Do you prepare and file your company’s taxes?
If you’ve been processing your business taxes, you might have been doing so incorrectly for years. You might have overlooked deductions that you could have taken. You might have missed credits and itemized items that you could have applied.
If you’re like most business owners, you might watch your “bottom line” and try to save money wherever you can. However, spending money on tax preparation and planning services will pay off in the long run. After all, you don’t want to get audited, do you?
Keep reading to learn more about how to do business taxes and why you should allow a professional to handle them instead.
The Harsh Truth About Business Taxes: You Need a Professional
Why do you need to have someone else prepare your business’s tax return? To ensure that all of the expenses you’re allowed to claim on your tax return are taken and accurate. For example, you might have forgotten about the home office deduction, mileage deduction, or the 50% deduction of entertainment (or you might have wrongly counted all of it).
Also, you might not know the difference between a travel expense when you’re traveling and having meals vs. being in your local area. There are distinct differences in these types of expenses.
An accountant not only prepares tax returns, but they have conversations about the entity structure and how to capitalize on the tax implications of the setup. They can give great business advice on how to change the entity type along with other recommendations. An accountant ensures that you’re doing the right things on your tax return and recording the most significant expenses of your business.
One big advantage of hiring a professional is that an accountant goes to school for tax preparation. If you’re a landscaper, for example, you won’t know everything there is to know about preparing and filing taxes unless you were an accountant in a firm and learned how to do taxes.
Another advantage is having another “set of eyes” on financial reports. An accountant can look at the health of your business, the growth in between years, and where you are saving and spending. It’s more than just a tax return!
Keep in mind that if you don’t have a business partner and you’re on your own, you might not be making the best business decisions for your business based on your data because it might not be right.
Your Business Might Be at Risk for an Audit and Penalties
If you have someone other than an accountant handle your business taxes, the following may happen:
- Missed deductions
- Untimely tax return filing
- Taking personal claims vs. business claims
You also have to consider a situation where you should be tying-out your sales tax returns to your gross revenue. Not only does a state’s department of taxation look at this, but so does the IRS.
When a non-certified person prepares your business’s tax returns, the risk for inaccuracies and penalties increases. It doesn’t necessarily mean you’ll be audited. It means the risk if you’re audited—the risk of you owing penalties, interests, etc.—is greater than if you have a professional accountant prepare your tax returns. And if you’re not filing returns, you’re out of compliance, and you’re more likely to be audited because you’re not following the rules.
Keep in mind that if you get audited and can’t back up or justify the expenditures you’ve taken (you need to have work papers and have it together), you’ll have a higher risk of higher penalties in a civil and potentially criminal case. Know that it’s extremely expensive to get someone to represent you if you wind up in a criminal case.
It’s preferable to have a CPA or an enrolled agent prepare your taxes; an enrolled agent takes an exam to become certified. Again, it’s not advisable for you to go to someone who only does tax preparation. You can increase the accuracy by having a professional who’s knowledgeable to handle your business taxes.
Steps to Take to Before You Meet with Your Accountant
The first step is to meet and speak with an accountant about preparing your business’s tax returns! You should meet with them on a quarterly basis, minimum. They can make sure you’re sending in the correct estimated tax payments, if applicable.
You should have a reconciled accounting file of some kind. For example, if you have loans, break out the principal vs. interest payments. Using Excel doesn’t cut it because there’s a potential for a larger error if you’re not using an actual accounting system, for example, QuickBooks.
You should have all of your December statements available—your accountant will pull a Trial Balance to make sure your balance sheet ties out.
Keep in mind that if you work with an accountant on a regular basis, you won’t have a problem understanding what you need. You’ll look forward to discussing your business’s financial health.
What Should You Bring to Your Meeting?
When you meet with your accountant, especially if you’re a new client, you might be asked to bring the following with you:
- The last three years of tax returns
- December bank and business credit card statements.
- Accounting file
- Answers to questions your accountant may have
- Capital assets–include invoices for large purchases
- List of inventory
- Mileage logs
- Home office expense
Working with an Accountant to Handle Your Business Taxes
You have to be comfortable with the people you work with on a daily, weekly, monthly, quarterly, or yearly basis. When you meet a CPA, consider if they’re approachable and have a good practice. If you want a more personal feel where you can drive to your accountant’s office and drop off a tax form, then you’ll want to find someone who’s local. Here are tips for hiring an accountant:
- Check out your state’s society webpages to ensure an accountant is licensed.
- Research associations (AICPA) and certified bookkeeping organizations.
- Review social media networks (e.g., LinkedIn and Facebook).
- Perform a Google search and check out websites (design and information should be current).
- Get referrals and references.
- Join a chamber of commerce.
Tip: If you don’t want to hire a CPA, you may consider hiring a certified bookkeeper who’s heavily engaged in their organization. Make sure they have certifications in the software they use and keep them current.
When you meet with your accountant, ask the following questions:
- How can you help me?
- Can you look at my tax returns?
- Do I need to use accounting software? Can you recommend one?
An accountant can show you where things may look strange on your business’s tax return, from deductions to cost of goods sold. Invest in an accountant as much as they’re going to invest in you. If you’re not willing to invest in yourself, how can you expect someone else to do so?
Will You be Ready in Time to File Your Business Taxes?
Do you watch Shark Tank, The Profit, or any one of these types of shows? If so, you’ve probably noticed that the investors are successful people who know how to ask questions and they know what the answers need to be. The business owners who seek investments in their businesses who don’t have their numbers together walk away without deals!
Before the next tax season, hire a professional accountant! Here’s what to look for:
- CPA (certified public accountant) designation
- CFE (certified fraud examiner) designation
- Enrolled agent
- A specific number of years’ experience
- Continuing education
- Certified in any and all software they recommend to you, for example, QuickBooks
Remember: There’s a higher risk level if you have someone other than an accountant preparing your business tax returns. If you get audited, you and your tax preparer are responsible for your tax returns. It pays to hire.
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from Fundera Ledger https://www.fundera.com/blog/how-to-do-business-taxes