Business writer Jennifer Hickey recently spoke with Brian J. Germer, CPA, who has been working with small businesses as a principal at Portland, Oregon-based Parsons & Germer, CPAs, LLP for over 12 years. He also contributes articles to PDXCPA: Portland Small Business Tax Blog and is the author of The Pocket Small Business Guide to Taxes.
JH: At what point should a small business owner (SBO) think about hiring a CPA?
BG: While it does depend on the needs and type of business, an initial meeting with a CPA to go over filing requirements, business structure, and the tax essentials is a good idea when you start planning for a new business. Many CPAs will not charge for the initial new client interview appointment. But even if it costs $100 or more for an hour meeting, it is a well worth the money, as mistakes in the setup of a business—especially with regard to the decision on the business entity type—can be very costly down the road.
Granted, a SBO could research much of this information themselves, but you have to look at the amount of time that would take away from building your business. Plus, there is a lot of inaccurate and outdated information on the web. So it is far more effective to engage a professional who has to stay current on the latest rules. In addition, a CPA is going to help separate the tax essentials the SBO needs to understand and those details only professionals really need to worry about. Partnering with a professional can help improve profitability by allowing a SBO to devote more time to managing and growing your business.
Also, when you have multiple owners of a business, you really need an independent party to review the books and complete the tax return. Having transparency with the financial data is important, so that no owner feels cheated. We see problems all the time where one owner or their spouse handles all the finances and there is poor communication with the other owner(s). Having a professional that is trusted by all the owners and explains all the issues is vital.
Lastly, if you have a CPA prepare your business tax return, you should have them prepare your personal return as well. Many younger small business owners with LLCs or S corporations try to save money by using Turbo Tax to prepare their personal returns. But most of the time, the CPA who does your business returns is going to save you much more in taxes and can offer a more comprehensive tax plan. The extra cost is well worth it, especially with how complex K-1s and basis limitation issues are getting.
BG: You always want to consider the size of the firm, who your direct contact will be, and whether it’s a sole ownership or one with several partners. We’ve taken on several [SBOs] that expressed frustration at being shuffled among different contacts with their prior firms. Make sure you have one point of contact and are not re-allocated to lower level staff.
Every CPA firm bills differently, so it is important to understand how they bill so there are no surprises or misunderstandings. Most firms bill by the hour, so SBOs should get the rates and ask who will be preparing the work, as there are often several tiers of billable rates. Some firms charge different rates depending on the type of work done. For example, accounting work is often charged at a much lower rate than consulting. Lastly, the SBO should ask for a range of what the CPA thinks it will cost. While it’s difficult to give exact prices—as it will all depend on how much work needs to be done to prepare the trial balance for the tax return—most CPAs can provide a fairly accurate fee range after briefly reviewing your tax return and accounting data.
It’s important to know if the firm offers writeup work or work with independent bookkeepers that can help your business stay up to date with its accounting, as those adjustments fees can really add up. If your business has a dedicated person in house that handles the accounting, see if the firm offers training.
You also want to find out how the firm approaches tax return work to see if they do any analysis. We take a balance sheet approach, almost like preparing a financial statement. In addition, you want to make sure journal entries are returned. If you ever have to seek a new tax preparer, it will be a mess to clean up without them.
A SBO should also inquire about staff turnover, as that’s usually a telling sign if it’s high, and whether the firm offers representation before the IRS in case of an audit.
JH: Should SBO be looking for an accounting firm that works primarily with businesses in the same industry?
BG: A firm that handles many businesses in a certain industry will usually have a lot more insight and be more effective, as there are industry-specific tax rules, particularly concerning depreciation. Also, when it comes to financial analysis, such firms tend to be knowledgeable about how those businesses can increase their profitability.
JH: What should a SBO have in place before their first visit to a CPA?
BG: If seeking help to structure your business, you should have a good business plan. If an established business, make sure you have filed all the necessary documents with the state. A SBO might want to bring copies of these documents when meeting with a new CPA, as they are typically needed for their permanent file. SBOs should keep a file with all IRS and state registration documents and correspondence for their business. These documents are very important—especially the 2553 and related acceptance letter if an S [corporation] election has been made.
If a sole proprietor, it would be a good idea to have some accounting system in place. Sole proprietorships do not have to report their balance sheet on a tax return, so the chart of accounts is going to be fairly straight-forward. However, LLCs and S corporations are much more complex, so a SBO might want to wait until meeting with a CPA to set up the chart of accounts and customize their accounting system.
Strong organization of receipts, along with a good filing system, whether virtual or hard copy, will help make tax preparation more seamless. And nothing is worse than being audited and not having the necessary supporting documents.
Sometimes first-time clients can be concentrated on deductions when they should be focused on business structure, setting up an accounting system, and how they are going to make a profit. As CPAs, we just see far too many new business owners rack up thousands of dollars in attorney and accounting fees and then their business never gets off the ground. It’s best to start small with a sole proprietorship or an LLC and then worry about deductions or incorporating when you actually have a steady profitable business.
JH: What are some of the other services CPAs offer outside tax preparation?
BG: Tax returns are a necessary evil. Most CPAs also offer business consulting, budgeting, and long-range tax planning to help clients become more profitable. Payroll services is an area where businesses can make a lot of mistakes and wrack up some penalties. A CPA can also help SBOs find as much value out of their accounting systems.
JH: How often should a small business meet with an accountant?
BG: A sole proprietorship that has been handling the accounting themselves all year should definitely meet with a CPA sooner rather than later. Between mid-October and mid-December are the best times. If they wait too long firms are often too busy with year-end tax planning and the holidays to help new clients.
Meeting with a CPA before year-end allows a business owner to make adjustments to estimated tax payments, get the books cleaned up and ready for the tax return preparation, and to take advantage of any last minute tax strategies.
When a CPA prepares your personal tax return, they should provide you with estimated tax payment coupons based on the your tax liability from the return, less any anticipated withholdings. If your adjusted gross income was above $150,000, the CPA will base the federal estimates on 110 percent of the tax liability amount. This amount is the “safe harbor” amount that protects you against underpayment penalties. Most CPAs can also base your estimated tax payments on a projection with their tax software, and estimated changes or circumstances can be factored in. If you owed less than $1,000 on your tax return, the estimates are not required and your CPA may provide blank coupons or none at all depending on your circumstances.
Most clients may only need to discuss estimates once a year with their CPA when their return is being completed. However, SBOs with growing businesses tend to have brief meetings or phone conversations with their CPA before each [quarterly] estimate is due. It is rare for changes to be made to second-quarter estimates, but usually I run new projections for the estimates due Sept. 15 and Jan. 15. For more stable businesses, we may only meet before year-end to see if the fourth-quarter estimate needs to be adjusted and to estimate net taxable income. You only have to pay estimates to cover 100 percent of the prior year tax (110 percent if adjusted gross income [AGI] is over $150,000); if you owe additional amounts above the safe harbor, you can choose to increase your final estimate or wait to pay the balance on April 15.
Keep in mind that the first-quarter estimate for the next year is also due April 15, so it can be a big double whammy if you owe a large balance for the prior year and have to pay a higher estimate for the first quarter. This is where many business owners, who did not meet at year-end, run into cash flow problems and have to borrow. In states with income tax, it is often a good tax strategy to pay the fourth-quarter state estimate before year-end, as long as the taxpayer is not subject to alternative minimum tax.
Disclaimer: The opinions expressed are solely those of the interviewee. As always, you should seek the advice of a CPA, financial planner, or other qualified professional for guidance specific to your situation.