A taxing situation
Tempted to figure out your own taxes? Here’s why that could be a bad idea.
From the pages of In Business magazine.
Most small business owners, especially startup entrepreneurs, have their hands full running their business. Who has time to worry about “little” things like accounting and taxes? But owners beware: Any accounting professional will tell you there’s nothing little about your business finances.
Still, it’s easier than ever to keep your own books and do your own taxes. Whether it’s maintaining financial records in a simple Excel spreadsheet, utilizing a service like H&R Block’s tax software, or combining everything in a suite of products such as Intuit’s QuickBooks and TurboTax offerings, many small business owners may see a way out of paying someone else to do their accounting. The question then becomes: Is going solo on your small business accounting and taxes really worth it?
The case for going it alone
If there’s one big argument in favor of doing your own taxes, it’s the cost. Using software programs — which are, increasingly, just online programs — can save small business owners a lot of money.
Programs like TurboTax, H&R Block, TaxACT, and Jackson Hewitt Online can handle small business taxes at a reasonable price, and online reviews of each tend to be positive overall. They each have their own quirks. For example, TaxACT asks users if they have a conscientious objection to Social Security and have filed Form 4029 documenting it. Members of some religious denominations may be exempt from Social Security taxes if they don’t take benefits. Yet they’re all valid in the eyes of the Internal Revenue Service, which is what really matters most.
Plus, you’re often buying more than just a program, assuming you actually take advantage of the full packages available from many of these services.
Gene King, director of corporate communications for H&R Block, notes that H&R Block Small Business does provide outsourced accounting services — bookkeeping, payroll, tax, and others — so small business owners can stay focused on their core competencies.
“Because no type of business is more strapped for time and resources than a small business, H&R Block Small Business Services serve as a virtual back office,” King says. “Given these constraints, small businesses have to prioritize what receives their attention and focus. Since growing their business and making it more profitable are the two most critical goals, important back-office tasks like keeping their finances in order fall by the wayside.
“There are so many aspects to running a business that if you focus on everything, you really are focused on nothing,” King continues. He notes that from experience, H&R Block knows that most businesses do not manage their accounting needs as well or as efficiently as a trained professional. By outsourcing these services, they can focus on the things they do well — the things “that are the reasons they got into business for themselves to begin with.”
The case for going old school
If the argument for self-preparation software and online services is cost, one argument against is security. In this age of data hacks, can any information transmitted online really be considered secure?
Earlier this year, in the midst of tax season, Intuit and its TurboTax software made headlines when the company and 19 states noticed a surge of fraudulent state tax filings prepared with TurboTax.
The fraudulent state and federal filings appeared to include data taken from TurboTax clients’ 2013 tax returns, raising concerns about whether it’s safe to prepare or submit tax returns electronically.
Thankfully for TurboTax users, Intuit did not believe the instances of fraud were the result of a breach of its systems.
Even King from H&R Block admits there is still value in seeking the advice of a real, live professional accountant.
“Even before setting up the business, we recommend speaking with a tax and accounting professional,” King says. “We can help establish the business and tax needs up front, which will then enable the small business owner to, on day one, focus on growing the business.”
There’s certainly an argument to be made for including your accounting plans in your initial business plan, says Brian Cantwell, owner of two restaurants and a real estate holding company.
“As many small business owners start formulating ideas and putting them down on paper, you need to put that into your plan,” Cantwell advises. “And quite honestly, I think it makes you more attractive to a lender to know and be able to see in your business plan that you already have the forethought of bringing an accountant into the picture and that area of your business is going to be well taken care of.”
Brian Cantwell, owner of The Cove Supper Club along Lake Mason in Briggsville, just outside of Wisconsin Dells, says entrepreneurs should consider working with a professional accountant on day one of operating their business.
Cantwell, who runs the Kingston House Supper Club just south of Green Lake and The Cove Supper Club outside of Wisconsin Dells in Briggsville, along with Cantwell-Endres Ventures LLC, acknowledges he toyed around with the idea of doing his own business taxes when he first started his businesses two years ago.
“But then I always kind of knew what I wanted to accomplish,” Cantwell explains. “I always knew what the 30,000-foot view was going to be for my two companies, and I knew I needed professional help to be able to create different operating companies that feed into a holding company. I knew I’d have more than one, so that’s multiple tax filings.
“I knew I wanted to be a LLC but wasn’t completely familiar how the [Schedule] K-1 worked and all that kind of stuff. So while I did have some knowledge about how it all worked, I also worked in this business for 20 years, and I knew I wasn’t going to have the time to do this. I really needed someone to make that worry-free and take those bricks out of my bag.”
For that, Cantwell turned to Berndt CPA LLC in Madison.
“For me it was just a no brainer to have a professional accountant on board,” Cantwell notes. “I really consider both Alicia Greer and Bruce Berndt part of my team. A business owner and his money, that’s a very sacred trust. So when I think of Alicia and Bruce and their firm, I consider them partners and team members and trust them with my business, my livelihood, and the livelihood of my 40 employees.”
Bruce Berndt, owner of Berndt CPA, says Cantwell made the right call by hiring a professional.
“The first thing when it comes to tax preparation, especially for a brand new business, the most important thing is: Have they selected the right way to do business?” says Berndt. “So you can be a sole proprietor, an LLC, a partnership, a C-corporation, or an S-corporation. Every one of those entities has different tax benefits and detriments. It’s really about making sure that they select the right entity when they start.”
If you assume they’ve made the right choice, then the most important thing is having accurate records, Berndt continues. So if they elect to do their own tax return, that means that they have to understand what’s deductible, what’s not deductible, and when to recognize income. Most entrepreneurs, Berndt notes, didn’t get into business to understand what those rules are.
If they have accurate records and they use one of the software programs — for the first year, if they haven’t purchased any assets — the software programs can get them an answer. “However, what I’ve generally witnessed is it may not get them the right answer, because it’s only as good as the input that goes into it,” Berndt adds.
That’s the rub, explains CPA Jason Kadow, a shareholder with KMA Bodilly CPAs and Consultants in Madison.
“The programs are only as good as the people who are putting the information in. So, if they don’t really know much about tax law or haven’t looked things up … I hate to say it, but it’s kind of like the blind leading the blind. You just don’t know. You’re just throwing something in and hoping that it sticks.”
Kadow offers an example. A small business owner has three employees. She decides to have a Christmas party and take herself and all three employees out to dinner at a nice local restaurant. “A lot of individuals who are doing their own taxes would consider that a meals and entertainment expense,” Kadow says, “which you get a 50% write off for. However, they might not know the rule that because it includes the owner plus all the staff, it’s a 100% write off. There are certain little things that if they don’t know the tax law regarding those, they can be losing out on deductions.”
Berndt says there are two specific events in the life of a small business owner, particularly the entrepreneur who’s operating a startup on their own, that are cause to make the switch from doing your own taxes to seeking professional assistance: hiring your first employee and purchasing your first significant piece of office equipment.
“When you bring on a partner, the issues become: Is it now a partnership? Are they an owner? Is it an independent contractor, an employee?” he asks. “There are significant differences, and once that happens, then there are a lot of different ramifications other than income tax. There’s unemployment tax, worker’s comp, certain limits of different reporting. So when a person gets to that level, generally to comply with not only the income tax but also all the other regulations, that’s when you generally need somebody to help you through that process.”
The other significant event is purchasing any large asset, continues Berndt. “If you just have a smartphone or iPad or those kinds of things, those aren’t significant, and doing your own taxes probably is not all that tricky,” he states. “But if you’re going to be purchasing a piece of equipment for your office, if you’re going to be looking at some sort of vehicle for your business, then that’s also another trigger point because the rules on depreciation, owning, leasing — those kinds of things — generally require someone to help you through that.”
Knowing your business
The experts agree that a small business owner knows their business best. Since that business often isn’t accounting, seeking out a professional accountant can provide more bang for your buck.
“Many times, the owner’s expertise is in the product or service, and they are not as experienced in the management aspects of running a business,” says Tom Milliken, a principal with SVA Certified Public Accountants. “There is a tendency to try to do everything on their own — business development, management, client interaction, bookkeeping, taxes, human resources, etcetera. Using that approach can end up being detrimental to their success. We suggest that the owners concentrate on their area of expertise and look for outside assistance on other aspects of running the business. In the long run, it is a smarter approach and leads to greater success.”
Milliken says he’s reviewed returns that taxpayers have prepared using self-preparation software. Generally, if the taxpayer is thorough, methodically works through all the questions, and inputs all of the information requested, the tax return is very accurate.
However, “the advantage of using a professional preparer is that someone is providing a thorough review of the output from the software,” Milliken notes. “The experienced professional has the ability to identify items that do not make sense and look into those issues further.”
So far, it would appear that tax filers aren’t ready to drop their accountants just yet. While H&R Block’s King notes the company’s online and software tax preparation products continue to grow, historically only about 40% of all taxpayers file their own taxes. Sixty percent still seek assistance, a trend that doesn’t appear to be waning any time soon.
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