A CPA has demonstrated professional competence by passing a rigorous examination and meeting high standards of education. In addition, they must meet strict continuing education requirements, undergo peer review, and adhere to a stringent set of ethical standards.
CPAs are authorized to represent taxpayers in an IRS or State audit, as are attorneys and other professionals known as enrolled agents (EA). An EA is an individual who has demonstrated technical competence in the field of taxation and is the only taxpayer representative who receives their right to practice from the U.S. government. An accountant can only represent a taxpayer before the IRS if he or she is an EA.
The IRS estimates that it can take 28 ½ hours to research tax law, organize your records, and complete a standard 1040 return with three common schedules. Tax law is constantly changing, so it is important that you are educated about these changes so you correctly fill out your forms. Being technologically savvy is also important as tax preparation software can help eliminate errors, both mathematical and technical. If you’re not comfortable with using this type of software, you may want to contact a CPA.
If you’re a salaried employee who takes the standard deduction, your return is likely to be simple. However, if you’ve encountered a major life change, such as marriage or divorce, or own a vacation home or rental property, your tax situation may be more complicated. Self-employed individuals and small business owners are more likely to be audited by the IRS, and working with a CPA will help lessen that risk. In addition, if you have a high income, and live in a state with high-income taxes, you could be subjected to the Alternative Minimum Tax (AMT). The AMT, which eliminates many itemized deductions and was created to ensure that the wealthy pay their share of taxes, is now affecting more middle-class taxpayers. If you think this might affect you, consult a CPA.
It is imperative that you contact a CPA. You will need to discuss the organization of your company for tax purposes as well as numerous other issues relating to operations, not the least of which will be setting your target pricing and gross profit margins. Don’t wait until the end of the year-end to have this discussion. You could be making decisions without the proper advice, and that could wind up hurting you financially or legally.
Can an accountant help a new business owner? Remember, the issue to be addressed is “What level of professional do I need at any particular point in time?” An accountant has some advantages. Accountants are unlicensed, this translates into lesser fees. This also translates into a lesser level of professional service. Routine accounting work is appropriate for an accountant. The IRS restricts accountants’ ability to represent taxpayers. CPAs and accountants often work in tandem. Accountants will perform the accounting work to the point where a CPA can address the more complex issues. Having accountants do pre-CPA level work saves money.
You need a CPA when: the IRS wants you for any reason, your professional needs are complicated, bankers or whoever needs financial statements, and when your accountant does not understand and/or cannot explain the issues. Non-CPA prepared business reports are not considered to be financial statements and have limited third-party acceptance. Most importantly you need a CPA BEFORE the circumstances above occur. Establish a relationship with a CPA early in your business formation, or now if you are already a business, so that he can give you guidance and keep you away from the pitfalls.
Yes. The more you understand about your needs, the better job we can do together of matching our services to those needs. Your first step is to decide what you want from us. Different CPA firms offer different levels of experience and provide different services. Prior to meeting with any CPA, EA or Accountant you are considering, you should review your present and future financial goals and needs. Some general questions you should ask yourself might be:
- Will you need help with personal financial issues, individual or corporate tax returns, retirement, estate, or college planning?
- Do you need financial statements prepared for your business? Must those statements be compiled or reviewed? Will you need special financial reports for government agencies?
- How comfortable are you in your own ability (or in the case of a business, your staff’s ability) to handle financial and operational needs? Do you want to do as much as possible in-house, or are you considering out-sourcing some of your bookkeeping, accounting, or CFO functions?
- Do you need help preparing a business plan or a personal or business loan application?
- Will your business need other services such as technology planning, strategic planning, process consulting, or costs analysis?
All business records, especially sales and payroll must be kept for seven years. The Social Security Administration requires discrepancy be resolved anytime within this seven-year window. The IRS and the states will audit within a five-year window. Keep all federal, state, and local returns indefinitely and all supporting documents for seven (7) years. Real Estate and stock market transactions records should be kept. Tax consequences of a transaction can depend on events that happened years earlier. Taxpayers often keep files in a single, easily accessible location.
Simply stated, the Tax Courts prescribed a standard for determining that a bookkeeping system is appropriate: “Does the bookkeeping provide sufficient data for the taxpayer to make informed business decisions”. An informed business decision is designed to increase profits, reduce losses, and evaluate the overall performance. Here is what the IRS says: You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records.
However, the business you are in affects the type of records you need to keep for federal tax purposes. Your record-keeping system should also include a summary of your business transactions. This summary is ordinarily made in your business books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook is the main source for entries in the business books.
Can an accountant help a new business owner? Remember, the issue to be addressed is “What level of professional do I need at any particular point in time?” An accountant has some advantages. Accountants are unlicensed, this translates into lesser fees. This also translates into a lesser level of professional service. Routine accounting work is appropriate for an accountant. The IRS restricts accountants’ ability to represent taxpayers. CPAs and accountants often work in tandem. Accountants will perform the accounting work to the point where a CPA can address the more complex issues. Having accountants do pre-CPA level work saves money.
You need a CPA when: the IRS wants you for any reason, your professional needs are complicated, bankers or whoever needs financial statements, and when your accountant does not understand and/or cannot explain the issues. Non-CPA prepared business reports are not considered to be financial statements and have limited third-party acceptance. Most importantly you need a CPA BEFORE the circumstances above occur. Establish a relationship with a CPA early in your business formation, or now if you are already a business, so that he can give you guidance and keep you away from the pitfalls.
Real Estate is land and its permanently attached buildings, structures, and land improvements Tangible assets are man-made, physical movable objects. The asset’s value lies in its physical being. Tangible assets are something that you can touch, which was transported to its present location and not permanently attached to the real estate. Intangible assets are man-created, intellectual property. The asset’s value lies in what it can do. Examples are patents, copyrights, and software.
The concept of “pass-through entity’s attribution” stems from the fact that this entity’s ownership can be attributed to another entity. The IRS Code prescribes that pass-through entities’ income belongs to that other entity. Pass-through entities earn the income but are not responsible to pay the tax related to this income. In effect, the pass-through entity’s income and related tax liability passes through to the entity having ownership. Examples are estates, LLCs, partnerships, S Corporations, and trusts.
The concept of “pass-through entity’s attribution” stems from the fact that this entity’s ownership can be attributed to another entity. The IRS Code prescribes that pass-through entities’ income belongs to that other entity. A pass-through entity earns the income but is not responsible to pay the tax related to this income. In effect, the pass-through entity’s income and related tax liability pass through to the entity having ownership. Examples are estates, LLCs, partnerships, S Corporations, and trusts.
First, a regular-Corporation pays federal and state income taxes on its taxable income. Next, the shareholder pays income tax on their dividends. Since shareholders feel that it takes corporate taxable income to pay dividends, taxable income and dividend income are one and the same. It appears to shareholders that the same income is taxed twice. This is the reason why shareholders feel that this is a case of double taxation. Avoidance: The IRS Code prescribes that pass-through entities’ taxable income and related tax liability belongs to the taxable entity that has ownership. Therefore, a pass-through entity’s taxable income and liability pass through to its owners. Pass-through entities pay no income tax. The owner pays income tax only once. Examples of pass-through entities are LLCs, partnerships, S Corporations, and sole-proprietorships.
To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:
- Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm’s collection policies are not aggressive.
- Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services.
- Manipulating the price of products: Many small businesses fail to make a profit because they erroneously price their products or services. Before setting your prices, you must understand your product’s market, distribution costs, and competition. Monitor all factors that affect pricing on a regular basis and adjust as necessary.
- Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.
- Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm’s cash reserves.
Transferring the family business requires the family to make a determined effort to do the following:
- Create a business strategic plan.
- Create a family strategic plan.
- Prepare an Estate Plan.
- Prepare a Succession Plan, including arranging for successor training and setting a retirement date.
These are the four plans that make up the transition process. By implementing them, you will virtually ensure the successful transfer of your business within the family hierarchy.
The family strategic plan establishes policies for the family’s role in the business and is needed to maintain a healthy, viable business. For example, it should include the creed or mission statement that spells out your family’s values and basic policies for the business, and it may include an entry and exit policy that outlines the criteria for working in the business. The plan should consider which family members desire to have a part in the management of the business versus those who desire a more passive role.
An estate plan is a written document that outlines the disposal of one’s estate and includes such things as a will, trust, power of attorney, and a living will. An estate plan is critical for the family and the business because, without it, you will pay higher estate taxes than necessary, allocating less of the estate to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family business is transferred in a tax-effective manner.
Any professional you choose should not only have the technical knowledge required but should also treat you with respect. Does your CPA and advisor take time to listen to you? Does your CPA and advisor return your calls in a timely manner? Do you feel comfortable asking your CPA and advisor a question? When you need a professional in the region who will make you their top priority, Call Michael J. Berger and Co., CPA’s LLP Today!
A succession plan identifies key individuals who will be groomed to take over the business when the time comes. It also outlines how succession will occur and how to know when the successor is ready. Having a succession plan in place goes a long way toward easing the founding or current generation’s concerns about transferring the firm.