How Bookkeeping Relates to Tax Planning
Brought to you by your local Chandler Arizona CPA, Chandler Bookkeeper, and Chandler Tax Preparer
Our last article focused on how bookkeeping saves you money and time. But how does bookkeeping tie into your tax planning and tax preparation? Do accurate books really mean something when it comes to my taxes? The answer is YES! Our friend Joseph Anthony from Microsoft Business advises that your tax preparer and bookkeeper SHOULD be working together! Read on to see his reasons why.
"It's tempting for small-business owners to want to handle their own bookkeeping and tax preparation. After all, there is a lot of excellent accounting software out there to help them.
And many business startups begin with a few partners who do everything, hiring outside contractors only when absolutely necessary.
But just because you can do something doesn't mean you should. There are indirect costs involved with everything that falls into the do-it-yourself category. These include the time you spend doing it yourself instead of tending to other business matters, and the possible missed opportunities that come with not having something handled by a full-time expert in that task.
At some point early on, most small businesses need to hand off their tax preparation, and at least some of their bookkeeping, to professionals.
Here's why, and here are three things to keep in mind when hiring this outside help.
1. Good tax professionals are more than just preparers.Full disclosure here: I'm a tax pro myself. Besides being a tax preparer, a good tax pro should be able to advise you on:While people tend to think of a tax pro as someone to interact with during tax season, you'll get the most out of a tax pro if you're able to talk with him about planning issues outside the crush of the preparation season. For example, many small businesses can benefit from setting up SIMPLE (Savings Incentive Match Plan for Employees) retirement plans for their owners and employees. But if you wait until the end of the year to talk about that, you've missed the boat—SIMPLE plans generally have to be established by Oct. 1 for the year in which they take effect. Similarly, issues such as how much to spend on new business assets, whether to lease or purchase vehicles and other equipment, and what your reasonable compensation should be as owner of a business, can and should be reviewed and discussed during the year. A good tax pro is going to be a helpful planner as well as a preparer.You should look for tax pros such as certified public accountants (CPAs) and enrolled agents (EAs) to be prescriptive in their dealings with you—not only reviewing what is going on in your business but also making suggestions about ways you might reduce your taxes.Ideally, your tax pro is going to look not just at the business's bottom line, but how it's getting to that bottom line and what the prospects might be for the future.
2. Keeping good books is a business necessity (and, in these times, could keep you out of jail).You also need a good bookkeeper, either someone on your staff or an outside pro. The key question is: Do you have someone within your staff, aside from you, who has the skills and can handle the demands of the job? Someone who understands such matters as double-entry bookkeeping and how to make journal entries? If not, look outside.A bookkeeper is going to be focused on properly recording the day-to-day financial activities of your business. This may sound simpler than the review, planning, and tax-return preparation activities that your tax pro engages in.But without good bookkeeping, and good books, tax pros can't properly do their job. In fact, many tax pros won't even take on a business client if the client cannot produce an accurate balance sheet and is unwilling to hire someone who will get his books in proper order.Good bookkeepers will record all your receipts and expenses, track accounts receivable and payable, and in the course of entering all your financial transactions also create a balance sheet for the business. Some bookkeepers also handle payroll services for their clients; others prefer to work with dedicated payroll companies. Depending on the size of the business, a bookkeeper may work with a client a couple of days a week, weekly, or even just once a month.
3. Your bookkeeper and tax preparer need to work together on your behalf.There's definitely some overlap between the two. A professional tax preparer such as a CPA or enrolled agent may also offer bookkeeping services. However, most tax practices that offer bookkeeping will turn that portion of your needs over to a staffer who is primarily a bookkeeper. That makes sense—you shouldn't be paying tax pro rates of $125 or $175 an hour for bookkeeping services that can be had for $35 or $50 an hour.Tax pros and bookkeepers should and will work together for the benefit of their clients. For example, a bookkeeper won't necessarily know how a company's assets are being written off or depreciated. The tax pro is responsible for providing that information so that proper depreciation adjustments can be made to the company's books.Sometimes, small businesses will handle their own bookkeeping while retaining a tax pro to review the books annually as part of overall tax preparation and planning. Again, this can work if the business has someone with the skills and the time to devote to this important task. Otherwise, get an outside pro.Bookkeepers and tax pros serve two purposes for small-business owners: They help keep the business out of trouble by accurately recording and reporting the business's financial information, and they allow the business owner to focus on his or her primary job—running the business—while they focus on their financial specialties."