There are a few basics every business owner needs to know.
CHECK AND BALANCE Every enterprise must have check and balances. Even if you are a sole proprietor with no employees, you should have someone else reviewing your books to make certain your tax return is based on a strong foundation. Most CPA’s will take your money to prepare your return, but that return is not of value, if your books do not have integrity
CONTROLS If you do have employees, then you need controls. You can watch your local paper and see small business embezzlement reported at least once a week. A business hires a bookkeeper, and after a few years you begin to trust and give more and more control. It starts with a tank of gas and doesn’t end until thousands or hundreds of thousands are gone. If you need controls, then your CPA can either provide them or help you put them in place
ADVICE Everyone needs advice, if you don’t, you are just kidding yourself, there is no way anyone can know everything they need to know. The question you need answered is what kind of advice you need, and where should you be getting that advice
You need to think of your CPA as your primary care Tax Physician. He/She should know enough to recognize opportunity, and once recognized, they should know who to refer that opportunity to. If your CPA / Tax preparer does not have a network of experts, they will try to make the determination themselves as to the best course of action. In most cases that CPA / Tax professional will simply tell you it’s not worth it and push you to move on.
A true story, I was meeting with a friend about some tax strategy work for his firm and the question of structure came up. In our research we found that he was over paying nearly $50,000 a year in self-employment tax. When he asked his CPA about it, the CPA brushed it off by saying that it would cost him $7 or $8,000 to fix it and would only save him $8 or $9,000. The real answer was that it costs him a few hundred dollars to correct and the savings was $50,000, per year. When I asked him how long did, he have incorrect structure; he responded by saying about $500,000 worth.
LONG TERM PLANNING: You do need to keep you CPA for your lifetime, but your planning should be? The fact is you are going to be paying taxes for the rest of your life. Your tax planning must be based on what is best for you now and in the future. You need someone that can tell you how to reduce taxes for high income earners.
COST VS. SERVICE: DO NOT shop by cost. One of the biggest obstacles you face in getting good tax advice is that your CPA / tax preparer is competing with software. It is estimated that about 30% of our tax returns are currently being done overseas. Tax returns have become a commodity and with all commodities, there is a product and a price, and the free market system dictates that price. Shopping by price will get you a compliant correct tax return, that cares little about how much you are paying, only that you will not get an audit.
Business returns, including 1040 schedule C, simply cannot be done effectively and efficiently only by software.
CREDENTIALS AND TRAINING: Even a CPA with 20 years of continuing education can have almost no training on business tax strategy. So, credentials by themselves are of little value. But let’s start with what is out there
CPA = master’s degree with 40 hours of annual CE required training
EA = Certification with IRS exam with 24 hours of annual CE required training
Accounting or tax professional = Who knows, I have met with hundreds of tax professionals and some of which have thriving practices and their entire training was a 2-week course, through H&R Block or Liberty Tax. Some of these firms do a really good job but you need to recognize that there is a difference. Just because someone advertises “accountants for small business owners”, does not mean that they have specific training to do what you need done.
ON-GOING SUPPORT: You may only file a tax return once a year, but you should be asking for advice much more often than once a year.
WHO IS DOING MY WORK: You may not want your CPA helping you with monthly journal entries, a supervised controller that bills $75 an hour would be just as good, instead of the CPA who bills at $150 an hour. But you don’t want your tax return sent someplace else to have it done.
WHAT ARE YOUR RESOURCES: Know beforehand that you have access specialists when the need presents itself. Do they offer help for how to reduce taxable income for high earners, do they offer council on how to find the best legal structure for consulting business.
WHAT ARE THEY GOING TO BE LOOKING AT: If the only thing your CPA is going to look at is your books for last year, then move on and find someone that will look both forward and backward. You deserve better, you did not go into business just for the headaches and stress. There are a lot of opportunities you should be taking advantage of and your CPA should be the one leading the way toward those opportunities.
In Summary here are my 10 questions you should be asking your CPA / Tax professional
- What are your credentials?
- How much of your CE do you focus on advanced tax strategy planning?
- What is the purpose of the tax code? Is it to generate revenue for the government, or is it to help business owner succeed?
- What % of your business clients file a 1040 Schedule C or 1065 vs. an 1120 or 1120 S?
- How can you help me improve my business operating efficiencies?
- What kind of help can you give me throughout the year?
- Can I just give you my P&L and balance statement?
- What questions do you have for me?
- Do you work with other experts?
- What is your audit history?
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