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TAXTIME. It’s that time of year when some small business owners are scratching their heads wondering, “Should I have done things differently?” “Should I have waited to buy that new truck? Am I taking all the deductions I should? Am I taking some that I shouldn’t? What if I’m audited? Will I be ready?” This anxiety could be replaced by a single question: “Do I have the right tax partner?” Success in small business depends not only on your own talents but on your ability to assemble the right cast of associates to keep your company running smoothly and profitably. The person you choose to help with your tax planning and preparation is a critical member of this cast.
Preparation or planning
You have some choices when it comes to choosing a tax service, but it’s important to remember that tax preparation and tax planning are two different things. Here are some of the options:
Tax preparation service: A basic tax prep service offers trained professionals who can correctly complete your returns at a fairly low cost. This might be an option for an owner with a simple return who is strictly looking for help with tax preparation—not for ongoing advice and guidance.
(EA): EAs are rigorously trained as tax specialists and must pass an extensive test administered by the IRS. They are licensed by the federal government to represent taxpayers before the IRS and are required to take a number of hours of continuing education courses each year in the area of taxation. Because their business and training is all about taxes, they are usually experts at it. If your needs are limited to the area of taxes, an enrolled agent might be a good option.
Certified public accountant
(CPA): A CPA with expertise in taxes can offer tax planning, tax preparation and more. A CPA can serve as a year-round business partner and consultant not just for tax reduction but for all of the financial aspects of your company. This can be invaluable for a busy green industry entrepreneur who doesn’t have time to focus on small financial details or on the big picture indicators of the company’s financial wellbeing. Keep in mind, however, that not all CPAs specialize in taxes, and some are better trained in this area than others. Finding one who specializes in taxes and other services for businesses like yours is the goal.
Tax attorney: Tax attorneys are lawyers who are extensively trained in tax law. They can provide tax planning and strategic business consulting and can also help with other legal aspects of running a business. Tax attorneys are also bound by attorney-client privilege, meaning they cannot testify against their clients.
While cost is always a factor in any business decision, make sure to look at more than up-front fees when choosing your tax and financial advisor. A tax advisor whose fees seem more expensive at first might make up for this many times over in the money he or she saves you over the long run.
Many businesses opt to use a CPA for a full range of financial guidance and services.
“Taxation is important, but it’s just one component of managing a successful small business,” says Michelle Cote, CPA, Dennis & Associates P.C., a Quincy, Massachusetts firm that specializes in working with small businesses. “It’s also important to understand the laws surrounding payroll, state tax and sales tax. A CPA will handle all of those things.”
CPAs can help companies identify problems and make strategic decisions. “Owning a business is all about staying competitive while understanding the risks of the decisions you’re about to make,” says Cote. “A CPA will focus on the entire business.”
tax-friendly business structure
One important decision a tax advisor can help with is your company’s business structure. Are you operating as a sole proprietor, an LLC, an S-Corp or a C-Corp? There are important tax and liability issues associated with this decision.
Sole proprietorship offers the advantage of simplicity without the additional costs involved in creating another business structure. Becoming an LLC, S-Corp or C-Corp adds varying layers of complexity and cost, but each of these entities has its own tax advantages, depending on the situation. All offer protection of your personal assets in the event your company is sued. For a contractor with a lot to lose in an industry where many things can go wrong, this is definitely worth some thought.
A qualified tax advisor with a thorough understanding of your company, your individual circumstances and your future plans can walk you through the different scenarios to guide you toward the best business entity for you.
“This helps eliminate a lot of problems later on,” says Randy J. Elder, a Phoenix, Arizona CPA who works with many small businesses. “People have a tendency to set up their business based on what a friend did or what someone else suggests, but this isn’t always the best solution for their individual situation. For example, time after time, I see people who have set up an LLC that may or may not be necessary. You really need to take some time and go through your situation carefully.”
Deductions and credits
It’s hard enough for tax professionals to stay abreast of the intricacies of the tax code; it’s nearly impossible for business owners to do it and run a successful company, too.
Have you hired a veteran? There’s a credit for that.
Did you hire a low-income teen to boost your summer workforce? There’s a credit for that, too. How will the jobs bill impact your company? Did you set up a SEP or SIMPLE plan for your employees? Are you using alternative fuels or upgrading your heating or air conditioning system? You may be entitled to more credits.
Hiring an advisor with knowledge of your company and the tax laws can easily pay for itself in identifying all the credits and deductions you’re entitled to.
Nearly every business move you make can have positive or negative tax consequences. Without proper advice, you’re liable to miss out on important planning that can save big tax dollars.
“There are a lot of different ways to minimize taxes in any given year,” says Elder. “One example is when it comes to writing off equipment you’ve purchased.”
For example, if it’s near the end of the year, and you’re planning to buy several pieces of office equipment, your tax advisor can examine your tax outlook to help you determine whether it’s better to buy now or wait until the next tax year.
When you do buy the equipment, he or she can also determine the most advantageous way to expense it. It may have the best impact on taxes if you take the entire expense the year you bought the equipment. Or it may be better to depreciate it over several years.
A tax planner can also help clients pay estimated taxes in the most advantageous way. “For example, if a business is having an exceptionally good year but cash is tight, it may make more sense for them to pay a safe estimate rather than what is actually owed,” says Elder.
They’ll have to pay the actual taxes later but will have more cash to work with now. On the other hand, if they’re having a poor year, it may make more sense to pay the actual taxes owed rather than the safe estimate.
Cote says one planning error business owners often make is waiting until the last minute to set up a pension plan they can contribute to before the tax year’s deadline. A tax advisor can help you sort through your options so you can establish a plan before the eleventh hour.
Bad record keeping can sabotage your efforts to take all the deductions you’re entitled to and can make audits very uncomfortable.
“Some owners are so busy doing everything, they think they just don’t have time,” says Elder. “They’re more interested in bringing revenue in to keep the business going and they don’t take time to do the daily record keeping. It becomes an afterthought or they try to do it in the evening when they’re done with work. After an exhausting day, it gets put off. That’s when they usually call me.”
The use of automobiles is one area where some owners fall short. “Regulations dictate that you need a log for cars you use in a business environment,” says Cote. “That’s sometimes an area where clients are lax. Some want to estimate, but the law doesn’t allow that.”
Co-mingling funds is another sloppy business practice that makes tax time difficult.
“Get a separate checking account,” says Elder. “A lot of people are still operating with their personal checkbook. Once you decide to file as an S-Corp, you can’t co-mingle funds. If you formed a one person LLC, co-mingling your funds may not seem like a big deal, but you really should keep it separate. It makes tax time significantly easier and less expensive because the person doing the work won’t have to put as much time into it.”
Your tax advisor can help you sort out reasonable practices from big red flags. For example, if you’re incorporated, it’s important to pay yourself a reasonable wage. Taking a salary that’s too small or one that’s too large can both raise eyebrows at the IRS.
“Another thing the IRS looks at is your style of living,” says Elder. “Can you afford your style of living based on what you’re reporting? If it’s way out of line from national averages, that can flag an audit.”
While a home office is sometimes thought of as a red flag, small business owners shouldn’t be afraid to deduct these expenses if the office meets the IRS definitions. A good tax advisor will guide you in deducting your legitimate home office legally and confidently.
No matter what type of tax partner you choose, make sure it’s one who has experience with companies like yours. This doesn’t necessarily mean they have to have extensive experience within the green industry, but that they work with service industries of a similar size.
“There are quirks with various industries, but I think it’s more important to find someone who has experience in public accounting with all types of businesses,” says Elder. “What you really need is someone who will listen to you and take the time to answer your questions.”
“Most CPA firms like ours don’t just look at the corporate side of business, we look at the individual side, too,” says Cote. “Sometimes these are very interrelated. For example what a business owner’s spouse does for work might impact what we decide to do on the corporate level. It also matters for pension planning.”
Success in the business game depends in great part on the quality of your team. Make sure you have an expert tax advisor on yours.