The #1 Thing Your Tax Preparer Won't Tell You

The #1 "Thing Your Tax Preparer Won't Tell You" From Smart Money's Top 10 Things Your Tax Preparer Won't Tell You

"A big name doesn't always mean better service."Roughly 135 million Americans file tax returns, and of those, two-thirds pay for help. While solo acts like CPAs and so-called enrolled agents have plenty of clients, almost 20% of taxpayers go through a big franchise like H&R Block, Jackson Hewitt or Liberty Tax Service to get their refund — last year an average $2,255 per return. Problem is, tax preparation and advice depend on the preparer, and in a system of franchises, that means thousands of seasonal employees and limited quality control.

The results can be dangerous. When staffers from the Government Accountability Office went undercover to get returns done by the big chains, they found "nearly all of the returns prepared for us were incorrect to some degree," according to the report. Worse yet, recently filed lawsuits allege that the owners of 125 Jackson Hewitt franchises cost the government $70 million in tax fraud and created an environment "in which fraudulent tax-return preparation is encouraged and flourishes," according to the Department of Justice. Jackson Hewitt says it stands behind its compliance procedures as well as its nationally standardized educational curriculum.


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Accrual Basis vs. Cash Basis

Q: I own a small business. How do I know if the Accrual Basis or the Cash Basis is right for me?

A: The simplest rule of thumb in determining which accounting method is better for your business (assuming minimizing taxes is your primary goal), is:

• If at the end of the year, your A/R (Accounts Receivable) is typically higher than your A/P (Accounts Payable), the Cash-Basis method would be your best bet in order to minimize taxes.
  
• If at the end of the year, your A/P is typically higher than your A/R, the Accrual-Basis method would be your best bet in order to minimize taxes.

Of course, this is just a generalization. Other factors such as Inventory may play a role in the final decision. Consult with your CPA before making a final decision, but just keep the above facts in mind as your general guideline.


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Worried that your employees are stealing time playing around on Facebook or Twitter?

Worried that your employees are stealing time playing around on Facebook or Twitter?

With so much new web-based technology out there, it becomes easier-and-easier to "play" at work. While larger companies combat this by blocking certain websites or by monitoring employee keystrokes, it is difficult for the smaller businesses to avoid this lost time. Here's an interesting approach...

...certain things are bound to happen. Employees taking some "me time" during work is one of those things. If you have the right employee, I would empower them to create social networking profiles & groups for you and your business and encourage them to spend 30-45 minutes each day updating these sites. This may satisfy their social networking cravings while giving your small business a boost as well.

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Tax Returns vs. Tax Refunds

Two of the most commonly mixed-up terms I come across when speaking with clients are the terms "tax return" and "tax refund." The most common mistake people make is using the term "tax return" when speaking about their "tax refund."

To clarify the difference between the two, here is an exerpt from the glossary of my upcoming book, Choosing the Right Structure for Your Business, due out in the fall of 2009. You can receive 40% off plus free shipping if you preorder this book at http://www.30minutebooks.com/choosing-structure.html:


Tax Refund: The amount of money that a business or individual receives as a result of overpaying their taxes throughout the year.

Tax Return: The actual document that is filed to report income/expenses of a business or individual.



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Tax Liens vs. Tax Levies

Hopefully, you will never have firsthand experience with either tax liens or tax levies. However, if you do, here is a quick explanation so that you know the main differences between the two:

Tax Lien
A tax lien is a claim that is filed against your property. Typically, a tax lien is filed against your bank account. This instructs your bank to "freeze" your money so that you do not have access to it until the lien is cleared.

Tax Levy
A tax levy occurs when your property is actually taken from you. Again, this is typically done through your bank account whereby your funds are removed from your bank account to pay the taxing authority.

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Quick Tips: Small Biz Tax Prep and Keeping Your Fees Low!

Reading Diana Ransom's article, Quick Tips: Small Biz Tax Prep on the SmartMoney Small Business site inspired me to take a few of her thoughts and expand upon them.

As a CPA, here are a few tips to help keep your accounting fees as low as possible:

1) Opt for QuickBooks over Quicken, Peachtree, any industry-specific accounting programs, or any lesser-known accounting programs. Today, just about every CPA out there is at least familiar, if not well-versed, with QuickBooks and we can simply import your data into our system. This eliminates the data-entry portion of our services and allows you to only pay us for our expertise...tax planning and tax preparation.

2) When filing your expense receipts, keep them in two separate envelopes:
Envelope #1 - Everything you paid for with cash, a personal check, a personal debit card, or a personal credit card

Envelope #2 - Everything you paid for with a business check, business debit card, or business credit card

This way, all you need to do is take Envelope #1 to your accountant at the end of the year (he will already see all expenses in Envelope #2 when reviewing your business credit card & bank statements.

3) If your business is inventory-intensive, do not rely on the QuickBooks inventory module. It is by far the weakest component of the QuickBooks program. Your best bet is to track inventory through separate software or use a program that interfaces with QuickBooks, such as Fishbowl.

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Top 10 Bookkeeping Mistakes

I came across this article about the Top 10 Bookkeeping Mistakes on SmartMoney's Small Business Site and wanted to comment since it was such a good article.

As a CPA who specializes in helping small business owners, I love this article. #2, #4, and #5 really stand out in my mind as the three most critical and most common mistakes on the list.

#2-Doing it yourself. Many business owners have the ability to generate a set of books...they will provide it to a tax preparer (or worse, prepare their tax return themselves). As long as they are happy with the amount of their refund and they do not get audited, they will feel that they did a good job. However, "happy with your refund" and "didn't get audited" do not necessarily translate to "the best possible tax return." The two biggest problems with the DIY approach include a higher than usual audit risk and the loss of certain credits/deductions that you would have received if you had a pro do it for you.

#4-Not properly classifying employees. Too many small business owners classify their employees as "independent contractors" in an effort to avoid paying payroll taxes. However, if the IRS or your state decides to challange your classification (which is fairly common when your ratio of 1099s to W-2s issued for the year is too high), you will pay back all the taxes you saved plus steep penalties, fines, and interest charges.

#5-Lack of communication (especially the part about paying someone a bonus and not reporting it). This is very common at the end of the year with Christmas bonuses...business owners pay their employees every week through a payroll service and then all of a sudden at the end of the year, they think it's okay to just write their employee a check with no taxes taken out and without notifying their payroll service. A mistake that could be costly to both the employer and the employee!

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Scary News About Your Spending Habits and How They Affect Your Credit Score

Credit card companies have always tracked their cardholders' spending for three main reasons:

1) To be able to market goods/services to you that your profile indicates you may like

2) To detect fraud

3) To assist law enforcement agencies

However, credit card companies have now found a fourth, and very scary thing to do with this information...determine your creditworthiness...Here are some trends in your spending that could result in a lower credit score and the reduction/elimination of your credit card limits:

1) Shopping at discount stores/thrift stores and purchasing generic brands

2) Shopping at the same stores that other people who have defaulted on their credit card debt shop at

3) Using your credit cards for the vices...cigarettes, alcohol, massages, casino gambling, online gambling, bail bond services

Congress is now investigating credit card companies for utilizing these practices in determing to lower credit limits, cancel credit lines, and deny applicants for credit. During 2010 and 2011, we can expect to see some public hearings about this issue. In the meantime, it seems like "what's done is done" but that credit card companies will be more careful in using this sensitive information (at least until we hear the results of the congressional hearings).

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Effective Tax Planning for the MicroBusiness

On Monday, 6/1 my book about effective tax planning for the small business owner & self-employed individual was released (see below for more info). While the book is focused mostly on offering tax planning tips and tax savings strategies to those who currently participate in active tax planning, I started thinking more and more about how to educate people of the benefits of implementing a tax plan.

In my opinion, everyone who owns a business or who is self-employed (gets paid via a 1099, has a "DBA," etc.) should be consulting with a CPA in order to put together a tax plan around the middle of each year. The simple action of deciding to start implementing a tax plan is the most important part of the process...as great as my strategies are, they mean nothing to the businness owner who does not actually implement them through a tax plan.

Effective Tax Planning for the MicroBusiness is available in bookstores nationwide for $24.95 plus shipping & handling. However, if you click on the link below, you can purchase your copy for $19.95 plus FREE shipping & handling:

http://www.30minutebooks.com/effective-tax-planning.html


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