How would you feel about getting operated on by your friend, who isn’t a doctor, but had the same surgery last year? Not a typical course of action for most people, yet I hear similar rationalizations about CPAs and business advisers every day.
“I can do my own taxes, it’s never been a problem before.”
“My buddy John’s been in business for years, he knows all the tricks, why should I pay you for advice?”
The short answer is, when it comes to life-changing consequences, we normally turn to experts, so why would you run a business without asking an expert for help or advice? Your livelihood hangs in the balance!
There are so many horror stories of business owners following bad advice from their peers or the internet (oh the irony!). The crux of the problem is this: If you ask a fellow business owner, they will give you their opinion, limited by their personal experience. If you ask a qualified adviser, they will give you the entire range of options available to you, and help you pick out the best solution for your individual situation.
There’s nothing wrong with getting a variety of opinions in order to help you make a decision, but always be sure that you know all of your options as outlined by an adviser who has only your best interests in mind.
So let’s assume that you agree with all this, but your main concern is the cost. After all, there’s plenty of free advice out there, why pay for it?
Because, believe it or not, hiring a CPA will likely save you more money in the long term than it will cost you in the short term.
One of your first questions when meeting with an adviser should not be “how much will it cost?” but “how much can you save me?”
The reaction to this question will not only give you useful insight into your potential adviser’s services, but will also incentivize him or her to actively seek cost and tax saving measures in order to prove their fees are worth it. Which they should be doing anyway, but it never hurts to remind them.
So where are some areas where you can save money with the help of a CPA?
- correct entity choice
- optimized depreciation
- tax credits
- tax deductions
- hiring decisions
- products and pricing
- questionable situations
- preferred service offerings
- connection to their clients
I will explore the first four now, find out more about the others here.
CPAs and Tax Savings
There are a ton of ways that business owners can save money on their taxes.
However, given the complexity and ever-changing nature of the tax code, it is extremely unlikely that the average person would know enough to take full advantage of them. Unfortunately, even the average tax preparer doesn’t know enough about them.
A qualified CPA will know enough to ask the right questions, even if they have to do some research before laying out all the options.
Some areas require various decisions to be made in order to construct a tax-saving plan tailored to your business. The most common of these areas are:
There are major tax differences depending on whether you file as an S-corporation, a C-corporation, a partnership or a Sole proprietor.
Any business has at least two of these options to choose from, are you confident that you have made the right choice? Note that LLC is not one of the options, because you don’t file taxes “as an LLC”.
How you depreciate your major purchases can have a huge effect on your taxable income.
A large part of the tax code that relates to this, Section 179, changes every year. There is also bonus and regular depreciation, and what qualifies as a “major purchase” anyway? What’s the difference between a repair and an improvement and why does it matter? What is cost segregation?
The cost, life, usage, and even size of the purchase all play a role, as does your income and your projected future income.
New tax credits are voted into law all the time, and old ones expire. Some, like the R&D credit, are so complex that it’s unlikely you could even calculate it without professional help. Others have various limitations and specific rules.
The hybrid and electric vehicle credit is limited to a certain number of vehicles sold, and then is no longer available. Educational credits are limited by your income, which typically fluctuates a lot for business owners. Still others are negated if you take certain deductions or other credits.
Plus, each state has their own list of special credits, which you may have to apply for ahead of time, or reach certain milestones during the year in order to qualify for.
Missed deductions equal higher taxable income, but it is often difficult to know for sure what you can deduct as a business expense.
In some areas of the tax code, the rules are very vague, and there are a lot of people who will tell you they deduct something that they really shouldn’t, whether it be intentional or not. Do you use your personal vehicle or a portion of your home for business? Often all the deductions available for this are not taken.
Certain deductions are also limited by a percentage or your income and others can only be taken if you are a certain type of entity. If you are in particular industries, you may even be eligible for special deductions like the Domestic Production Activities Deduction.
These items are just the beginning!
There’s a saying: “You don’t know what you don’t know”, meaning you might not even know enough to ask the right questions regarding your business. This is where a CPA is most valuable, because we are paid to stay up to date on everything you might run across in your business.
If you hear something from another business owner that doesn’t quite make sense, ask your adviser about it! Their number one priority should be making you more successful, and if it isn’t, you might need to find a new one.
Do you have a CPA for your business? If not, what is holding you back? Let me know in the comments below or on Facebook!