Small Business Taxes For Dummies Cheat Sheet

Tax-wise strategies for your small business and personal success

Starting and operating a small business involves many moving parts and issues. Taxes permeate just about everything that you do. Taxes are too often maddeningly complicated. Most folks’ single biggest “expense” is their tax bill. And for tens of millions of small business owners, U.S. tax laws are a complex and constantly changing web ready to trip them up and siphon off their most precious and valuable business resource — their money!

Handled in the best possible way, you can save yourself tens of thousands — if not hundreds of thousands — of dollars by making informed tax moves. And you can comply with the tax rules and regulations and stay out of trouble with the Internal Revenue Service and your state and local tax authorities.

• Take charge of your income taxes. Find out enough about the tax laws to prepare your own return and handle your own decisions or intelligently hire a quality tax advisor.

• Get and stay organized. Keep your tax and financial documents well organized throughout the year. Doing so saves you many hours when preparing your return and also when making important decisions.

• Understand and use the tax laws to legally reduce your income taxes. If you educate yourself about the tax laws and incentives, you can significantly and permanently reduce the income taxes that you pay over your lifetime.

• Make use of retirement accounts. Be sure that you and your employees take advantage of opportunities to contribute to retirement accounts, which reduces your income tax bill both now and in the years ahead.

• Seek tax help when your situation changes or becomes complicated, or you lack the time to do your taxes well and correctly. Tax advisors can be costly year after year, but a good advisor should save you money and help you with the most difficult issues and returns.

• Learn from your return. Don’t simply file your return in a folder after you complete it. Use the information on it to plan ahead for the next tax year.

• Keep your taxes in perspective. Life has so much more to offer than just working and making money. If you do such a good job with your small business and minimizing your taxes that you gain great wealth, don’t forget to enjoy the fruits of your labors.

Must-ask questions for prospective small business tax advisors

When you believe that your small business tax situation warrants outside help, educate yourself as much as possible before searching for assistance. The more you know, the better able you’ll be to evaluate the competence of someone you may hire. Ask the right questions to find a competent tax practitioner whose skills match your small business tax needs. The following questions are a great place to start.

• What tax services do you offer? Most tax advisors prepare tax returns. Many advisors can help you plan and file other important tax documents throughout the year. Some firms can also assist your small business with bookkeeping and other financial reporting, such as income statements and balance sheets. These services can be useful when your business is in the market for a loan or if you need to give clients or investors detailed information about your company. As a small business owner, you should seek out tax advisors who work with a large number of small businesses. This should comprise a significant portion of their practice.

• What are your particular areas of expertise or focus of your practice? This question is important because you want to find an advisor who is a good match for your situation. For example, if a tax preparer works mainly with people who receive regular paychecks from an employer, the preparer probably has little expertise in helping small business owners best complete the blizzard of paperwork that the IRS requires. Find out what expertise the tax advisor has in handling whatever unusual financial events you’re dealing with this year — or whatever events you expect in future years.

• What other services do you offer? Ideally, you want to work with a professional who is 100 percent focused on taxes. A multitude of problems and conflicts of interest crop up when a person tries to prepare tax returns, sell investments, and appraise real estate all at the same time. That advisor may not be fully competent or current in any of those areas. Avoid tax advisors who sell financial products that pay them a commission — this situation inevitably creates conflicts of interest.

• Who will prepare my return? If your tax advisor has assistants and other employees, make sure that you know what level of involvement these different people will have in the preparation of your return. It isn’t necessarily problematic if a junior-level person does the preliminary tax return preparation that your tax advisor reviews and finalizes. In fact, this procedure can save you money in tax-preparation fees if the firm bills you at a lower hourly rate for a junior-level person. Be wary of firms that charge you a high hourly rate for a senior tax advisor who then delegates most of the work to a junior-level person.

• How aggressive or conservative are you regarding interpreting tax laws? Some tax preparers, unfortunately, view their role as enforcement agents for the IRS. This attitude often is a consequence of one too many seminars put on by local IRS folks, who admonish and sometimes intimidate preparers with threats of audits. On the other hand, some preparers are too aggressive and try tax maneuvers that put their clients on thin ice — subjecting them to additional taxes, penalties, interest, and audits. Assessing how aggressive a tax preparer is can be difficult. Start by asking what percentage of the preparer’s clients gets audited.

• What’s your experience with audits? The IRS audits about 1 percent of all taxpayer returns. Small business owners and more affluent clients can expect a higher audit rate — somewhere in the neighborhood of 2 percent to 4 percent. If a tax preparer proudly claims no audited clients, be wary. Among the possible explanations, any of which should cause you to be uncomfortable in hiring such a preparer: She isn’t telling you the truth, she has prepared few returns, or she’s afraid of taking some legal deductions, so you’ll probably overpay your taxes. Ask the preparer to explain her recent audits, what happened, and why. This explanation sheds light not only on her work with clients but also on her ability to communicate in plain English.

• What qualifies you to be a tax advisor? The more tax and business experience they have, the better. Although gaining credentials takes time and work, these certifications are no guarantee that you get quality, cost-effective tax assistance or that you won’t be overcharged. Generally speaking, more years of experience are better than fewer, but don’t rule out a newer advisor who lacks gray hair or who hasn’t yet slogged through thousands of returns. Intelligence and training can easily make up for less experience.