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2011

Part-1-Article.jpgby Max Berry.

 

Many small businesses already use some kind of accounting software to track their day-to-day cash flow so why not apply that do-it-yourself attitude toward filing your own taxes? But handling your business taxes on your own takes more than a little know-how and no small amount of courage. It also helps to have the most appropriate tax software for your small business. With that in mind, here’s a look at what three of the most popular tax prep programs have to offer this year.

 

Intuit’s TurboTax

The most well-known and widely used tax software for small business is Intuit’s TurboTax. Intuit is offering two different packages for the 2010 Poll-Tax-Software.pngtax year. TurboTax Business, designed for corporations, partnerships, and LLCs, costs $129.95 and comes with five federal e-file credits. To file state taxes, however, you’ll need to download a separate TurboTax software component (pricing for state tax filing has yet to be posted).

 

Sole proprietors and single owner LLCs may be better served by TurboTax Home & Business ($99.95), which allows you to file your business and personal taxes together. As with the Business edition, five federal e-files are included. (The IRS caps the number of annual e-files from any one entity, individual or business, at five.) You can also file state taxes with Home & Business, but each one will run you an extra $19.95. Both the TurboTax Business and Home & Business models are available as downloads and on CD. Compared to the CD, the online version of Home & Business, which costs $74.95 for one federal e-file and $36.95 for each state filing, can be a better deal if you only have to file one federal and state return each.

 

TurboTax tends to be the priciest of the major tax prep software products, but also comes well reviewed, receiving a best-in-class 19 out of 20 rating in Tax-Compare.com’s annual comparison of tax prep software. It’s no surprise then that TurboTax has become something of an industry standard. “The reason I’m fond of [TurboTax] is so many bookkeepers and accountants are fundamentally comfortable with it,” says Richard Wooley, principal partner at the New York-based business consulting firm Bond/Wooley Inc. Speaking of industry standards, TurboTax continues to offer free coverage in case of an audit and a network of professionals to offer you help and support should you need it.

 

Note: This article is Part One of a three-part series on tax filing options for small businesses. Part Two focuses on retail (storefront) tax preparation sites and is posted here. Part Three looks at when it might be appropriate to hire an accountant and is posted here.

 

H&R Block At Home

H&R Block also offers some DIY tax products for small business owners. For those who are self employed or own rental property—and won’t need to file any business forms beyond a 1040 Schedule C—the At Home Premium program may be a good option. If completed online, At Home Premium only costs $49.95 for one federal e-file. But, as with TurboTax, each state e-file requires an additional cost, in this case $34.95 per state return.

 

Entrepreneurs who will be filing their business and personal taxes together should consider H&R Block’s downloadable At Home Premium & Business package ($79.95), which includes five federal e-files and allows you to file your state taxes for $19.95.

 

For a self-employed individual who will only file a 1040 and a Schedule C, H&R Block also offers its Best of Both package ($79.95). Best of Both allows you to prepare your taxes online while also having an H&R Block professional review your return and then e-file it for you. State filings with the Best of Both package cost $34.95 per return.

 

The added peace of mind that comes with having a tax pro review your return is the major benefit of the Best of Both package, but even if you’re doing your taxes on your own, it pays to have someone help you get organized. “If you’re a kitchen table business, I think that you’re probably going to be fine with [tax prep software],” says Wooley. “But I encourage entrepreneurs to get a really good bookkeeper to set up a program in QuickBooks. [The software] will import that tax information directly from QuickBooks.” As Wooley notes, nearly all major tax prep software models will import data from popular bookkeeping programs like QuickBooks and Microsoft Money.

 

TaxACT

TaxACT offers tax preparation products comparable to those offered by TurboTax and H&R Block, but follows more of an á la carte pricing structure. With TaxACT, small business owners purchase downloadable Business 1065, 1120, or 1120S software packages separately for $39.95 a piece. Each download includes one federal filing. To file additional state 1065, 1120, and 1120S returns, however, you must pay an extra $14.95 per state. For companies with locations throughout the country, TaxACT also offers an All-States edition that lets you file in as many states as necessary for $51.80.

 

For entrepreneurs looking to combine the preparation of their personal and business taxes, TaxACT also offers a Home & Business package for $54.95 that bundles a Business 1065, 1120, or 1120S return (and one free federal e-filing) with free federal and state 1040 returns. But, as with its other platforms, the filing of state returns, both business and personal, costs extra.

 

Like H&R Block and TurboTax, TaxACT offers advice and support from its network of tax professionals. E-mail support is free, but access to a tax specialist via telephone costs one flat fee of $7.95. H&R Block and TurboTax, however, offer the same phone consultation service at no additional charge.

 

The tax software that represents the best value for you will naturally depend on the specific needs of your business. Every service you encounter will boast of maximum refund and accuracy guarantees, but bear in mind that even TurboTax plainly states that its top-tier small business software works best for companies with revenue of less than $250,000 and fewer than five employees. As Wooley says, “The more employees and investors a business has, the more imperative it is to get a reality check from a human being. Your business is intuitive to you, but the tax code isn’t intuitive to anybody. There’s an education out there you have to go through, and you can’t always get it through software.”

Part-2-Article.jpgby Max Berry

 

If your business has reached the point where doing your own taxes is too big a task, you might want to consider taking them to a retail tax service. Here’s a look at what some of the leading tax prep services can—and can’t—offer you this tax season.

 

Cost and Convenience

It’s hard to beat retail tax prep services for convenience, but convenience isn’t worth much without peace of mind. Thankfully, it is an industry standard for these services to offer some form of free accuracy guarantee. H&R Block, Liberty Tax, and Jackson Hewitt, three leaders in the field, all promise full reimbursement of tax penalties resulting from mistakes made in filing your return.

 

An extra $35 at H&R Block gets you the Peace of Mind Extended Service Plan, under which the company will pay up to $5,500 of additional owed taxes assessed by the IRS and provide you with qualified representation in the event of an audit. For an additional (and unspecified) fee, Jackson Hewitt offers its Gold Guarantee, which provides the same coverage as the H&R Block’s Peace of Mind service, but will only cover $5,000 of additional owed taxes. Liberty Tax offers audit representation free of charge, but does not advertise any guarantee to cover additional taxes assessed by the IRS.

 

Security aside, there’s also the matter of getting the biggest return possible. “As we’re growing, it’s all about strategic tax planning,” says Elyissia Wassung, co-owner of the South River, New Jersey–based chocolate retailer 2 Chicks With Chocolate. “If you want to be able to take advantage of all your deductions, it really pays to use a pro.”

 

Exactly how much it will cost for one of these services to find those deductions for you depends on the complexity of your return. Pricing for the most complicated returns is difficult to determine ahead of time since retail services typically charge by the form. It is worth noting, however, that while H&R Block and Jackson Hewitt did publish their average tax prep fees for 2010 ($189 and $208 respectively, though those figures include more straightforward individual returns), Liberty Tax did not.

 

Note: This article is Part Three of a three-part series on tax filing options for small businesses. Part One, which focused on tax prep software, can be found herePart Three looks at when it might be appropriate to hire an accountant and is posted here.

 

A Personal Touch

One possible downside to using a retail tax service, where employee turnover can be high, is that you may not be able to establish a long term—and year-round—relationship with a taxPoll-Tax-Software.png professional. One possible way around that conundrum is to request an enrolled agent (EA) to prepare your taxes. While they cost more, EAs are licensed by the government to prepare tax returns, having either passed a comprehensive exam or worked at the IRS for a minimum of five years. They must also complete ongoing professional education.

 

“A beginning stage company should take advantage of [an EA],” says Richard Wooley, principal partner at the business-consulting firm Bond/Wooley Inc. Since many EAs are also certified financial planners or accredited tax advisors, working with one now could prove fruitful in the long run.

 

Wooley, a serial entrepreneur himself, also encourages entrepreneurs to consider taking their taxes to a tax prep service that operates on the H&R Block model but isn’t part of a national chain. For instance: “Going to a tax prep company that is family run, you find people who are always there and you get a continuity of service that really helps.”

 

Whether or not you can find that continuity of service at a national chain will depend on the quality of the offices near you, but H&R Block, Jackson Hewitt, and Liberty Tax all offer year-round tax and financial advice, so it is still possible to get your questions answered even when it isn’t tax season.

 

Taking the Next Step

As the corporate structure of your company becomes more complex, you will reach a point when it’s worth it to have the same person doing your taxes every year. When this happens, consider weighing the services provided by a retail tax preparer against those of a licensed CPA. “The biggest education I ever got was from a CPA I hired. He taught me how to maintain a business as opposed to just operate it,” Wooley explains. For much more on when to consider the move to a CPA, be sure to read for Part III of our series by clicking here.

 

Finally, if you need help determining the best option for you, don’t be afraid to ask around. “Ask your friends who might be business owners and find out what they recommend,” says Wooley. “Whatever you do, don’t just go to the place across the street. Finding the right person to do your taxes is all about pounding the pavement.” As any small business owner knows, it pays to shop around.

Part-3.JPGby Max Berry.

 

With great growth comes great responsibility, and as your business becomes more successful, more lucrative, and more complex, you’ll have more work to do come tax time. If you’re one of the lucky entrepreneurs who saw their business grow in 2010, it may be time to enlist the services of a Certified Public Accountant (CPA).

 

Cost vs. Benefits

Many small business owners, especially those just starting out, might be put off by the seemingly high cost of a CPA—$100 to $400 per hour, on average (costhelper.com has an overview of how much you can expect to pay for professional tax prep). But that price won’t seem so steep when you consider all the money a CPA can save you. “The amount that CPAs usually save you [on your taxes] pays for their fees,” says Anne Maxfield, founder of organic cooking site The Accidental Locavore.

 

The exact price of having a CPA do your taxes will naturally depend on how complicated your return is. If you fall on the more complex side of things, with a number of full time employees, contractors, and investors, the cost of using a CPA will typically be no more—and may even be less—than the cost of filing your return through a retail service. That’s because storefront tax preparers often charge by the form and not the hour. Plus, you’ll get the added peace of mind of knowing that a licensed CPA completed your taxes.

 

If you still aren’t convinced the benefits of using a CPA justify the costs, bear in mind that there are CPAs who will work with you to make sure you get the best deal. Maxfield’s CPA, Gary Topche, will often give a discount to young companies that don’t have a lot of capital. He also makes a point of training entrepreneurs in things like basic bookkeeping so that they won’t have to pay him—or anyone else—to handle it. “I don’t charge entrepreneurs for things they could do themselves,” he says. “It’s a way to keep the fees down.” 

 

Note: This article is Part Three of a three-part series on tax filing options for small businesses. Part One, which focused on tax prep software, can be found herePart Two focuses on retail (storefront) tax preparation sites and is posted here.

 

A Special Relationship

Of course, a CPA does much more than just file your taxes. The advice of a good accountant is invaluable year-round. “Taxes are just part of the service [a CPA provides],” Maxfield says. “The things they do to keep you functioning are more important. It’s like having a good doctor.”

 

Poll-Tax-Software.pngTopche illustrates the relationship between a CPA and an entrepreneur—and all its potential benefits—with a story about one of his former clients, a family-owned travel agency he began working with in 1985. “The father, who ran the business, was a good salesman, but not a businessman. He had a comptroller stealing from him.”

 

After the comptroller was fired, Topche began mentoring the founder of the company and his daughter, answering all their financial questions. Sixteen years into the relationship, when the family sold the travel agency for $56 million, they likely had very few complaints about Topche’s fee.

 

Maxfield has been working with Topche for 15 years. “He’s been a great sounding board,” she says, “full of levelheaded advice.” He echoes her sentiment: “The real value in our relationship is that I can be that objective, independent sounding board. Whenever a client has something important going on in their business, I’m the person they talk to.”

 

But Maxfield also knows the dangers of working without a CPA. She speaks fleetingly about a time early in her entrepreneurial career when she ran afoul of her state’s labor board—an incident she might have avoided had she consulted with a professional when setting up her company. Says Topche: “Businesses often bring in a CPA after they’ve gotten into trouble when, if they’d brought one in earlier, they might never have gotten into trouble.”

 

Choose Wisely

Finding a CPA isn’t difficult; finding the best CPA for your business can be. “Not all CPAs are the same,” says Topche. “People who have a CPA license don’t necessarily have the real life experience. There are Fords and Mercedes out there.”

 

So how do you get yourself behind the wheel of the model that best fits your business? Web sites like CPAdirectory and the home page of The American Institute of CPAs are excellent places to start, but you don’t have to go too far afield to begin your search. Both Maxfield and Topche recommend relying on referrals. “Referrals are critical,” says Maxfield. “Talk to people in similar businesses and similar states in their entrepreneurship. Interview people and see who you’re comfortable with.”

 

Maxfield’s point about finding a CPA with whom you’re comfortable is an important one. As your business grows, the art of maintaining it for the long haul will become imperative. A CPA, one who knows your business well, can assist you in everything from dealing with the IRS to strategies to help you prepare for retirement or for the sale of your business. Still, this person will have an intimate knowledge of your company’s financials, so you’ll want to be selective and find someone with whom you feel an innate trust.

 

Which CPA is best equipped to help you out is something only you can know. The important thing is to recognize the point at which your business becomes too complex for you to manage without the help of a professional—both for filing your taxes and for all the day-to-day advice you’ll need if your business hopes to achieve great growth.

Small-business-taxes.jpgSome valuable advice on how to help avoid an audit and what to do if you can't. 

 

By Max Berry.

 

Just how much time the IRS will devote to small business audits in the current financial climate remains to be seen, but one thing is for sure: Small business owners have always run a heightened risk of being audited. Some businesses are more vulnerable than others, but knowing how to best avoid an audit-and how to deal with one if one can't be avoided-will only help you come tax season.

 

Risk Avoidance
"Self-employed people have always been...audit targets simply because a salaried person has very few deductions, or ways to cheat," says Fred Daily, tax attorney and author of Stand Up To The IRS. With the IRS looking for cheaters, the best way to avoid an audit is, quite naturally, to play fair. Make sure you report all your income, particularly if you run a cash-based business. Dubious deductions will arouse suspicions as well: Be strict about which ones you claim.

 

Also take note that the IRS is often on the lookout for businesses that categorize full-time employees as independent contractors in an effort to avoid payroll taxes. If your business uses freelancers, make sure you draw up individualized contracts for their services and refrain from dictating the terms of where and when they complete their work for you.

 

Speaking of categorization, unincorporated businesses tend to be at greater risk of audits than those that are incorporated. "It's historically true that if your small business is in entity form, your audit likelihood is lower," says Daily. "Small corporations can incorporate and operate as S corps or limited liability corps to reduce their chances of being audited."

 

Be Prepared
Even if you've taken all the necessary precautions to avoid an audit, it never hurts to be prepared. The National Federation of Independent Businesses recommends keeping all records and receipts for at least seven years. "Records are the Achilles' heel of the small business person," says Daily. "Very few-if Poll-Tax-Software.pngthey're successful-have the time or ability to keep records." For help staying organized, Daily recommends using an accounting software program.

 

No one who aims to save every receipt for seven years will be successful. Thankfully, the IRS allows you to reconstruct missing records when necessary. Notations made in a business diary or a calendar from the period in question are acceptable substitutes for actual records and receipts. Also use pre-numbered invoices so the IRS will be able to tell that all transactions are accounted for. Hang on to voided invoices for the same reason.

 

Deductions need to be documented just as carefully as revenue. Home office deductions, for example, are not valid if your dining room doubles as your office. Take a photograph of your (separate) home workspace and keep it on hand in case an auditor challenges the validity of the deduction. Personal vehicles may be used for business, but take great care to record where and why you used them and keep track of exact mileage. If family travels with you on business, none of their expenses may be deducted; if you take a client out for a nice dinner, make sure you save the receipt.

 

Handling an Audit
Should worse come to worst, and you become the subject of an audit, don't panic. The IRS does most of its auditing by mail. Even if you are audited, chances are you won't come face-to-face with an agent. But if you do, the easiest way to handle it may be to employ an accountant or tax attorney. That is, if you think the reward will be worth the investment. "If you're dealing with six or seven figures, you may want to think of hiring a professional," says Daily.

 

Or, if the money you'd save by winning your audit is more or less equal to what you'd pay a pro, you may want to go it alone. "If you're confident," says Daily, "I don't think there's any reason you can't handle the audit yourself." If this is the tack you choose, organize all your records ahead of time. Being forced to sort through a messy stack of documents will only force the agent to take a harder look at each of them. Always be polite and answer the agent truthfully, but know your rights. Reading IRS Publication 1, explaining the Taxpayers' Bill of Rights, will give you a sense of what the agent is allowed to ask for and what you are allowed to withhold. Buying yourself some time never hurts either. Request a postponement if you need more time to get your records in order.

 

Whenever your audit takes place, it is never a good idea to host. Holding the audit at the tax office or your attorney or accountant's office is the smarter practice. Daily explains: "An IRS agent may see something in your office that raises a question in his mind. Secondly, there's nothing to stop an agent from talking to your employees, and you probably don't want your employees to know you're being audited."

 

Employing a professional may be a good way to spare yourself such a visit. An attorney or accountant will know exactly which documents you are required to provide and, perhaps more importantly, the ones you aren't. Once you have supplied your representative with the appropriate materials, you may not even have to be present at the audit. You do have a business to run after all.

 


Article updated on Feb 11, 2011.  Originally published on Mar 3, 2009

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