEO of the National Association of Certified Public Bookkeepers, a trade group for the unregulated bookkeeping field. He recommends that you give back any work papers that the client provided to you, such as year-end financial statements. But final reports that you produced do not have to be returned without compensation.

Give us your advice: Check out recent “Ask & Answer” questions.

When to get tough with a deadbeat client

Help, my client won’t pay!

How to avoid deadbeat clients

Business owners can write off many of their health care costs, but complying with IRS rules requires some planning.

Jonathan Cottor, Scottsdale, Ariz.

I have an LLC, and I’m seeking some advice about my family’s medical expenses. One accountant told me they can be run through the LLC as a business expense, and I’ve been paying the insurance premiums and any eligible co-pays and FSA-qualifying-type out-of-pocket costs through the business as an expense. I haven’t set up a separate HSA account, since the medical expenses run through the business and reduce my taxable income anyway when it pulls over to my personal return.

Another accountant has questioned this logic, and advised me that medical expenses need to reside solely on my personal return and are not business expenses. Who’s right?

By Lenora Chu, CNNMoney.com contributing writer

The second accountant is closer to the mark. For the most part, you'll need to treat medical costs as personal expenditures.

As a general rule, a business can only deduct expenses if they're “ordinary” and “necessary” for the operation of the business. Medical expenses for a member of an LLC are not considered “ordinary and necessary,” says Scottsdale, Az.-based tax accountant Phillip Wuollet of Johnson, Harris & Goff.

However, you still have options for cutting medical spending out of your tax bill.

You can deduct the premiums for your coverage using the "Self-Employed Health Insurance Deduction" on your personal return, according to Debbie Oster, director of tax compliance at Margolin, Winer & Evens, LLP in Garden City, N.Y. That will let you deduct 100% of the premiums paid for yourself, your spouse, and your dependents.

If the LLC pays for your coverage from its own coffers, it would need to classify that expenditure as a "guaranteed payment" to you. The business can deduct guaranteed payments as expenses, but then on your person return, those payments need to be included as income.

“If you pass it through as ‘guaranteed,’ you’re deducting it out of one pocket and adding it to another,” says Wuollet. “You’re just transferring money between accounts.”

If your insurance premium is passed through in that fashion, you can still deduct 100% of it off your personal return.

Co-pays and other incidental medical costs are considered your own expense — not the LLC's — and need to be included on your personal return. The IRS only lets you deduct medical bills, though, when they get extremely high: more than 7.5% of your AGI (adjusted gross income).

To get more tax protection, you could set up an HSA (health savings account), as you mentioned. Another relatively new option is a "section 105" health reimbursement plan. Under that arrangement, you contribute a fixed amount for each employee to an account that they can tap to pay for medical expenses.

Contributions to these accounts are tax-deductible for the company, and when the worker accesses the funds, those reimbursements are not considered taxable income, Wuollet says.

Give us your advice: Check out recent “Ask & Answer” questions.

Starting a biz: What you can write off

Will an HSA save you money?

Your true net profit is the number that potential buyers will want to know.

Susie Pemberton, Centralia, Mo.
I live in a small town and own a child care facility. My gross income in 2008 was $126,134. Someone’s interested in buying it, and they’re waiting for me to give them a price. I understand that I need to “adjust” my expense report for 2008, but I’m not sure what to use for a multiplier. I’ve been in business for six years, and can see room for expansion in the future. How do I name my price?

By Lenora Chu, CNNMoney.com contributing writer
Valuing a business is not an exact science. Many factors come into play when you're determining an appropriate selling price.

At its simplest, that price will be based on the economic benefit the business is expected to generate for the new owner.

Start your calculation by determining the “seller’s discretionary cash flow,” (SDCF), or true net profit.

To arrive at this number, examine your 2008 accounting records to pinpoint your net income, says Terry Monroe, president of the St. Louis brokerage firm American Business Brokers.

To that number, you should add back any personal expenses such as your cell phone, health insurance and travel costs, Monroe says. The new owner may not choose to pay for such things out of the business cash flow. Including them artificially lowers your business's apparent income, and therefore your selling price.

To put some numbers to the calculation, say you have a business that generates $140,000 in gross income. Your cost of goods was $40,000. That means your gross income before expenses is $100,000.

Then, subtract your expenses. Say you have utilities, payroll, taxes, insurance and advertising costs of $65,000. Personal expenses covered by the business, such as a car payment, health insurance, and travel costs, added another $15,000. For such a business, total expenses would be $80,000.

That leaves a net income of $20,000. But adding back the $15,000 in flexible expenses brings the business's discretionary cash flow, the true net profit, up to $35,000.

Once you’ve arrived at the SDCF, you’ll need to determine an appropriate multiplier to arrive at your business's valuation.

Multipliers vary widely for small companies. Factors include the economic issues affecting your industry, the size of your business, how long you’ve been around, and any risks the buyer might face, says Mark Gottlieb of MSG, a Great Neck, N.Y., accounting firm that specializes in business valuations.

An appropriate multiplier for your industry will likely fall between 1.0 and 2.5, according to Monroe and Gottlieb's estimates.

Thus, an appropriate selling price would be the SDCF times this multiplier.

With an SDCF of $35,000 and a multiplier of 2, a reasonable selling price would be $70,000.

You’ll also want to tack onto the selling price the used value of any physical assets of the business, such as furniture or playground equipment, says Monroe.

If you're serious about selling, the best first step is to consult with a business broker or investment bank to evaluate the specifics of your business and determine an appropriate multiplier.

Give us your advice: Check out recent “Ask & Answer” questions.

Finding the best broker for your business

Selling out and shutting down

How much should you pay your company directors? First, take a hard look at what skills they'll need to guide your business.

Paul Dzera, MGBD, New York City
What would you recommend for determining board of directors' fee levels (annual retainer, board meeting fees, committee meeting fees, etc.), both in cash and stock options? I have a small public company with revenues of about $30 million. To date, I have reviewed the Director Compensation Report available through the National Association of Corporate Directors, but their "smaller" company information is for companies with revenues ranging from $50 million to $500 million.

By Emily Maltby, CNNMoney.com staff writer

Before you think about compensation, consider what skill sets you need represented in your board members.

"Twenty years ago, it was all the CEO's friends. So the qualifiers were, 'What's your golf handicap and how fast will you nod when I propose something?'" says Suzanne Hopgood, director of Board Advisory Services of the National Association of Corporate Directors (NACD). "This meltdown in particular has focused people on skill level. That will help define compensation. If you do rocket-science stuff, then you need highly educated, specialized people."

Also think about what you'll be expecting from your board. Startups that still require a lot of heavy lifting should pay their directors more than companies that are already chugging along at a steady pace.

One way to think about both skills and compensation is to imagine the board as a team of outside advisors, recommends Tom Juenemann, executive director of the Institute for Family Owned Business in Portland, Maine, which will be holding a conference in June on this topic.

"What would a good consultant cost you?" he says. "The answer will vary by industry and experience."

As you read this, board fees are in a state of flux. As the recession drags on, businesses are reducing the pay of senior executives and board members to keep costs down.

Taking this into account, Juenemann believes a good ballpark figure for a private business with about $30 million in revenues is $10,000 to $15,000 per board member, per year. Part of that should be paid as a base retainer, with the rest made up of attendance fees paid only when the board member turns up at board and committee meetings.

Another way to get sense of what you should be paying is to look at your competitors, suggests Hopgood. "Pick five public companies that are in your competitive range, go to public filings and see what they're paying," she says. "Then pick five that are in your revenue range, regardless of industry, and compare data points."

CEO salary is another commonly used benchmark. Juenemann says you can take your CEO's salary, divide it by the number of working days in the year, and come up with a reference point for a daily salary that you can pay your board chairman for each day that the board is working. Other board members typically command a salary about 80% of the chairman's.

Public companies like yours have other considerations: Do you want to pay part of your directors' compensation in stock or options? Fifty percent of public companies do so, Juenemann says; the rest pay only in cash.

As you figure all this into the equation, keep in mind that the economy right now has lots of supply and slow demand for seasoned business executives.

"Right now, people are looking to get board seats. Plus, there are more who are interested in smaller businesses than larger ones. The result is that you don't need to pay premium dollars," says Juenemann.

However, in this environment, it's imperative that you do extra vetting to ensure that your board members are skilled executives who are genuinely interested in helping your company succeed. You don't want a board member who is only in it for the salary.

If you need help finding candidates, try contacting NACD. They maintain a director registry that can help match qualified people with your needs.

Give us your advice: Check out recent “Ask & Answer” questions.

Free advice? Priceless

How to ditch bad business partners

'Should I hire a business coach?'

Some sales aren't worth winning. If parts of your company are successful and others aren't, it's time to purge.

Sharron Stankiewicz, Ohio
I own three hearing aid businesses, all listed under the same corporate name but located in different areas. Two of them are going bust. Can I get out of my lease and still keep the one successful business running? What could the landlord do if I simply walked away from those leases where the businesses are failing?

By Kathleen Ryan O’Connor, CNNMoney.com contributor
Some times you have to cut off ailing branches to save the rest of the tree. The trick is to do it without killing everything.

If you simply cannot continue with a commercial lease, the first step is to dust off the paperwork you signed when taking the property, read the fine print, and hope you were farsighted enough to negotiate an “out” in case of business failure.

If you didn't, your next step is to talk to your landlord. In a down economy the landlord might be prefer to live with less rent instead of an empty storefront – and that might buy you time to reorganize and renegotiate with other creditors.

If cheaper rent won’t save the business, walking away has its own issues.

The landlord has the right to try to recoup the money outlined in the lease with one caveat: they do have to make an effort to mitigate the loss, such as trying to find a new tenant. But if they find one and the new tenant can’t pay your full rent, you could get stuck owing the difference.

Alternatives to walking away include asking to buy out the rest of the lease with one discounted lump sum, or simply declaring bankruptcy and forcing the landlord to stand in line with everyone else you owe money to.

Say the landlord goes after the money. Your personal assets might be safe, but that’s assuming there was no personal indemnification clause in the contract and that your company is “actually a legal corporation where protections have been maintained and remain unbreeched,” says Deena Burgess, a New York City lawyer specializing in small and online businesses.

That said, the assets of the business – and that includes your remaining, healthy location – are fair game for the landlord and other creditors.

“Failure to separate the companies means that they would be treated as a single entity, and that the creditor [or landlord] could chase the assets of any and all of the businesses that comprise that corporation,” Burgess says.

If you need to start triaging, what first?

Edward Stevenson, a corporate partner in the Newark office of the law firm Herrick Feinstein LLP, suggests the following:

— Minimize or restructure the debts of the two unhealthy stores by negotiating with creditors.

“The first thing is to contact and meet with each creditor of the different stores in an attempt to work out a payment plan or a reduction of the liabilities so the two unhealthy stores can operate at break-even, or possibly at a profit,” Stevenson says.

— If you are unable to negotiate a resolution with the creditors, file for Chapter 11 protection. You would have to include all three stores, even the healthy one, in such a filing, but it might allow you to re-emerge with a leaner, more profitable operation. “It doesn’t have to be the death knell for the business,” he says.

— Test the market to see if a sale of any or all of the stores is feasible.

If you do emerge in a stronger position, be sure not to make the same mistake twice. Have a lawyer review your corporate structure, Stevenson advises. Maintaining each store as a separate legal entity can save a lot of headaches down the road.

Keith Gerson, president and COO of Tamarac, Fla.-based PuroClean, has first-hand experience with moving a company with different operations into a more streamlined and profitable model.

PuroClean began as PureSystems Inc., a jack-of-all-trades company that dealt with property damage mitigation, restoration and reconstruction. The model was successful, but after the depressed construction industry of the early 1990s rebounded and the contractors PureSystems worked with “went back to their first loves,” Gerson says, the reconstruction part suffered.

Although the overall model was strong – the company added 82 franchises between 1991 and 2000 – its managers had to take a tough look at their business and admit that certain aspects weren't working.

One franchisee was doing nearly a million dollars worth of sales per year but was still losing money. Which led to PureSystems' big revelation: “Not all business won is worth keeping," Gerson says. "Sometimes you want to concede that to the competition. That work might just be tying up your bandwidth.”

From that epiphany came the tough choices. "We went ahead to move into a brand called PuroClean [and] tailored it to focus on the mitigation work,” Gerson says. “The margins were significantly improved.”

In 2001, the company franchised the first PuroClean. The change paid off: It's since expanded to 263 locations, three times the growth it had in the '90s.

“You need to obviously understand your business and your margins or get someone who will help you,” Gerson says. “The rest will take care of itself.”

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

My landlord wants rent on a broken lease!

When the lease outlives the business

Sorry, it's legal, and you may even have to pay more than just the rent.

Richard Barker, Aprizona Florist, Covington, Ga.
Our business went south, and as a result we had to break our lease. Less than 30 days later, the landlord rented the space to a new tenant. Six months after that, we were served with papers demanding $12,000, which is the remaining rent on the lease. Is it legal for the landlord to collect rent from both new and old tenants?

By Adriana Gardella, FORTUNE Small Business senior editor
The answer depends on your lease terms. As you describe it, the situation sounds unfair, but that doesn't make it illegal, says lawyer Hanna Hasl-Kelcher, author of The Business Guide to Legal Literacy: What Every Manager Should Know About the Law.

Generally, a tenant must pay rent until the lease term expires. Moving out early won't end that obligation unless you have a different agreement with the landlord – preferably in writing. Although some agreements may provide that the landlord can find a new lessee before the broken lease expires and use the new tenant's rent to offset the amount owed by the departing tenant, you shouldn't act on this assumption. "This type of provision must typically be negotiated," Hasl-Kelcher says.

Have an attorney review your lease and discuss possible defenses to your landlord's claim. Typically, you'll face a penalty for breaking a lease, says Elizabeth Milito, a lawyer with the Small Business Legal Center, which is operated by the National Federation of Independent Business in Washington, D.C. Even if your landlord reduced his or her damages by the amount of the new tenant's rent, in many states it is the former tenant's responsibility to prove that damages should be limited, she adds. There are other damages you may be obliged to pay, such as your landlord's attorney fees and expenses incurred in finding the new tenant.

Next time review your lease carefully before signing. "Commercial leases typically provide more room for negotiation than residential leases," Milito says. "Don't be afraid to request modifications."

This column provides general information only and is not intended to replace the services or legal advice of an attorney. Always consult a lawyer regarding any specific legal concerns, as laws vary from state to state.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

When the lease outlives the business

An office on wheels: RV tax breaks

Breaking the lease when your business goes bust

For retailers that don't want the overhead of stockpiling merchandise, drop shipping can be a cost-saving option.

Mike, Queens, NY
I started a home-based wholesaling business six months ago and got four credit cards totaling $18,000. I was scammed out of $10,000 and invested another $4,000 into a Web site and advertising. Now my cards are almost maxed out, and I need the cash or credit to purchase merchandise. Business people tell me it takes a few years before turning a profit, but I've worked like the devil these past six months to finally get the contacts and deals I've been searching for, only now I don't have the cash or the credit. Is there anything I can do?

By Kathleen Ryan O'Connor, CNNMoney.com contributing writer
Starting a business from scratch takes time and an incredible amount of energy – and setbacks are inevitable. It can feel like you're knocked two steps back for every step forward.

Lacking working capital is going to make it even harder, unfortunately. Credit markets have grown extremely tight, and the fact that you're using nearly all of your available credit lines pushes down your credit score, which makes you a less attractive candidate to the banks for extending further credit. That's never ideal, but it can be the kiss of death today, when even people with pristine FICO scores and very little debt are finding it difficult to find decent lending options.

So what to do?

One option is to take a break from working on your business full-time and find an outside job that will let you pay down debt.

But if you want to keep forging ahead, you could approach the suppliers you've already lined up and ask if they will open an account for you to buy on their credit terms. That may be tricky: When you run a credit check, you might not rate as a good risk.

Another option is for you to start an account with a drop shipper. Drop shopping is a "buy-as-you-go" model under which you advertise the merchandise, sell it to the customer, and then, after the buyer's money arrives, you complete your purchase of the requested products from the drop shipper, typically via credit card. The shipper then mails the purchased items to the customer on your behalf. The transaction is generally invisible to buyers: Drop shoppers offer a variety of arrangements, from plain boxes to packaging decked out with your logos.

Drop shipping isn't a new concept. One of the few studies on the practice, published in the journal Management Science in 2006, found that about one-third of Internet retailers rely on drop shipping to fulfill orders.

"Early on, there was a lot of hype around drop shipping," says Serguei Netessine, an author of that study and an associate professor of operations and information management at the University of Pennsylvania's Wharton School of Business.

The initial idea was that drop shipping would be a one-size-fits-all "panacea" for e-tailing. That hasn't panned out. In its early days, even Amazon.com (AMZN) used drop shipping, but the bookselling Goliath soon realized the practice wasn't a good fit for the volume of business it was doing. Amazon instead committed to buying its own inventory and building warehouses. It now offers its own drop-ship service to smaller retailers, Netessine says.

"That's kind of a natural evolution," he says.

Among the downsides of drop shipping: You are introducing a middleman into the transaction, the drop shipper, who has to make their own profit, so your margin is going to be smaller than if you acted as the wholesaler yourself. On some products, the profit margin is already so low that drop shipping makes it extremely difficult to make any money at all.

Another challenge: Drop shipping scams are all over the Internet. Key red flags include recurring monthly fees or difficulty in getting a live person on the phone. Try to hit a trade show. If a drop shipper has a booth there, that's probably a good sign. Several Web sites help connect online merchants with drop shippers and wholesalers; WorldWideBrands.com is one example.

And since your shipper will be packaging and shipping merchandise under your name, be certain to pick one that demonstrates a commitment to the same quality and customer service you'd want your customers to expect of you.

Also take care to thoroughly note your shipper's policies on backorders, returns and lost shipments. Chronic problems in order fulfillment have destroyed many a small business, online or not, and savvy consumers used to Amazon or Zappos boxes dropping on their doorstep a day after they've clicked in their order will not look kindly on poor or slow service.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

Business grants: Sorting out the scams

Raising cash for a fast-growing business

Securing small business loans in a melting economy

Want to write off the cost of meals while you're traveling? Here's a rundown on what to deduct, and how.

Donna, Rome, N.Y.
My boss is an electrician and is working 4 hours away from his office. Can all his meals be deducted while away from his home office?

By Lenora Chu, CNNMoney.com contributing writer

The IRS allows you to deduct travel expenses, including meals, if you are working away from your “tax home,” or your principal place of business.

Generally, four hours away from your normal place of business would qualify as “away,” says tax attorney Brian Whitlock of Blackman Kallick, based in Chicago.

More specifically, two conditions must be met for you to be eligible to take a meal deduction, says Michael Beauchemin of the Charlotte, N.C.-based Carolina Accounting and Tax Service. Your duties must require you to be away for substantially longer than an ordinary day’s work, and you must need sleep or rest to meet the demands of your work while away from home.

An example might be the electrician who must travel to a job site, perform the work, and then stay in a hotel room to rest before the return trip home. In this case, meals would be eligible for deduction, says Beauchemin. However, should the electrician travel to a work site, take an hour off for a meal, and then return home in the same day, the meal deduction would not be allowed.

Note that should the “away” work extend beyond several months, the IRS may deny the deduction on the grounds that the tax home has shifted to the location of the work, Whitlock says.

How much can you write off for qualifying meals? Generally, you can deduct 50% of the actual cost of the meal, or you can take the IRS's standard meal allowance, says Beauchemin. That's $39 per day in most cities.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

How much of my car is deductible?

Sales tax: A state-by-state wrangle

Enterprise zones yield lucrative tax breaks

Environmentally friendly practices can help your business grow – and grants and low-interest loans are available to help.

John, Lynnwood, Wash.
“I'm looking to make my auto detail shop very green. Are there any government grants that I could get to convert everything to the greenest detail shop you've ever seen?”

By Kathleen Ryan O’Connor, CNNMoney.com contributing writer

Saving energy and reducing waste can have a powerful impact on any small business — auto detailing included.

But it can be expensive and difficult to convert to an all-green operation. Recognizing this, organizations and agencies ranging from your local utility to the federal government now offer a variety of incentives that can help, in the form of grants, loans or rebates.

Your local utility is the perfect first step. A quick check on the Web site of the Snohomish County Public Utility District No. 1 shows several rebate programs to help local businesses to become more energy efficient.

One, for energy-efficient lighting projects, will rebate 70% of the cost, or 100% of the materials cost if the project is self-installed, up to $7,500.

Another great place to look is the Database of State Incentives for Renewables & Efficiency, which has more than 100 listings for green grants, rebates and loans for Washington state alone.

Also check Business.gov, a Web site managed as a partnership by 22 federal agencies, for “green” business incentives. But as always, beware of grants that ask for money upfront and those that simply seem too good to be true.

You will also want to contact your local government-sponsored Small Business Development Center, a great resource for information to help your small business go green. Late last year, the Small Business Administration funneled $500,000 through business development centers in Idaho, Nebraska, Nevada and New York to help fund energy efficiency projects. Your local center might have similar options available.

The Washington state SBDC can be reached via Washington State University in Spokane.

Pamela Evans, the green business coordinator for Alameda County, Calif., helps businesses in her state adopt greener practices. Her program certified its first business in 1997 and now boasts 350 local “green businesses” and a waiting list of companies waiting to be considered for certification.

Even without a formal auditing or certification process in your area, small business owners can easily cast a critical eye themselves, she says. Look at your energy use, water use and waste volume. Few business owners realize that lighting can be as much as a third of their energy use, so it pays to go as energy-efficient as possible.

And it sounds obvious, but make sure you are in compliance with all existing environmental laws, Evans says.

“Say, for example, you are washing cars,” she says. “Most local governments will have regulations to prevent runoff into a creek.”

Thomas Rennie, founder and owner of AutoBella, a green auto detailing business in Portland, recommends starting with the front office.

“We just decided, me and my wife, to start treating our business like our home,” Rennie says.

They began ordering liquid products that come in corn-based, eco-friendly containers that compost easily. They replaced old, energy inefficient lighting and took advantage of an option to buy wind-based power from their local utility. Even the pens they use got an eco-friendly makeover — they are made from cardboard and wood. Today, AutoBella workers wear shirts made from bamboo fiber, an easily renewable resource.

They've since moved on to bigger-ticket items, including a major investment in a $15,000 water reclamation system.

“It’s expensive, but I’m getting a huge amount of business off of it," Rennie says.

He and his wife also committed to using biofuel instead of kerosene, a fix that illustrates how inexpensive some green moves can be. Switching to biofuel cost just $30, Rennie says, for a parts change on their high-pressure washer.

Just one warning, if you're on a diet: "It smells like french fries all the time," Rennie says with a laugh.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

How can I cash in on clean energy?

Harnessing solar energy in Senegal

Investing in a green work environment

Grants for small companies are almost as rare as unicorns. Here's how to protect yourself against fraud.

Adriana Matteo, Warwick, R.I.
I'd like to start a small business and need a grant to start. How do I go about it and who do I need to contact? Everything seems to be a scam, but I know there are grants out there for young women who want to start a business.

By Kathleen Ryan O'Connor, CNNMoney.com contributor
You're right to be cautious – bogus claims of free money to start your business and shady outfits promising the moon are everywhere.

While legitimate grants for small business owners do exist, even for startups, they look very different from what you might encounter online. A typical Internet ad will promise thousands even if you don't know the difference between a balance sheet and a balance beam. Real government grants are scarce, tightly targeted toward specific industries, and rigorously competitive. If it sounds too good to be true, it probably is.

Getting a refresher course in that truism cost Donna Hartley of Tahoe City, Calif., a cool $2,500.

A survivor of a major plane crash, cancer and open-heart surgery, Hartley works as a motivational speaker. Interested in raising capital for her management company, Hartley scoured the Internet for leads. She found Grant Financial Network, and in August 2007, she gave the company $2,500 in return for detailed information on grants and assistance in securing them.

Grant Financial Network asked Hartley to authorize payment of the fee as a bank draft, rather than by mailing a check or paying with a credit card. That's a big red flag: Consumer groups warn that an ACH draft or wire transfer is the most difficult kind of payment to delay or dispute.

"Months and months pass," she recalls, with her calling repeatedly and not hearing anything. She eventually received some information from the company, but Hartley says it was nothing she couldn't have found out herself for free – and she never received any grant money.

When Hartley called to try to get her money back, the Las Vegas-based company instead tried to get her to part with an additional $6,500, for which it promised to help her turn her company into a 501(c)(3) charitable organization. The brazen pitch, she recalls, was about how that would make her eligible for even more grant money.

"I feel like I got taken to the cleaners," she says.

When we tried to call Grant Financial Network for a comment, the phone number listed for the company was disconnected. The Better Business Bureau of Las Vegas rates Grant Financial Network as "unsatisfactory." The bureau processed 26 complaints about the company in the last 12 months, mostly over refund issues and allegedly dishonest sales practices. More than half of those complaints went unanswered by the company.

Hartley, still the sole proprietor of Hartley International, has lodged her own BBB complaint, but doesn't expect to see her money again anytime soon.

"I know that grants can happen – I've written grant proposals for the Parent Teacher Association," she says. "It makes you feel very stupid."

John Miller, a spokesman for the Small Business Administration, says there is only one place to look for legitimate government grants: www.grants.gov.

"Speaking for the SBA, we do not provide grants to start or expand a business," he says. "The only grants the SBA administers are for research and development for high-tech companies through our SBIR/STTR [Small Business Innovation Research/Small Business Technology Transfer] programs."

Real grants have very detailed eligibility procedures. Take a look at the specs for this solicitation on grants.gov: "Eligible applicants for this program are non-profit, non-governmental organizations with a nationwide organizational infrastructure. … Applicants ideally should have state-level constituencies representing all states and territories, but at a minimum representing 20 members including both U.S. states/territories and international members."

Contrast that with this come-on from one of a dozen sites promising free money for your business: "None of these Grants require a credit check, collateral, security deposits or co-signers, you can apply even if you have a bankruptcy or bad credit, it doesn't matter. Its [sic] Free Money Never Repay!"

That said, entrepreneurs with great ideas, even if their business is in its infancy, can sometimes land grants, says Bo Fishback, vice-president of entrepreneurship at the Kauffman Foundation, a Kansas City foundation devoted to entrepreneurship. There are opportunities, but they are extremely competitive and often confined to science and technology.

"I don't know hundreds," he says, "but I know of a few."

The state of Missouri, for example, offers a grant for "Phase Zero" companies, which contributes $5,000 toward hiring a grant writer to help land a SBIR/STTR grant. "Those types of programs, state and federal, are in some ways the most obviously legitimate and recommended for startups to go after," Fishback said. "It's about as close to free money as you can get."

Angie Barnett, CEO of the Better Business Bureau of Greater Maryland, warns that now is a particularly vulnerable time for people to get taken in.

"After the holidays people are going to be grasping at every straw, and scam artists know that," she says.

To find legitimate resources for expanding your business, Barnett recommends visiting your local college- or university-based small business development resource center, or a nearby SCORE office. SCORE is a program backed by the SBA that brings together retired business executives and small business owners looking for guidance.

Your local economic development agencies can also point you toward financing resources. For example, your home state, Rhode Island, has a Web site at everycompanycounts.com with an online guide to organizations that assist local businesses. You won't find no-strings free money, but you will find loans available to new entrepreneurs. The Minority Investment Development Corp. is one local agency that focuses specifically on the needs of minority- and woman-owned businesses.

"People need to do their homework to be directed toward those [resources] which are legitimate," Barnett says.

Barnett has a list of warning signs that a grant offer is fishy:

-Grants are usually given to non-profits, and rarely go to small businesses for personal gain.
-The government – federal, state and local – does not make phone calls or send e-mails soliciting people to apply for grants. "If all of a sudden you start to get marketing or advertising, that's a tell-tale sign," she says.
- Be wary if you're asked to pay any kind of up-front processing fee. "One consumer reported they called it an ‘attorney's fee,'" Barnett says.
- If you're asked for your bank information, case closed: It's a scam. "They're fishing," Barnett says.
-Finally, don't be deceived by logos or graphics that appear to offer official endorsements. They're easy to fake, and can lend a false air of legitimacy.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

Can I get a loan after bankruptcy?

Raising cash for a fast-growing business

Securing small business loans in a melting economy

Looking to sell your business? Some technology investments are worth the cost.

DC Kirstein, Softcare Computer Consulting Co., Pittsburgh
Do you have any articles that link updating your company's technology and selling your business? I believe that simply improving a company's technology can help increase its resale value. Is this true?

By Christina Crapanzano, CNNMoney.com contributor
It's easy to measure the effect remodeling or upgrading infrastructure like windows or plumbing has on the resale value of a typical home. Not so with a small business – there are very few metrics on how to quantify the value of a company. The Small Business Administration does not keep data on small business sales, according to spokesman John McDowell.

A technology investment that directly helps a business's bottom line will pay off for a seller – but only once it's already paying off for the business. The number-one thing most potential buyers will care about is a company's cash flow.

“Buyers pay for what you have already built, and they buy it so it can grow,” says Domenic Rinaldi, managing partner of Chicagoland Sunbelt Business Brokers.

Mike Handelsman, general manager of sales site BizBuySell, backed that assessment. “It depends on whether the technology relates directly to the ability to impact revenue or cash flow,” he said. “For example, adding a technology can allow you to tap into a new customer base, increasing revenue.” But what buyers will reward is the new revenue stream, not the underlying infrastructure behind it.

Why it is so hard to value a business? Many of a company's best assets are intangible: Its brand recognition, its staffers' skills, its supplier relationships. The motives of the buyer also come into play.

"There are a lot of moving pieces," says Dick Leslie of San Diego's SCORE, a businesses counseling organization. "Are they buying your customer base? Do they like your location?"

Even without statistical evidence of higher resale prices, small business advisors recommend keeping the technology you need for your daily operations current and investing strategically in systems and equipment that will add value. This is especially key for companies in the information technology (IT) field: "If you’re trying to sell technology, you really need to be at the forefront," Leslie says.

Ramon Ray, a small business technology advisor for AllBusiness.com, notes that technology is only one element of business growth. To get the most from your IT investments, you need good leadership, efficient business processes and savvy financial management. Well-implemented systems for managing your company's finances, employees, vendors and clients can pay off handsomely – but botched deployments of new systems are expensive and frustrating mistakes.

Fast working computers for your office and good security systems are must-haves these days. If you have those basics covered, Ray recommends looking at your customer relationship management (CRM) system as a good investment opportunity.

"Without customers, you have no money," Ray said. "Overall, systems that affect how you work with customers – order fulfillment, for example – are of particular significance."

Except in specialized fields, equipment is a commodity. Investments in software and systems will pay off more than sinking cash into the latest-and-greatest in office PCs or printers. Fortunately, software investments don't have to be expensive. Leslie recommends that companies look into "Web 2.0" applications: Web-based systems managed remotely. Salesforce.com (CRM), NetSuite (N), and Google Apps (GOOG) are examples of online business-management applications popular with small companies.

"Those things can be bought pretty inexpensively," Leslie says. "Web 2.0 applications that allow clients to interact with the company are of significant value."

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

Selling out and shutting down

Finding the best broker for your business

Selling your business and keeping the gains

Expert tips for picking clients wisely and getting paid on time.

Denise Haney, Orem, Utah
How can I get our clients to pay up? There's a fine balance between getting our money and losing them as clients – but when invoices are past 100 days, isn't it time to get tough?

By Kathleen Ryan O'Connor, CNNMoney.com contributor
It's tough asking for money, and no one wants to risk losing a client. But letting payments arrive on the client's schedule, not yours, is the quickest way to "nice" your way right out of business.

The first step, experts and seasoned business owners say, is to take the emotion out of the process and set up a system that works in your favor.

"Money is sort of a taboo topic," says Victoria Merriman, design director and founding partner at Digital Loom, a Boston Web design and branding firm. "I've really struggled to overcome that. One thing that is very helpful – be really, really transparent about the money."

In addition to contracts that spell out the scope of services and payment terms, Merriman's company builds payment dates into the project milestones that it shares with clients.

"They can see exactly when payments are due," she says. "Be really clear at the outset. That's helped a lot."

But if it's too late for a solid contract and friendly reminders, it's time to think about the best way to collect.

"Make contact right away," says Jennifer Katrulya, CEO of Business Management Resource Group, a firm that offers outsourced CFO and bookkeeping services from offices in Danbury, Conn. and Rhinebeck, N.Y.

If your client can't pay everything they owe at once, offer to set up a payment plan. You can also take payment in ways other than through checks: The Internet has made it cost-effective for even the smallest businesses to accept credit card payments. If you have a PayPal account, clients can send payment through it, and if you use Intuit's QuickBooks, you can link the two systems and automatically send invoices that include PayPal payment links.

Integrating an e-commerce system into your Web site is another way to make it easy for your customers to pay. Robin Robins, entrepreneur and founder of the Technology Marketing Toolkit, uses 1Shopping Cart, but there are plenty of others to investigate.

Accepting plastic makes getting paid much easier, she's found. "Of my 3,000 customers, 99.99% are on credit cards," Robins says.

If your client is still overdue and unresponsive, it's time to escalate your collection measures. One option is to go through business data aggregator Dun & Bradstreet. If your client is a business, D&B can act as a debt collection agency.

"It's a way to become a true creditor and get to the top of the pile," Katrulya says.

Beyond that, she says, it gets trickier.

You can go through Small Claims Court, which is inexpensive but time-consuming.

In your home state, Utah, you can try to recover up to $7,500 in small claims court. The filing fees are modest and you don't need a lawyer. According to the Utah state courts, it costs $45 to file for claims of $2,000 or less and $70 for claims of more than $2,000.

You could also contract out or sell the debt to a private collections company, but pay close attention to fees and commissions – it may not be worth it.

No matter what you try, some bills may never be paid. That's a frustrating reality for all business owners. Katrulya recommends budgeting for some percentage of your receivables to be written off as bad debt. Companies such as ProfitCents can provide information on bad-debt trends for your specific industry.

Former corporate executive and business coach Paul Lavoie of ActionCoach of Connecticut says that above all, you shouldn't worry insisting on getting paid on time will mean losing valuable customers.

He recalls a telecommunications client who had to buy a lot of expensive hardware upfront. He counseled them to change their invoicing procedure. Rather than laying out all that cash and waiting a long time to see returns it on, they created a new contract that requires customers to pay for 50% on signing, 40% on installation and 10% on completion.

"They didn't lose a single customer," Lavoie says. "No one blinked. They were blown away."

And what's the worst that can happen?

"You lose customers who aren't going to pay you anyway," Lavoie says. "When did you become a bank?"

Don't be afraid to start refusing service once customers are significantly late on their bills.

"I've had to take web sites down," says Web developer Merriman. "That really got people’s attention."

Anything you can do to make your service invaluable to clients' day-to-day operations will increase your chances of being paid promptly. As Robins puts it, "How do we make ourselves so essential to our customers we will be the last bill they will be late on?"

And at the end of the day, if asking for money is just too far outside your comfort zone, don't be afraid to delegate. In Lavoie's ActionCoach business, receivables go right to his no-nonsense business manager.

"Who doubles as my wife, by the way," he quips.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

Inexpensive marketing moves for hard times

Turn your receivables into quick cash

After a business falters, its legal obligations live on – but your personal assets can be protected.

Dianne Fernanadez, Keva Juice, Vacaville, Calif.
My son and I opened a small smoothie business two years ago. We did great until the economy fell. We opened it under an LLC, and he has since bought me out. Now, he has to take money out of his personal account to support it every month. He just got a rent reduction of $600 a month, but that won’t be enough. He has it for sale and has a possible offer coming through. If that falls through he is planning to close the doors. He is afraid the landlord will go after his house. I have lost my home and have nothing left, so I’m not too worried about losing my property.

What is the best way to go about getting out of this? What kind of repercussions are we facing, as we still have three years on the lease? We spent $107,000 on the build-out (new tile floors, bathrooms, etc.) as it was a brand-new complex. The landlord inherits this – does this help? The business has no loans against it as we refinanced our homes and/or paid everything in cash. Please help!

By Shara Rutberg, CNNMoney.com contributing writer
Your son’s assets should be protected by his use of an LLC unless he gave a personal guarantee to the landlord or the court “pierces the company veil” that protects against personal liability, says David Sokolow, a professor at the University of Texas Law School. Courts rarely do that – it's a move typically made against sham companies.

“It’s unlikely that the court would pierce the veil if your son didn’t siphon funds from the firm or use it to perpetrate a fraud on the landlord,” Sokolow says.

The LLC, however, is liable for the remaining three years on the lease. This means the landlord can sue for damages, which would be reduced by any rent he or she gets from a replacement tenant during that time. Additionally, a court may subtract out whatever benefit the landlord receives from the improvements made to the space, though it probably wouldn't deduct the full $107,000.

There’s no real way to get out of a lease unless the landlord’s willing to renegotiate. However, “as long as the lease was signed only by the LLC and not by you or your son individually, your personal assets should be shielded from the landlord’s claims,” Sokolow says.

Hiring an attorney is expensive, but the experts highly recommend it in your case. Unwinding obligations when a business fails is complicated, and having a professional on your side with expertise in the legal details pays off in the long run.

As credit card companies move to limit their risks, business owners face unpleasant surprises from their credit card providers.

Owen Kusolpaisit, Southhaven, Miss.
I have a very small business and most of our debt is on credit cards. We had a 0% annual percentage rate until January 2009 that would go up to 7.99% thereafter. A few months ago my check got there a day late. The credit card company, Advanta, increased my APR to 7.99%. I just received my current statement and the APR jumped to 25.39%. When I called, a supervisor said it was done for economic reasons. How can they do that? Is it illegal? Can I report them?

By Kathleen Ryan O'Connor, CNNMoney.com contributing writer
Raising your interest rate at any time, for any reason, is perfectly legal – just check the terms and conditions on your card for the proof. But if it makes you feel any better, you have plenty of company.

Faced with the same economic pressures as other companies affected by the ongoing recession and credit crunch, credit card companies are racing to protect themselves from the costs of more defaults by hiking interest rates and slashing credit limits, even for cardholders with excellent credit histories.

Stories abound of customers waking up to find their cards less flexible and more expensive than ever before. But where a credit squeeze on an overextended shopaholic might be a blessing in disguise, credit cards are a critical source of financing for many small business owners. As bank loans and credit lines become ever-scarcer, entrepreneurs are left with fewer and fewer options.

Experts warn that the pain won't pass quickly. One prominent banking analyst, Meredith Whitney, predicts that pullback will wipe out a whopping $2 trillion in credit lines over the next 18 months.

"Unfortunately, it's a situation we are hearing from a lot of our members," said Molly Brogan, vice-president of public affairs for the National Small Business Association, a Washington-based advocacy group. "There's so little transparency in the credit card industry, so people just don't know. [Small business owners] go in understanding they will have one deal, and then realize there are very few limits [on what credit card companies can do]. There's not a lot of recourse small businesses can take."

An NSBA survey in April found that 44% of small business owners used a credit card to finance their business. "That's more than any other source of financing, including bank loans and earnings," Brogan said. "There's a huge reliance on credit cards."

Even the chair of NSBA's board, Marilyn Landis, discovered the hard way that she isn't immune to rapid changes in the credit card market.

Landis is president of Basic Business Concepts, a company that provides CFO services. Landis' expansion of her Pittsburgh-based business turned into a major headache after the increased activity and travel expenses on her business credit cards prompted her issuer to lower her credit limit. She intended to pay off all the expenses within a year, but that plan became more difficult when her interest rate abruptly jumped from 3% to 27%.

Plus, payment dates moved across the calendar seemingly at random each month, and the COO of her company was given the runaround while trying to make a payment over the phone. Landis was stunned at the difficulty she ran into with the card – "and I'm a finance person!" she said.

Advanta said its right to raise interest rates at will is spelled out in the terms and conditions for its cards. On the company's Web site, those terms include this catch-all phrase: "We may change any of your account terms, including rates and fees, at any time for any reason."

Advanta spokesman David Goodman said that each customer who receives a rate increase is notified in writing and given the opportunity to opt-out. If they exercise that right before a set deadline, they can continue paying down their existing balance at the old interest rate – even making just minimum payments – until the balance is zero. However, the credit line will be frozen, and once it's paid off, the account is closed.

How does the opt-out option work? Advanta isn't saying. Goodman declined to offer details about the length of the deadline and whether cardholders need make their opt-out request in writing, by telephone, or in some other way. Consumer complaint boards on the Web are full of tales from Advanta consumers who say they never received any notice of their rate hike, and who are unaware of any opt-out clause.

Forcing customers to accept higher rates or close their accounts is a way for credit card companies to triage their credit risks. The sour economy has directly hit their bottom lines: According to one analyst, delinquencies and default rates rose to all-time high in September for Advanta. Defaults on Advanta's loans rose to 11.02% from 4.76% a year ago, and the delinquency rate rose to 6.47% from 3.22% a year ago, according to analyst Scott Valentin of Friedman Billings Ramsey & Co.

Mike Haynie, a professor of entrepreneurship at Syracuse University's Whitman School of Business, said all of this has a snowball effect.

"A lot of people use those cards for inventory, and it's a revolving kind of relationship between buying inventory or supplies," he said. "When the credit card company takes away their ability to do that, it's an instant hit on the bottom line. It's particularly tough to swallow when it's not because of a late payment or something like that but to reduce risk …There's not a lot they can do."

When companies can't borrow, their performance can suffer, which then leads to layoffs and production cutbacks. "It's a vicious cycle," Haynie said. "It's scary, honestly."

Seasonal businesses can be particularly hard hit.

Charles McCabe, CEO of People's Income Tax and The Income Tax School in Richmond, Va., has seen his credit limits lowered and interest rates increased on both his business and personal American Express (AXP) cards.

He tried to preserve what was left of the available credit on one card, about $15,000, by writing a check against it to deposit as cash into his business checking account, but "as soon as the check reached Amex for payment, they reduced my credit line down to the amount that was previously owed and rejected the $15,000 check," he said.

"Their reason was that my overall credit balances with all credit cards is too high," McCabe said. "I explained that they are high at this time of year because I operate a multi-office tax business which is highly seasonal, and that the credit lines are paid down each year during tax season. I also pointed out that I have been an Amex customer for 37 years, since 1971, and have never been late or missed a payment. They said that those factors didn't matter and their decision is based strictly on their criteria and could not be reversed."

Getting burned by credit isn't a new problem for business owners. An over-reliance on consumer credit to bankroll his business almost cost Glenn Phillips his company in the downturn that followed the Sept. 11 attacks in 2001.

"The credit cards were just showing up, business and professional. We had good cash flow and I have great credit," he said of the time before the downturn. "Just cheap, cheap, cheap money."

That caused Phillips to be overly optimistic, and when business slowed for his Birmingham, Ala., software company, he went from using credit cards to expand his business to using them just to keep it afloat.

Phillips learned the hard way that when you really need the money is the precise moment the banks will start saying no. "I wasn't disciplined," he admitted.

Phillips fought his way back from the brink of bankruptcy, at one point selling his home and renting a single room to live in to save money. Today, his revamped company, Forte Inc., is stronger than ever, winning awards from software giants such as Microsoft and employing a staff of eight.

"The credit card game – if you are going to play that game, understand what is coming," he said.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

Credit card crackdown coming soon

Message to Obama: Send loans fast

Cash crunch: Small businesses get creative

How to keep your retirement savings on track when you're out on your own.

Joe Vitale, New York City
I recently left a staff job and am working as a freelancer. I’d like some advice on how to best manage my bookkeeping. Do you have any recommendations on interest-bearing checking accounts that I can link with an account to set up a retirement savings plan such as a SEP?

By Myrlande Davermann, Fortune Small Business contributor
A good bookkeeping program is essential when you're running your own shop. Susan Lee, a tax consultant and financial planner with Freelance Taxation recommends Intuit's (INTU) QuickBooks, a popular choice for small businesses.

For a checking account, check out brokerages such as Charles Schwab. It offers interest-bearing accounts that have automatic withdrawal options for funding different retirement plans.

But approach automatic withdrawals with caution: Lee warns that the first year of freelancing rarely goes smoothly. Income might not come in as regularly as you expect. Lee recommends underfunding your retirement account and setting aside the extra cash in a separate account. That way, it will be available if you need it. When you do your taxes at the end of the year, you can figure out what you can afford and sock the money away.

A SEP-IRA, which stands for Simplified Employee Pension Individual Retirement Account, will allow you to contribute up to 20% of your net self-employment income into your retirement account, up to a maximum of $46,000. If you have a lot of cash you want to tuck away for retirement, another option worth investigating is the solo 401(k), which will let you make contributions both as an employer and as an employee (of yourself).

If you don't have inventory or complex business arrangements, another software program that could fit your needs is Quicken, says CPA Terry L. Jones. She recommends you seek out tax and accounting assistance from a qualified CPA with experience working with to working with freelancers.

"This is a specialized area, and you need a good advisor on your team," Jones says.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

The Ultimate Guide to Retirement

Resources to help your company grow

Costs soaring? Overhaul your business

Setting competitive fees for your business

If your business drop ships, be prepared to investigate state statutes for every location in which your suppliers do business.

Chris Crocker, Smyrna, Ga.
Our business drop ships from its various suppliers. We are having more and more vendors tell use we need sales-tax numbers to be exempt from being charged sales tax when shipping to various states outside our state of residence. But it was my understanding that the federal government struck down this requirement from the states: In the Supreme Court case Quill v. North Dakota, the court upheld Quill's position that they did not have to collect sales tax for orders shipped out of their state. My suppliers are saying that ruling did not cover drop ship deliveries. But they’re not selling the product to our customers, we are. So how would they be responsible for paying sales tax outside their state? They didn’t sell it, we did. We have no "presence" in any state but our own. Could you please help me with this issue?

By Lenora Chu, Fortune Small Business contributor
The sales tax experts say that your suppliers are right. The Supreme Court case of Quill v. North Dakota does not apply to drop shipments.

As you know, there are three parties involved in a drop-shipment transaction: The wholesaler, the retailer and the consumer. After the consumer submits the order to the retailer, the retailer submits the order to the wholesaler, who then ships directly to the consumer.

The location of each party will determine whether there’s a sales tax obligation, says tax attorney Brent Herrin of the Atlanta-based law firm Cohen Pollock Merlin and Small.

In most wholesale transactions, you, as the retailer, are exempt from paying sales tax thanks to a resale exemption, Herrin says. In general, you must produce a copy of a resale certificate issued by the state department of revenue to qualify for the exemption.

However, in wholesale transactions that cross state lines, some states do not recognize other states' resale certificates as valid. In such cases, sales tax would be imposed. Furthermore, in some states, the sales-tax statutes deem the wholesaler to be the retailer – thus imposing tax obligations on the wholesaler.

Either way, your suppliers would be right to ask for your sales-tax number, says Joseph Micallef, founder of the Sacramento-based tax consulting firm Associated Sales Tax Consultants.

That information is required because most states impose the sales-tax obligation until proof of exemption is established. Your suppliers would need the sales tax-number to provide the necessary documentation, Micallef says.

As you pointed out, the Supreme Court case Quill v. North Dakota denied the state’s attempt to impose tax liabilities on products shipped into the state, since Quill had no “nexus” or presence within North Dakota. That case dealt with a transaction between an out-of-state retailer and an in-state consumer.

The issue in Quill is different from those faced in a drop shipment transaction, according to both Herrin and Micallef.

The question of sales tax obligations in a drop shipment has to do with whether the state in question recognizes your resale certificate, or whether the wholesaler is defined as the retailer by that state's statute, Herrin says.

In short, it varies from state to state. Examine the sales-tax requirements for the states in which each of your suppliers is located to determine your obligations.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

Enterprise zones yield lucrative tax breaks

How much of my car is deductible?

Tax obligations for a new merchant

Health Savings Accounts are gaining popularity, but business owners need to take a close look to see if the low-cost, high-risk plans are right for their company.

Normand Savellano, Chino Hills, Calif.
I am president of my own company and my wife is vice-president. We pay ourselves a salary and get our health insurance through the corporation. Are we eligible for an HSA and for the corporation to contribute?

By Kathleen Ryan O’Connor, Fortune Small Business contributor
HSAs – or Health Savings Accounts – are a hot topic right now. Ever since President Bush launched a high-profile push to expand access to HSAs in 2006, an increasing number of consumers are choosing to spend their health care dollars on the IRA-like vehicle – to the tune of 6.1 million users, up 1.5 million from last year, according to the health insurance trade group America’s Health Insurance Plans.

But before jumping in headfirst, know that HSAs come with one very important eligibility criteria: You must first be enrolled in a high-deductible health plan, or HDHP, and not have coverage under any other health plan, including Medicare.

According to the Health Savings Account Resource Center a qualified HDHP is a health plan with a minimum annual deductible of $1,100 for an individual, $2,200 for a family. They recommend that an insurance carrier or licensed insurance professional verify that a plan qualifies for an HSA. You can get penalized for setting up HSAs without the appropriate insurance. The idea behind this combination is to strike that elusive balance between protecting against huge medical bills while still providing users with an incentive not to run to doctor with every sniffle or head cold.

But no two people are alike, so plenty of individual research is necessary before you decide to switch health plans. Some people balk at the fact that HDHPs feature higher annual deductibles than traditional health insurance. Small business owners also tend to like them because they can provide employees with health insurance at a lower cost.

The biggest lure with an HSA is that contributions to your HSA, within limits, are completely tax deductible, as are any withdrawals for qualified medical expenses. Plus, HSAs are fully portable, and the balance can roll over year-to-year up to a predetermined amount – a key difference between HSAs and FSAs (Flexible Spending Accounts). You won't face that year-end scramble to stock up on Tylenol to use up dollars that will otherwise disappear.

“You never lose it. It’s your account,” says Serena Yee, a St. Louis lawyer with Brian Cave LLP who specializes in employee benefit and retirement plans.

So what is the employer’s responsibility with HSAs? Very little, which is another thing that makes them attractive. Employers don’t have to contribute to their employees’ HSAs or even administer them. However, if you want to help your employees out, you're allowed to contribute up to the annual HSA funding limit. For 2008, that limit is $2,900 for individual coverage and $5,800 for a family. For 2009, it will be $3,000 for an individual, $5,950 for a family.

But there are some rules. Contributions among employees must be equitable – you can’t contribute $1,000 to one worker and a $1 to another – and if an employee leaves, your contribution walks out the door with them, even if they’ve only been there a short-time.

The National Health Policy Forum offers a great deal of information about HSAs. Other good information sources include Information Strategies, a media and marketing company that runs a Web site called HSA Finder, and the Small Business Guide to HSAs by JoAnn Mills Laing.

Consulting with a qualified tax professional is also a smart idea, since the tax implications for a corporation are going to be different than those for an individual or family.

Rob Wilson, president of Employco, a Chicago company that handles payroll and benefits for small businesses, says that while HSAs have been slow to catch on, companies continue to keep an eye on them. After all, an HSA is a radical departure from a more traditional health plan – and the full benefit isn’t necessarily felt right away, he says.

Typically, in the first year you are paying the higher deductible without accruing any significant balance on the account, so a consumer has to be committed for the long haul. With HSAs, the idea is, “The less I go [to the doctor], the less I spend,” Wilson says – which also might be a problem for some people.

“Part of it is education,” he says.

Give us your advice: Check out recent “Ask & Answer” questions.

Related links:

Lose weight or else!

A new solution to the obesity crisis?

Can I tell my employees not to smoke?

A downturn can be a great time to become an entrepreneur – but only if you're prepared, financially and emotionally, to wait out the economic turmoil.

Charlene, Fort Myers, Fla.
I'm interested in buying a small pack-and-ship company. It's for sale for $70,000 with a gross profit of $245,000 a year. As an owner, after making all my bills and deductions, I would make about $60,000. My husband and I want to run it ourselves, with no employees, but we are worried: Is buying a business in the current economy a smart idea?

By Kathleen Ryan O'Connor, Fortune Small Business contributor
When Ken Proskie started his occupational health and safety consulting business in 2004, the economy was emerging from its post-Sept. 11 downturn, but downsizing and offshoring were still pummeling Main Street.

Proskie knew the problem too well: The impetus to strike out on his own came from being laid off after a 30-year corporate career in the field.

The economy seems even worse off now. What's his advice for someone pondering the same plunge today?

"It may sound philosophical, but sometimes a crisis is the biggest chance to find out who you really are," says Proskie, who lives in Evanston, Ill.

Convinced that his advance research was sound and that a clear need for his services existed, Proskie went in prepared to wait out the economy. He planned for a stretch of red ink before he'd see profits.

That approach was smart, experts say. Anyone thinking of starting a new business or taking over an existing one in late 2008 should keep that in mind and be prepared for a potential sales decline.

But above all, finding financing is going to be the top challenge. As banks pull away from lending to large, established companies, you can only imagine what they're telling unproven business owners just starting out.

That's not to say the dollar spigot is closed off completely, but the days of easy money are long gone. A strong personal credit rating is mandatory, but it won't be enough. Be prepared to front plenty of cash and collateral. Many entrepreneurs report that business loans are impossible to get unless they back them with their house.

"A few businesses that I've talked to over the last couple of weeks have had lines of credit canceled, even though they've been up to date on them," says Larry Bennett, a professor of entrepreneurial practice at Syracuse University's Whitman School of Management in New York. “That’s a little bit concerning to me, when even those with high creditworthiness are having problems.”

Still, there are opportunities. For those who come prepared, now can be a good time to launch – your rivals will be facing their own challenges and sales struggles.

"If you've done your homework and you see there is still an opportunity or a window of need, and your competition is not terribly with it, it can be a better-than-ever time," Bennett says. "But take the old saying: Take whatever you are forecasting for money [needed to get started] and double it. I'll say, take what you are forecasting for money and quadruple it."

Small business coach Jeff Williams of BizStarters, which specializes in the over-50 entrepreneur, warns potential entrepreneurs to be prepared, financially and emotionally, for a long stretch of economic turmoil.

"It takes footwork now and that eliminates a certain subcategory of buyers right there. This is not for the faint of heart," he says. "You are really going to have to look three years into the future. That's what smart buyers have always done."

One bright spot to consider: The economic crisis has some older entrepreneurs with solid businesses thinking it's a fine time for a graceful exit. And with the credit crunch, sellers might be willing to offer private financing.

Above all, Williams says, you need to take a long, hard look at the value of the business you're considering starting or buying. Does it fill a fundamental need?

Take industrial supplies. "Even if the factory goes from three shifts to two, they still have to buy these things," he says. "They still have to keep the plant running."

And don't be afraid to think outside the box. Even lawn care, a seeming luxury, can be a prosperous business in a downturn, Williams says. Downsizing means everyone is left working longer hours. Envision the suburban dad working from 7 am to 7 pm six days a week – he isn't going to be spending hours tooling around on the Cub Cadet anymore.

Sticking to the fundamentals was the key to Proskie's eventual success with his firm, Compass Health and Safety.

"The first year wasn't great," he says. "I had to have the resources behind me to survive [that initial loss] in income. I tried to position myself smartly. Why would you want to use me – a small fish in a big pond? I marketed myself as a seasoned professional and, probably more important, was the value proposition. I can do it for less, with better quality and better service than you've gotten in the past."

Eventually, that approach built up his client base. After all, even in a recession, work still has to be done.

One key thing to keep in mind: In any business climate, boom or bust, you can't let your emotions get the best of you.

As Bennett puts it: "I tell my students, fall in love with business, just don't fall in love with the business."

QUIZ: Are you ready to start your own business?