Come tax time many self-employed individuals who donate their business time and services wonder if that time is deductable as a charitable donation. Unfortunately, no, a donation of your time is not a tax deduction. Self-employed individuals such as lawyers and therapists often donation their services to charitable organizations and think that each hour they work for the organization should be deductable as a charitable contribution based on their normal hourly billing rate but this is not allowed under IRS regulations.
For a charitable contribution to be deductable on your tax return it must be a contribution of money or goods to a qualified charitable organization. If you donate goods to a qualified organization then you can generally deduct the fair market value of those goods at the time of donation. Charitable donations are usually limited to 50% of your adjusted gross income and are reported on Schedule A of your personal tax return.
Contributions that do not qualify for tax purposes are contributions from which you benefit, contributions to specific individuals, contributions to non-qualified organizations, the value of your time or services, your personal expenses, appraisal fees, certain contributions to donor advised funds, and certain contributions of partial interests in property.
If you have questions on whether or not a specific contribution you have made or are thinking of making qualifies for tax purposes it is always a good idea to consult your tax advisor.
There’s no standard rule regarding the best time to hire a CPA for your business. Rather, it more depends on when you’ll most be able to benefit from a professional accountant. If you own a small business, it’s likely that you handle nearly all the day-to-day operations on your own. But as you grow, your ability to do it all efficiently will lessen. No matter what stage of your business’ development you find yourself in, it may be prudent to ask yourself these questions:
How comfortable would you feel about your records if your were audited?
If the thought of the IRS paying you a visit gives you a miniature heart attack, you may be able to find some comfort in hiring a CPA. First of all, compliant bookkeeping will reduce your chances of being audited and having an accountable professional will help you retrace your footsteps in a worst case scenario.
Are you spending too much time with bookkeeping?
Businesses grow when the principles are out there interfacing with customers, developing products and improving the core competencies. If all of your time is consumed with paperwork, payroll and bookkeeping, then it might be a good idea to hire someone else to handle this relatively mundane aspect of the business.
Are you losing money and you don’t know why?
Having a clear financial picture of your company is key to improving your business. An accountant can give you an accurate snapshot of your cashflow and areas that need attention so you know where to focus your energies.
Are you thinking of restructuring?
Being a sole proprietor works for some businesses, but as you grow, you might want to think about incorporating. Choosing the right structure for your business can save you lots of time and money. A CPA can advise you on what’s best for you.
The bottom-line is that you should hire a CPA if you aren’t completely confident and comfortable with the numbers side of your business. This is a reality for many small business owners, since most entrepreneurs get into the business by following their innovation or passion and give little thought to bookkeeping. But accounting practices can make or break a business, no matter how ingenious your product is.
A tax preparation professional, such as a CPA, may be exponentially more qualified and knowledgeable when it comes to navigating the tax code, but no matter how good they are, they aren’t magicians. In order to get the most mileage from your relationship with a CPA, it’s essential to have your bookkeeping organized and complete before you begin preparing your tax return. Follow these five tips to help the tax filing process along when April rolls around:1. Implement an efficient, organized bookkeeping system from the beginning.
April 14th is a bit late in the game to start getting organized. By coming up with a day-to-day system for organizing your transactions and finances from the beginning, it’ll make for a much less hectic time down the road. Instead of shuffling through stacks and stacks of papers, keep a spreadsheet or folder that you can simply forward along to your accountant when it’s needed.
2. Save everything.
After ringing in the New Year, financial institutions will start mailing you pertinent forms to your tax filing. Keep these safe in a specific folder or process them right away. Likewise, plan ahead throughout the year and keep anything that might be essential when it comes to filing your taxes (i.e. receipts for charitable donations, insurance papers). If you lose these important documents, it’ll take a lot of legwork to get them replaced. Save yourself the trouble by hanging on to everything that might be needed for taxes.
3. Back it up.
Fires, break-ins, hard drive crashes - these can all spell disaster for your bookkeeping if you don’t have a back up system. Keep hard copies and paper records as well as digital backups of all your important documents and be sure to backup your master spreadsheets periodically.
4. Create a clear audit trail.
Set up a system for monitoring daily, monthly, quarterly, and yearly transactions: for example, decide what financial processes you will use like balance sheets, bank statements, monthly profit and loss statements, and so on. That way, if there are ever any discrepancies, you can quickly go through various records to finding the missing figures.
5. Set up a system for calculating income and expenses.
For example, what criteria will you use to work out gross and net profit, and how will you differentiate fixed costs like rent, electricity, and salary from variable costs like advertising, commissions, and petty cash? To answer questions like these, you may want to talk to a CPA ahead of time so everything will be in order when it comes to file.
Essentially, then, you want to create not only a balance sheet as part of your bookkeeping but also systems for storage and retrieval of financial information. By developing a smooth bookkeeping system you not only make it easy for the tax preparer but you also avoid getting into trouble with the IRS for accidentally losing information that could be misconstrued as an act of or fraudulent bookkeeping for the purpose of tax evasion. Bookkeeping is more than a shoebox stuffed with receipts and miscellaneous records.
There are two accepted methods of accounting for federal tax purposes - Accrual and Cash. The main difference between these two methods is the timing of transactions. As a small business owner you need to be aware of the differences, the advantages and the disadvantages of each method before choosing one for your business.
Most small business owners are able to choose which method they want to use for their business for tax purposes. In some cases though, you have no choice but to you the accrual method. This is when:
1. Your sales are more than $5 million per year or
2. Your business stocks an inventory of items that you will sell to the public and your gross receipts are over $1 million per year
The cash method of accounting is the most commonly used method for small businesses. When using the cash method you do not recognize income until the cash is actually received. You also do not recognize expenes until the cash is actually paid out.
The accrual method of accounting is different from the cash method in that you recognize income when a sale occurs, even if you have not yet received the cash from it. You also count expenses when you receive the goods or services, even if you have not paid for them yet. With the accrual method you do not have to wait until you receive or pay money to show the income and expenses
The advantage of the accrual method is that it more accurately shows you a picture of how your business is doing because it shows the ebb and flow of income and debts. The disadvantage of the accrual method is that it can lead to cash flow problems because it does not always show you an accurate picture of cash on hand. You also have to keep accounts payable and accounts receivable records which leads to recording more transcations.
The advatages of the cash method are that it gives you a better picture of your current cash on hand and it is also easier to maintain when it comes to bookkeeping. The disadvantage is that it can give you a misleading picture of longer-term profitablity.
When you are a new business owner it is important to discuss with your tax preparer which method of account is best for you and your business. Accural vs. cash method of account can be an important decision that you must make when first starting your business.
Certified Public Accountant (CPA) designation signifies that your accountant has undergone specialized training and passed rigorous education and examination requirements. Even so, not all CPAs are equal. When choosing a CPA, be sure to look beyond the acronyms and find out about his or her education, experience, expertise, and whether or not they meet your needs. To help you make this judgment call, begin by asking these five questions:
1. Have you met all the requirements to be considered a Certified Public Accountant in my state?
The first step when vetting a CPA is to determine whether or not they are a genuine CPA in your state. You can actually answer this question on your own via your state’s professional licenses website. You can find a list of CPA institutions by state at aicpa.org. Make sure your CPA is up to date with their requirements and are not suspended or inactive.
2. How many years experience have you had as a CPA?
The road to becoming a CPA is marked by years of education and training, so even a freshly minted CPA won’t be completely inexperienced. But it’s still best to choose a CPA who has considerable hands-on experience as a practicing CPA.
3. What is your financial expertise in?
There are a number of CPA specializations, including Assurance and Attestation, Corporate Financing, Corporate Governance, Estate Planning, Financial Accounting, Financial Analysis, Financial Planning, Forensic Accounting, Income Tax, Information Technology in accounting and auditing, Management Consulting, Performance Consulting, Tax Preparation and Planning, or Venture Capitalism. Make sure your CPA is well-versed in the area where you need the most help.
4. I need (state the requirements of your business) and I’m wondering if you have the necessary knowledge and experience to help me with this type of accounting?
Chances are, you know what part of your tax return is the most complicated and potentially problematic. Be up front about this issue and make sure they can address it with confidence.
5. What are your hours and availability? What kind of contingency is there if I am audited?
Lastly, you’ll want to make sure that your CPA firm will be there for you when you need them. Make sure they can meet with you when you are available (i.e. do they only operate during business hours when you are also at work? Are lunch meeting feasible?). You’ll also want to be sure that they’ll be accountable (no pun intended) in the case that you are audited. Otherwise, you’ll have to reverse engineer their work in order to answer all of the IRS’ questions.
These five questions should just get you started. Choose your CPA carefully and ensure that you feel comfortable and confident in their experience and expertise.
U.S. tax law is notoriously complicated both to laymen and those who work in finance but may not specialize in tax preparation. Because of this, it’s often worth it to enlist the help of a tax specialist who has an extensive breadth of knowledge regarding the tax code and experience handling different taxation situations.There are few basic options which tax filers in the U.S. choose when preparing their yearly tax returns: filing taxes on their own electronically with the help of tax preparation software, hiring a licensed professional such as a certified public accountant (CPA), or walking into a storefront tax preparation business. All three prepare taxes for a fee in return for expert consultation. And, of course, the higher the expertise needed, the higher the fees.In this case, purchasing tax preparation software is often the most affordable route. But in the end, it’s comparable to filing your own taxes. Because of this, many filers feel more confident having their taxes prepared by a real live person (other than themselves). To this end, many filers wonder whether it is better to get a CPA or hire a service like H&R Block. The answer is (as is typical with financial matters): “It depends.”
A CPA is someone who has had a rigorous education and has been trained to meet high professional standards and follow a strict code of ethics to get licensed by the American Institute of Certified Public Accountants. CPAs have extensive knowledge and years of experience with tax law, including state tax law (for example, a Seattle- or Bellevue-based CPA is required to pass examinations pertinent to Washington state tax codes).
On the other hand, someone who represents a business like H&R Block has only been trained for a few weeks on how to process different kinds of tax information. They offer their employees short, intense training courses to orient them on the process for filing taxes for general purposes. While most of these tax preparation firms tend to hire people with financial backgrounds, you’ll very rarely find someone here who is as experienced and knowledgeable as a CPA.
Bottom-line: with a CPA, you pay more but you’ll get more. But if you have a complex tax situation, a CPA may be able to pay for him or herself by finding you savings that an H&R Block employee might be unaware of. But on the flip side, if you have a very straightforward tax return, a CPA may be overkill. Your best bet is to describe your situation over the phone to both a CPA and a storefront tax preparation business and get a rough estimate before you decide.
A Certified Public Accountant (CPA) typically bases their rates at least partially on an hourly basis. Because of this, it’s in your best interest to be organized and efficient with your paperwork so they don’t have to spend a lot of time requesting pertinent documents and information from you. To help speed along the process and save yourself some money, make sure your bring all of the following to your first meeting with your CPA.A completed tax organizer - This is a form that has all your necessary basic information for your account. Some CPAs will have their own form for you to fill out. Otherwise, you can find basic tax organizers online.
Last Year’s Tax Return - This is essential for new clients. Always keep your returns on file so your tax preparer has a good starting point.
Form W-2 - Ask your employer for this if you haven’t received it yet.
Form 1099 - You’ll receive this from your banks and investment accounts or from anyone who’s retained you as an independent contractor.
Form 1098 - If you own a home or property, your mortgage company will forward you this information.
Brokerage statements - Bring these in for each of your stock, bond or investment accounts for the year.
Closing statements - If you bought, sold or refinanced real estate in the tax year, bring your closing documents.
Any notices from the IRS or other taxing authorities - If you received any letters about your taxes or tax situation from your city, county, state or the IRS, bring these with.
Schedule K-1 - This form is for income or loss form S-corporations, partnerships and other legal entities.
State specific forms - Some states require additional forms or documentations for exemptions and deductions. For example, Seattle and Bellevue businesses have to pay Business & Occupation (B&O) taxes according to Washington State tax law.
Aside from these documents, you’ll want to bring in any other supporting documents. That includes schedules, checkbooks, receipts for charitable donations and business purchases, information regarding deductible expenses and any documents relating to self-employment income or other miscellaneous income.
Being organized when it comes to working with a CPA pays off in many ways. You’ll save time and you’ll ensure that your tax return is filed in a correct and timely fashion, which decreases your chances of paying penalties or being audited. Ask your CPA what you should bring to your first meeting and get started off on the right foot. John Huddleston Seattle CPA
With the proliferation of tax preparation storefronts that are here today and gone tomorrow, the prevalence of tax return scams or unscrupulous tax filing practices is on the rise. While the government is attempting to buckle down on tax scammers, it’s incumbent upon you to sort out the bad apples from the reputable tax professionals. To help you spot the phonies, take note of these warning signs:
The tax preparer won’t sign your return.
There’s a designated area on your tax return for your preparer to sign. No matter what, you will be responsible to pay fees and penalties if there are mistakes, so there’s no reason a tax prepare should refuse to sign the return. By doing so, they put their stamp of approval on it. By refusing to do so, it’s clear that they have something to hide.
The tax preparer promises you a specific amount on your return.
If someone says they can guarantee you X amount of dollars on your return, they are blowing smoke. No one can know for sure how much you will receive until they’ve done all of your paperwork.
The tax professional bases the fee on the amount of your refund.
This is also suspect, since it may motivate the tax preparer to artificially inflate your return amount. Tax professionals should charge according to the complexity of your return, not on how much you receive from the IRS.
The tax accounting firm doesn’t have a history.
The IRS may initiate an audit up to 7 years after you file your return. If that happens, you’re going to want to talk to your tax preparer - make sure they’ll still be in business if you have questions. Watch out for accounting firms that set up temporary store fronts or just suddenly appeared right around tax time.One last bit of advice: You may be better off choosing a CPA. Aside from being the best fit for complex tax situations, you can easily verify a CPA’s license online. For example, you can check the status of a Bellevue or Seattle CPA’s license at the Washington State Board of Accountancy website with just a few clicks. It’s illegal to call yourself a CPA if you aren’t one, and if they don’t show up in your state’s database, that’s a deal breaker.
Small businesses have a tendency to try to keep everything in-house. Most business owners agree that a tax professional is essential to running a profitable business but are less convinced that it’s worth it to outsource bookkeeping. But as your operations grow, so too does the benefits of having a scalable, efficient bookkeeping system in place. Here are a few reasons why:
Tax Pros Can Offer Year Round Advice
Most tax filers treat CPAs and other tax professionals as mere seasonal contractors. But in reality, there are actions you can take throughout the year that can save you money on taxes and make filing your annual return exponentially easier. A good CPA does more than just file your return - they are able to offer advice on ways you can save money and stay compliant year round.
Bookkeeping Can Make or Break Your Business
Keeping sloppy books doesn’t just hobble your day-to-day operations - it could even wind you up in jail. Bookkeepers make it their full time job to ensure that your business is accountable and compliant. Some tax professionals won’t even take on your account if you don’t have organized books and records and if your business is audited, your life will be much easier if you can retrace your steps. Some CPAs will be able to handle your taxes as well as bookkeeping, payroll and other accounting, which lets you focus on your core competencies.
Bookkeepers and Tax Professionals Should Work Together
When it comes to filing your taxes, the person who knows your books and accounts inside out needs to sit across the table from your accountant and explain the important details and answer all the financial questions. If this person is you, it means you’re going to have to devote your valuable time to meeting with your CPA. When you let your CPA handle your books or let them setup a custom bookkeeping system for you, this streamlines the process immensely, saving you time and money.There’s lots of overlap between bookkeeping and tax preparation. By getting both bases covered, you can focus your energy and expertise towards improving your business with the peace of mind that all of your financial ducks are in a row.
The services of a CPA are invaluable. Not only can they get you bigger tax returns and save you time and hassle, but they can also keep you out of hot water with the IRS and the state tax department. Many tax filers see CPA fees as an investment, since in the end, a CPAs services may pay for themselves. Nevertheless, you can get even more from your relationship with a CPA by being prepared and being a good client. Follow these money saving tips when hiring a CPA.Come Prepared
CPAs often based their fees on an hourly rate and a “hassle factor.” If you show up to your first meeting with a box full of loose papers and no idea how much you even made that year, it’s going to take considerable time and effort to even get to the beginning. You can save you and your CPA hours of hassle by getting your records in order before you meet, which translates into a lower overall cost for his or her services.
Get in Touch Early
Things get crazy for tax professionals come March and April. Of course, all CPAs will do their due diligence with every return, but if you want extra attention and a less harried pace, don’t get in touch right in the middle of crunch time. Instead, pick up the phone around mid-February so nobody feels rushed.
Rush Accounts Aren’t Ideal
You may think that CPAs prefer doing rush jobs because they get to tack on a premium for getting the job done quick. But in reality, most CPAs would rather take their time with your account to make sure everything is in order and may even refer you to another accountant rather than taking you on last minute.
Don’t Hesitate to Get an Extension
Instead of paying the rush fee, you might be better off filing an extension. Contrary to popular belief, filing an extension doesn’t necessarily flag you for an audit. In fact, by taking more time to go over your records and make sure everything is in order, you actually decrease your chances of getting audited.
As with any professional, being a good client means you get better value from the relationship. Follow these tips and you’ll pay less in fees and get more benefits from your CPA.
