Thursday, November 3, 2011

Do you need an Accountant?

An accountant can help you navigate the tax code and keep your books.  But do you need one?

Much of the discussion about tax reform, flat taxes, and simplifying the tax code is directed toward the feeling that most people have, that they should not have to pay someone to figure out how much they owe in taxes.

Of course, many of these folks who struggle with a form 1040 are not very bright and struggle with basic math.  Altering the tax code so that idiots can navigate it ("IRS for Dummies") seems sort of lowest-common-denominator to me.

And there are programs, including Turbotax Online, which allow you to figure out your taxes pretty painlessly.  And since my accountant died, I have been using Turbotax -and also simplifying my life so that I don' need an accountant anymore.

But if you run a small business or have investment properties, you may need an accountant.  Keeping the books is not only necessary from a tax perspective, but to understand how your business works and whether or not you are making money - and where you are wasting it.

I think also, it is important for anyone to understand how a business - particularly a small business - is run, so that they can appreciate how difficult it is.  People whine and complain about how there are "not enough jobs" - but they have no clue as to how hard it is to create a job for someone (more on that in another post).

My first exposure to accountants occurred when I hung out my shingle and opened my own shop.  I was pretty naive back then (and still am, just older) and had no clue about accounting, bookkeeping, or the tax code or tax requirements.  I formed a subchapter-S corporation, because that seemed to be what everyone did those days.  In retrospect, it was just a reporting nightmare and paperwork hassle, as these Sub-S corps do not insulate a professional from professional liability - at least in the Commonwealth of Virginia.

One day, on the way to the post office box (another mistake, but more on that in another post) I got a letter from an accountant in Maryland.  He had gotten my name from a published list of new sub-S corporations, from Richmond.  He introduced himself and noted that he "specialized" in helping small businesses.  And he was a CPA.

Now, right off the bat, I should have been skeptical.  He was SPAMming me, by mail - sending out a generic letter to names on a list.  And I should have tossed it in the trash.  A successful accountant would get business without such tactics.  When you see someone advertising on billboards, chances are it is because they need the business.  Good bargains sell themselves, and good accountants (and lawyers) don't need to advertise much to get a steady stream of clients through the door.

So, blithely ignoring this first warning sign, I went off to see him.  Now, running a small business takes a lot of energy.  You have to file returns for your sub-S corp.  You have to pay estimated income tax - to the Federal Government and the State.  And if you have employees, you need to withhold several kinds of taxes - match some of them - put them in escrow, and then pay them monthly or quarterly to the Government.  There are a lot of things you have to do, and it ain't easy doing them yourself.

I went to see this guy, and he bent my ear for an hour, but didn't give me any good advice, other than to promise to "look into" these issues and send me information.  And he billed me for an hour of his time.  A week later, he sent me information about Federal taxes.  So I called him again, and asked him about State Taxes.  Same deal, another hour billed, and then more information sent to me.  What about Unemployment Insurance?  Workers Comp?  With each inquiry, he sent a bill, and then the information I needed to do these things myself - often information that I could have gotten, for free, from a government website.

And he never volunteered information or tried to say, "This is what you need to do" - but rather waited for me to ask and then would "research" the issue, as if I was the first person to every pay taxes.  And before long, he had a pretty hefty bill for me to pay.

What he should have said was, "Call ADP" or some other payroll processing company.  These companies will, for a fee, calculate all these tax issues and print up paychecks for you.  And they will even pay the withholding taxes, if you send them the money or authorize access to your payroll account.  But that was a painful lesson I had to learn on my own.

And when it came time to file tax returns, he wanted over $1,000 in fees, just to do my business returns.  This is a staggering amount of money for a small business.

Do you need a CPA as an Accountant?  I don't think so.  CPAs are registered with a national organization - and I did file a complaint with them, which got my bill reduced somewhat.  But for the most part, I don't think the letters "CPA" are an indicia of honesty, any more than "Member of the Better Business Bureau" means anything.  The crook I had hooked up with had no business selling himself as "specializing in small businesses" at all.

I found a new accountant - two doors down from me, as it turns out.  She had moved in after I started my business.  She was not a CPA, but she was honest - and that is the key right there.  She charged modest amounts for her services and prepared my tax returns and other records correctly - although she had a bad habit of procrastination, which is bad in the accounting business.

I used a payroll service company to handle payroll, although I quickly realized that I was making less money - not more - by hiring employees.  And having employees meant I had to work more, not less.  Being an employer sucks, but like I said, more on that later.

Of course, you will still need to "keep the books" with some sort of accounting software.  I tried doing this on a ledger - very briefly - before breaking down and buying Quickbooks - and taking an Adult Learning Class at the local Community College, on how to use it.  Accounting is an interesting business, and unfortunately, few of us learn even the basics of ledger-keeping and book-keeping.  I had to learn a whole new profession, so to speak, just to run my business.

If your business gets large enough, you might consider hiring a bookkeeper.  However, again, this is an area of peril.  For a very small business (under 10 people) the expense of a bookkeeper is too high.  Even a part-time bookkeeper can be staggeringly expensive.  And this illustrates why very small businesses have a very hard time - you have to grow quickly to the point where you can absorb these costs into your overhead.  A small business of five employees or so can find itself swamped by reporting and documentation requirements in short order.

And then there is the question of  honesty.  Every so often, yet another story appears in the paper about a law firm, medical practice, or other small business, where the bookkeeper (often also the secretary) is found to have been skimming hundreds of thousands of dollars - even millions - off the top, over the years.  The partners, when interviewed, are always shocked to discover that "dear old Mary" their bookkeeper, had a gambling habit, and over the last 20 years had taken them to the cleaners to the tune of 1.5 million dollars.  "I always wondered why our practice didn't make more money," one of the Partners will always say.

This is why it is essential that you should never hire anyone who has a gambling habit - for any job.  If you are interviewing someone for a job, and they mention casually that they just got back from Vegas, just say "NEXT!" and move on.  Because they are a prime candidates for theft.   In addition, it shows they have poor judgement as well.

But good record-keeping is essential - not just for the IRS, but so you can figure out where all the money is going, and take steps to stem the flow.  One mistake I made, early on, was to try to file all our papers separately - indexing phone bills, utility bills, and the like, into separate files.  It took me a long time to figure out that once the data was entered into the computer, the paper files could just be tossed into a box, labeled "Fiscal Year, 20XX" and then taped shut and stored at the end of the year.  There was no need to order things or separate the different documents.  In fact, by tossing them in the box, they ended up in a sort of reverse chronological order.  And the few times I had to dig into the box to find a piece of paper, the amount of work was far less than filing things from the get-go.

Accountants can be helpful and useful, but as I have noted time and time again, never use the IRS tax code as an investment guide!  And a lot of Accountants will try to be "helpful" by providing investment advice, when they should really stick to accounting.

Yes, funding your 401(k) is a good idea and a good tax deduction.  And yes, a home mortgage interest deduction is a good thing to take - if you qualify for it.  But no, going heavily into debt to buy the largest tax-deduction house possible is not a good idea.  And borrowing money on your home so you can fund your 401(k) so you can chase deductions is not only stupid, it is dangerous.

As many people are finding out today, listening to an Accountant, when it comes to financial decisions, can be perilous.  Many folks bought "as much home as they could afford" to get a tax deduction, put money into their 401(k) and are now in a situation where they are upside-down on their house and their investments have tanked.  Buying a smaller, more appropriately sized and priced house, with a smaller mortgage would make much more sense.

And yet, I heard this back in the 1990's and 2000's from folks.   "I'm making so much money now, my Accountant is bugging me to buy a house or condo or something, to reduce my tax burden!"  So Joe Renter becomes Joe Homeowner, unwillingly, to satisfy the tax code.  And then it goes horribly wrong, as the house or condo he bought was overpriced.

So if you need an accountant, use one - for accounting.  But when they suggest investment strategies, just smile and walk away.

Not that all of such investment strategies are a bad idea - just that they should be something that you want to do in the first place - not something you are doing to satisfy Uncle Sam.

I made a lot of money in investment Real Estate - buying properties that were self-funding through the rents received.  The fact that I got a nice depreciation deduction was sort of a bonus.

Unfortunately, in the late 1990's and 2000's, a lot of people jumped into that market, convinced that, even if they lost money on renting the place, they would make out like bandits on the depreciation deduction or in Capital Gains.  But we know how that panned out.  And I am sure that many of them were advised by Accountants to get into investment Real Estate as a tax dodge.

Tax dodges work great - when the underlying investment works great.  But a huge house that goes down in value, a rental condo with a negative cash-flow, or a 401(k) in risky stocks that hits the skids, are all bad investments, and all the deductions in the world won't turn them into good ones later on.

Most people don't need an accountant.  If you are a typical American, you can use a program like TurboTax to calculate your taxes.  Chances are, your deductions are very few and easy to calculate (such as home mortgage interest).  If you are filing 1040-EZ, you don't even need a computer.

For small businesses even, accounting software and TurboTax can do the job - and keep you in better touch with the numbers that are the pulse and blood pressure of your business.  Handing off that sort of thing to an accountant can be expensive and risky.

Unless you have a lot of complex transactions - a lot of Real Estate, a moderately size business, or the like, you probably don't need an accountant.

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