Sunday, November 18, 2007

Why Have Both?

Good reasons to have both: a bookkeeper and a tax pro

It's tempting for small-business owners to want to handle their own bookkeeping and tax preparation. After all, there is a lot of excellent accounting software out there to help them.

And many business startups begin with a few partners who do everything, hiring outside contractors only when absolutely necessary.

But just because you can do something doesn't mean you should. There are indirect costs involved with everything that falls into the do-it-yourself category. These include the time you spend doing it yourself instead of tending to other business matters, and the possible missed opportunities that come with not having something handled by a full-time expert in that task.

At some point early on, most small businesses need to hand off their tax preparation, and at least some of their bookkeeping, to professionals.

Here's why, and here are three things to keep in mind when hiring this outside help.

  1. Good tax professionals are more than just preparers.

    Full disclosure here: I'm a tax pro myself. Besides being a tax preparer, a good tax pro should be able to advise you on:

    • How to reduce your overall tax bill;

    • Options for setting up retirement plans for you and your employees;

    • How the latest federal or state tax legislation affects your business;

    • How to coordinate your business and personal tax returns and issues;

    • Setting up benefits plans; and even

    • Whether you should consider changing the legal form of your business in the wake of evolving tax laws.

    While people tend to think of a tax pro as someone to interact with during tax season, you'll get the most out of a tax pro if you're able to talk with him about planning issues outside the crush of the preparation season.

    Similarly, issues such as how much to spend on new business assets, whether to lease or purchase vehicles and other equipment, and what your reasonable compensation should be as owner of a business, can and should be reviewed and discussed during the year. A good tax pro is going to be a helpful planner as well as a preparer.

  2. Keeping good books is a business necessity (and, in these times, could keep you out of jail).

    You also need a good bookkeeper, either someone on your staff or an outside pro. The key question is: Do you have someone within your staff, aside from you, who has the skills and can handle the demands of the job? Someone who understands such matters as double-entry bookkeeping and how to make journal entries? If not, look outside.

    A bookkeeper is going to be focused on properly recording the day-to-day financial activities of your business. This may sound simpler than the review, planning, and tax-return preparation activities that your tax pro engages in.

    But without good bookkeeping, and good books, tax pros can't properly do their job. In fact, many tax pros won't even take on a business client if the client cannot produce an accurate balance sheet and is unwilling to hire someone who will get his books in proper order.

    Good bookkeepers will record all your receipts and expenses, track accounts receivable and payable, and in the course of entering all your financial transactions also create a balance sheet for the business. Some bookkeepers also handle payroll services for their clients; others prefer to work with dedicated payroll companies. Depending on the size of the business, a bookkeeper may work with a client a couple of days a week, weekly, or even just once a month.

  3. Your bookkeeper and tax preparer need to work together on your behalf.

    There's definitely some overlap between the two. A professional tax preparer such as a CPA or enrolled agent may also offer bookkeeping services. However, most tax practices that offer bookkeeping will turn that portion of your needs over to a staffer who is primarily a bookkeeper. That makes sense — you shouldn't be paying tax pro rates of $125 or $175 an hour for bookkeeping services that can be had for $50 an hour.

    Tax pros and bookkeepers should and will work together for the benefit of their clients. For example, a bookkeeper won't necessarily know how a company's assets are being written off or depreciated. The tax pro is responsible for providing that information so that proper depreciation adjustments can be made to the company's books.

    Sometimes, small businesses will handle their own bookkeeping while retaining a tax pro to review the books annually as part of overall tax preparation and planning. Again, this can work if the business has someone with the skills and the time to devote to this important task. Otherwise, get an outside pro.

    Bookkeepers and tax pros serve two purposes for small-business owners: They help keep the business out of trouble by accurately recording and reporting the business's financial information, and they allow the business owner to focus on his or her primary job — running the business — while they focus on their financial specialties.
Joseph Anthony
Joseph Anthony is a tax professional in Portland, Ore., who writes about finance and tax issues affecting small businesses. Send Joseph an e-mail.

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