In my previous two posts, I have proposed that having a strong personal relationship with both a banker and an attorney is crucial to the success of a small business. Whether those individuals are with large organizations or smaller boutique firms is probably a matter for debate, and certainly a matter of preference. Regardless, the relationship should be comfortable enough for you that you can share all aspects of your business with that person. And by "all," I mean ALL. I'll give provide an example or two of why at the end of this posting.
The third outside relationship that I feel is necessary, and which is often overlooked by the independent consultant, is with an accountant or CPA. I'm not talking bookkeeper here. That's a subject for a different day. I'm talking about someone who can provide you with both personal and corporate tax advice. Someone who can create and submit your state and federal corporate and personal tax returns. Someone who can point you to financial advisors or suggest retirement, pension, and savings plans. Someone who can help you legally keep as much of your money as possible!
Here's the truth of the situation. As a business owner, you have your expertise. I have commented that my philosophy is to hire people and get out of their way. That's not quite the case for your accountant, but close. His or her job is to know what has changed in the tax laws and how that will affect you. If the "Bush Tax Cuts" are revoked, what will that mean for your business, if anything? If you fire or lay off an employee, how might that affect the amount you pay into Unemployment? Is installing new carpeting a capital expenditure that will be depreciated over several years, or a is it repairs which can be expensed? So often with tax issues, we don't even know what questions to ask, let alone what those answers might be! That's what your CPA is for, and if he is kept in the loop about what's going on with your business, he can help you avoid IRS issues.
I talk with my accountant regularly, and meet with him a few times a year. He gets all our bookkeeping backups monthly. Our bank statements actually go directly to our accountant. Why? Because I want to be confident that our taxes are correct.
Now, is it always the case? Honestly, no, because there are grey areas. We as the business owners are ultimately responsible for understanding our books and our taxes. But when the IRS wanted to audit me for our 2009 taxes, while I was understandably nervous, I was also confident in our books and taxes. Because of that organization, our IRS audit took an hour. What did they find? They decided I had erroneously expensed $15,000.00 in landscaping instead of depreciating it. I felt it was repairs as we had to have sewer work done, so I was comfortable in our justification, but they disagreed. The end result? A$5,000.00 bill from the IRS, all of which I will get back in the next few years through depreciation. I have now gone through two audits, neither of which caused me much anguish nor cost me much cash. That is entirely because John Noggle, my CPA, knows my business so well. Had I wanted him to, he would have even handled the audit directly.
You have likely noticed by now that I firmly believe in keeping my people in the know, and your lawyer, banker, and CPA really need to know EVERYTHING. The best example I can provide is the $2.4 million bill I received from the IRS. Imagine my surprise! What happened is that in late 2008 and early 2009 I decided to play around a bit in the stock market, doing some day trading on margin. Overall, I lost a couple thousand dollars. Because I lost money, I didn't tell John about it, figuring that I couldn't write off losses, which was true.
The problem was that ETrade provided a 1099 to the IRS. In and of itself, this wasn't a problem, except that all they provided was the information for the individual sales done. None of the purchases were actually included! So, in addition to our 2009 1040 tax forms, the IRS received a 1099 statement from ETrade showing I had sold several million dollars in stocks. And with no purchases associated, the IRS correctly surmised that I had not included this income on my return.
Of course, had I told John along the way what I was doing, he would have asked for all the necessary paperwork, included the loss on my taxes, and life would have continued on. Instead, we have now been dealing with the IRS for a few months, and the case still isn't finished. I wasted my time and money by not keeping my advisors in the loop. Don't make that same mistake!
Finally, after writing this three part story, I realized there will need to be a fourth part. I have not always agreed with my three advisors, nor have they always agreed with me. I think it's worth taking some time to discuss how those relationships should work.