Small Business Tax Preparation Services as One Piece of the Tax Puzzle
Small business tax preparation services are thought of by many to be a once-a-year contact and process. You give them your books and receipts and they prepare your business tax returns. Another way to think of it is to replace one word: replace “preparation” with “reduction.” This expands the process in a big way, but it can also save you big money.
Successful small business owners are good at growing income and controlling expenses to get money to the bottom line. Those are the activities on which they should spend their time, and this can leave gaps in a tax reduction strategy. Often those gaps are large enough to offset a significant chunk of those hard-earned profits. The other pieces of the tax reduction puzzle should include:
Entity Formation
For the brand new business or one that is growing and may want to make a change, the tax entity structure of the business is an important choice between:
- Sole proprietorship
- Partnership
- S-Corporation
- LLC, Limited Liability Company
- Corporation
Business Cleanup
This is not always necessary but should be next in this group because if it is necessary the business should be cleaned up tax wise before the other pieces can be effective. An accountant or other tax professional should go through the business chart of accounts, bookkeeping system(s), and current tax preparation processes. By thoroughly examining these systems, changes can be made to streamline and improve the business tax reduction strategy.
Bookkeeping
Bookkeeping is the data center that feeds the decision-making, tax planning, and tax preparation pieces of the puzzle. If not on staff, this function should have access to an accountant for advice on proper classification of income and expenses. Improper classification of expenses can get you in trouble.
The IRS computers are checking every expense category and comparing your total to other businesses like yours. If you go over significantly, it will be caught and you may get a letter with questions, or worse, an audit. Just about any out-of-normal entry on your tax return can kick it out for more scrutiny by the IRS.
Bookkeeping collects, organizes, and outputs reports of the numbers and accounting ratios. These ratios are used to determine the health of the business, make growth decisions, and give to lenders when applying for loans.
Tax Planning
Already mentioned is the tax planning piece that uses the data from bookkeeping to consult with owners to make tax related decisions. These can be related to new major purchases, how and when to write them off, and when and how to depreciate assets.
The planning function often also involves the owners’ personal tax situations and retirement plans. Setting up IRS qualified retirement plans can save the business in taxes while building a secure retirement for owners.
Audit Response and Representation
The fully completed tax reduction puzzle would include the services of tax professional authorized to represent you with the IRS should questions arise. To hopefully keep that from happening, the tax professional monitors the other pieces and makes sure that all of them are functioning properly.
So, instead of thinking business tax preparation services, start thinking “business tax reduction services.”