Tax season is a trying time of year for most businesses, especially if they haven’t taken the time to prepare for the inevitable annual event. Paperwork, receipts, loopholes, business-specific rules, etc. can become daunting for the average business owner to sort through.
Fortunately, there are Certified Public Accountants (CPA’s) who can help you make sense of the details, help handle the tedium of paperwork, and help you understand the qualifying rules that could be applied to your business. Even so, many business owners still prefer to complete their returns on their own and today’s technology has made that much easier with the use of tax preparation software.
Regardless of whether you choose to defer to a professional or complete your taxes independently, there are some important steps every business owner should take in order to prepare for tax time.
In a recent interview with Carson D. Sands, CPA and Bill Caton, CEO of Caton Consulting Group ,NTC Texas discovered several useful tips for easing these looming tax season woes. Sands and Caton confirmed that some of the most important things for businesses to remember are preparation, timeliness, and knowledge of the rules—all of which are key for tax time success.
In the questions and answers below, business owners can find practical tips from real CPAs about how to make tax season a much less painful experience.
1. What steps should small businesses take throughout the year to prepare for tax season? In what ways can businesses be proactive to get the most out of their taxes, or pay the least?
Small businesses should try to keep a tax folder that contains items specifically related to tax. It can be difficult in February to remember transactions that occurred over a year ago in January of the prior year, however this is about as early as most tax returns can be prepared.
Throughout the year make a record of large purchases of any kind, but especially any new furniture or equipment. Keep your receipt, as your CPA will need more than just the amount spent on the item. Other factors that the CPA must consider are the date purchased, if it was new or used, and what category of asset is the item.
In order to be proactive and avoid unnecessary taxes, taxpayers should always consult with their CPA prior to year-end. There are so many more options for tax savings before year end, and not much we can do to help out in the current year once the year is over. Better still, it might be worth a phone call to your CPA before any major actions are taken.
2. Can you tell me, in general terms, about a situation in which a business could have prevented serious penalties or losses, or perhaps some general pieces of wisdom you’ve gained from working with businesses and some of the basic circumstances that inspired those lessons?
One of the most common mistakes that business owners make is to go out and spend a lot of money unnecessarily at year end. This is a mistake that is born out of frustration with potential tax bills. It is true that yearend tax planning can include the option to move up large expenditures from early next year into the current year in order to delay taxes. However, oftentimes business owners will spend money that they do not need to spend to save taxes. The problem with this is that even in the top tax rate (currently just under 40%) you are still throwing away 60 cents of every dollar you spend. Worse still, often times these yearend expenditures are on some sort of asset that must be depreciated, so they don't even get to take the entire expense in the year of purchase. Avoid this mistake by simply looking into what might be spent in the first quarter of the next year regardless of taxes, and then work with your CPA to determine what (if anything) should be moved up to the current year.
3. What are 3 major “don’ts” you can think of for small businesses with regards to their taxes, either in preparation for doing taxes or the actual completion of the tax process?
First, don't wait until the last minute to provide your information to your CPA. While there are many options that go away when the year is over, there are still some that are available after year end, but your ability to utilize these is made more difficult as the deadline approaches.
An example that comes to mind is the funding of certain retirement plans. Small businesses have some pretty interesting options available in the form of retirement plans depending on the number of employees, the structure of the entity, and the profitability. Regardless of which plan you use, you do NOT want to miss the deadline to contribute which is usually extended past the end of the year until you file your tax return. You could miss out on massive tax savings in the current year and great retirement funds in future years, simply because you waited until the last minute. If you bring in your information on the 15th a good firm will do their best to help you if at all possible. However, if you were planning to contribute to retirement by the deadline you will definitely not be able to get a plan funded in time, even if your Investment Counselor is as accommodating as your CPA.
4. What characteristics do you think businesses should look for when seeking a good accountant? And what advice would you offer those who might prefer to do their taxes on their own?
When searching for a CPA it is always good to look for someone who has a desire to help you understand your tax situation. You should not use someone who wants you to blindly follow his/her advice. Instead, seek out someone who listens to you completely and teaches you along the way. Your CPA should provide you with the facts and let you make the decision rather than telling you what to do. My goal is always to educate my clients as much as possible because they are on the front lines of their business and can see things that the CPA in the office can't possibly know.
For those who prefer to prepare their own tax return, I think that it is a good option for some people. Most successful business owners are intelligent and have the ability to figure out the tax return with reasonable accuracy. What we often see is that business owners prepare their own until the tax return becomes too complicated, or too time consuming. Once you are dealing with separate returns for your business and personal returns it is probably time to seek help. For those preparing their own return I would use one of the big name brand software, but don't get up sold to the higher options that are offered unless you fully understand what you are paying for and know that it is worth your money. Don't let the advertisement of guarantees and 100% accuracy sway your choices. All of the major tax software providers will be 100% accurate if the information you feed it is 100% accurate. Make sure that you understand all of the deductions that you are entitled to and maybe every few years have a professional look it over and make sure that you aren't missing out on any big savings.
For additional questions or tax tips, feel free to contact Caton Consulting Group at (972) 650-1900.
About the Author - Ashley Choate is a native of Jacksonville, FL where she lives with her son, dog, and three cats. She graduated Magna Cum Laude from Jacksonville University with a BA in English and holds an MAED in Adult Education and Training. She lives for reading and writing, learning and teaching, and figuring out the day-to-day traumas and joys of mommyhood. .
Top Photo Courtesy of Alan Cleaver @ Flickr CC.