When you hear the word “taxes,” other than a CPA, what else comes to mind? For many people tax returns is the first thing they think of. While that is a huge part of tax accountants’ work, there are other areas within the tax world that are of equal importance. Three of these areas are tax planning, tax preparation, and tax consulting. Understanding the importance of each helps a business owner to know what questions to ask her or his CPA and what to consider when making business decisions concerning day-to-day operations. We will look briefly at each area pointing out its importance and how it impacts a business.
Tax Planning
The best way to think of tax planning is the process of strategizing how to legally reduce your tax liability throughout the year and how to project what your business’s estimated taxes will be at the end of each IRS quarter (yes, the IRS’s quarters do not line up with the standard calendar quarters) and year-end. There are many factors that play into strategizing what will impact a specific business, for example allowable credits, a business’s legal structure (Sole, S Corp, LLC etc.), and prior year(s) net loss. Strategizing how to reduce the tax liability and projecting estimated taxes is best handled by a CPA or tax accountant. In most cases, tax planning is treated as a separate service and billed quarterly or as agreed upon with one’s tax accountant.
Tax Preparation
Normally between the months of Jan – Apr tax accountants begin preparing their clients’ tax returns. This involves sending out questionaries, phone or in-person meetings to discuss changes that occurred during the year that impact the business’s taxes, gathering necessary tax-related forms and data. Tax preparation is not solely the work of the tax accountant, it also involves work handled by the business’ accountant. The accountant needs to ensure the year’s financial books are finalized and accurate. She or he then runs the year-end Income Statement and Balance Sheet and gives a copy to the tax accountant. I often run across business owners who find things wrong with their financials and wonder why the tax accountant did not address it. The answer is, unless your tax accountant also handles the accounting of the business’s daily operations, they will not examine the financial statements of the business. They simply take them and use them to prepare the tax return.
Tax Filing
After the tax return has been prepared it is time for the filing process to occur. The tax accountant should send a draft of the return to the management team of the business to review before filing the return. Most of what shows up on the return may not make much sense to the management team, that’s fine. There may however be something that sticks out and that needs to be addressed or clarified. Both the tax preparation and filing services are normally covered by the terms of the tax service contract.
Tax Consulting
Consulting, as it name states, is tax service where the management team reaches out to the tax accountant / CPA making specific tax-related inquiries. Consulting regularly with a tax accountant can help address issues that may save the business money and time down the road. This can happen any time during the tax year and is often a “billed-as-needed” service. While most tax accountants can answer general tax questions, it is important to note that just like doctors and lawyers specialize in specific areas, tax accountants specialize as well. Start with your accountant and if she or he cannot answer your question I am pretty certain they know a tax accountant who specializes in the area you need help with.
I hope this blog has given you some insight to be able to determine what tax service you need and the role your team plays in tax preparation work to ensure your business runs smoothly.
DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.
