How to help your accountant help you
Why utilize an accountant? The obvious answer is creating monthly financial statements and preparing year-end tax returns. There are other reasons. The first would be to minimize the amount of taxes paid. The reason would be to delay paying taxes for as long as possible. And for a few fortunate businesses, the accountant could show them how to make more money.
No one wants to pay more in taxes than they absolutely have to. An accountant should be making sure that your business is taking every deduction possible. Part of this would be to council the business owner with regard to the proper legal entity of the business. It may be a sole proprietorship, partnership, ‘Sub S’ corporation, ‘LLC’ – Limited Liability Corporation, or a ‘C’ corporation.
The second reason of delaying taxes does not refer to delaying by months by filing tax extensions. Instead we are referring to legally delaying taxes from one year to another by the way we report revenue and expenses. We are also delaying taxes for years by the usage of depreciation.
Depreciation is recorded as an operating expense and is a means of taking the value of a piece of equipment or other asset that you purchase and over a period of years recognizing that it has less value.
While there is a limit as to how much depreciation you can take, there are choices as to when the depreciation is taken. As compared to simply taking the price of the equipment and dividing by a predetermined number of years, depreciation can be arranged to be more in the beginning or during the later years of the life of the equipment. More depreciation taken earlier in the life of the equipment causes the business to show less profit during those same years.
With depreciation, you have choices not only as to how many years are used to depreciate the item, but you can decide the dollar amount of the depreciation. With all of these factors to be considered, the purchase of a piece of equipment is more than just deciding which piece to buy and how much to pay for it.
The third aspect of working with an accountant occurs when they help a business to increase their profitability. They can achieve this by showing you how to diminish your expenses, increase your margins, or sell more goods and services. With this type of participation, it would be like having a business coach and accountant rolled into one.
When do you work with the accountant regarding year end financials? Perhaps the answer is during the first quarter of the following year. And while we would at least commend you for enlisting the help of accounting firms, we would quickly point out that you are about 150 days behind schedule.
You can see we are suggesting that you begin the discussion with the accountant in the fourth quarter of the current year. If you wait until the new year to talk with the accountant, the suggestions they give you will work in the current year, but you won’t be able to affect the year just completed.
In the last quarter of the year, the accountant should be asking questions about that same year. You should be making sure that the accountant has been closely monitoring the monthly profit and loss statements to compare numbers to the prior year. This should give a good idea of how the last quarter of the year should play out.
The accountant should be closely watching your balance sheet to know how much money you currently have, as well as an idea of how much cash you traditionally have available. Without this, you would not be the first small business that had an accountant inform them of a sizable year-end tax liability when the business does not have enough cash on hand.
The accountant should be asking what your expectation is for revenues for the rest of the year. There should also be a conversation regarding the expenses to date and anticipated expenses for the rest of the year.
Another series of questions from the accountant should focus on your observations of the economy and your industry for next year to help to make an educated guess as to whether next year will be more or less profitable for you.
An old rule has been that a business should carefully monitor the revenues and expenses during the year end period of time. Expenses that are to be paid in the early part of the next should be paid in the current year if possible so that the profit of the current year is reduced. Likewise, by deferring incomes from December to January, profitability will be pushed into the following year.
Major equipment purchases you anticipate for the business for the first part of the next year will likely be advised to occur in the current year.
The relationship between accountant and business should be defined by both parties working together. Too often the relationship is defined by the accountant. If the accountant is not providing what you want and need, it is time for a conversation if not a search for a replacement accountant.
Whatever your decisions, the time for a conversation and perhaps action is now; not at the point next year as you and the accountant say that you wish you had talked about something this year.