Today begins a two-part interview with Sheryl Schuff, a CPA in private practice and a frequent blogger. I asked Sheryl about how a business owner can choose a CPA/tax adviser. It's confusing to business people (CPA? Enrolled Agent? Tax Adviser?), but Sheryl cuts through the junk and gets right to the questions with solid answers:
Choosing a CPA/Tax Adviser
Q: Small business owners need someone to help them with their taxes, but it can be hard to choose a CPA. If you haven’t worked with a professional accountant before (and even if you have), you might not even know how to decide. Since this is one of the most important decisions a business owner has to make, could you give some guidance on how to go about the process?
Sheryl: Sure. Business owners should understand that not all tax preparers are CPAs and not all CPAs do tax prep work. While you don’t necessarily need to hire a CPA to do your taxes (there are many competent non-CPA professional tax preparers), you do need to consider what other kinds of services you might need, like choosing accounting software, setting it up and getting trained, data entry tasks, and review of records for tax evaluation.
Q: So, if I understand you correctly, you’re saying that you might need both a CPA and a tax preparer? Or should you just choose a CPA who can do it all?
A: In some ways it’s like choosing a doctor. Some physicians are general practitioners and some are specialists. Sometimes you’re fine with your family doc, but sometimes you prefer one who concentrates on the particular area you’re having trouble with.
Tax practitioners can be generalists or specialists and so can CPAs. Just be careful if any of them tells you they know everything there is to know about taxes. That’s a huge red flag. As you well know, the Internal Revenue Code is a massive piece of legislation and it would be literally impossible for anyone to understand it all.
Q: So how do we judge the competency of a particular tax preparer or CPA? Can you explain the licensing requirements and that these folks have to meet?
A: The licensing requirements vary from state to state as do the minimum and ongoing educational requirements. In the tax prep area, some states don’t have any laws at all regulating who can call themselves a tax preparer. In those states, anyone can offer to prepare taxes for another person and charge for their services.
For CPAs, there is a uniform exam that all U.S. CPAs have to pass, but the educational requirements to get (and stay) licensed are decided by the individual states.
In Indiana, where I’m licensed and registered to practice as a CPA, I’m required to take 120 hours of continuing education every 3 years. I have to take at least 20 hours every year (so I can’t go 2 years without taking any then catch up by taking all 120 in the third year), supposedly ensuring that I get at least some sort of update every year.
I’m required to have a certain number of hours in accounting and auditing subjects and a class in ethics, and I’m limited as to how many hours I can complete by self-study and how many where I actually have to be in an organized class of some sort.
Q: As a CPA are you required to get updated on the tax laws every year?
A: Nope. I’m not required to. I almost always take at least 16 hours every year of tax classes, but that’s strictly my personal preference.
As you can see, being a licensed CPA doesn’t guarantee that I know any more about taxes than when I originally passed my CPA exam (for me that was in 1974).
Q: What about enrolled agents (EAs)? Aren’t they subject to Federal licensing laws?
A: Yes, I’m glad you asked about that. An enrolled agent is a person who has either passed a standardized test that covers all parts of the tax code or who has at least 5 years’ experience working for the IRS in a qualifying position.
EAs are required to have 72 hours of continuing education every 3 years with a minimum of 16 hours every year. Like CPAs, they have to take an ethics course. Unlike CPAs (who can take accounting, management, technology, and personal development courses), EAs have to take all their courses in the area of Federal taxation.
Q: So it sounds then like EAs would be more current with their Federal tax knowledge.
A: Not necessarily. A CPA who isn’t required to take any tax classes might voluntarily take more hours than an EA. And we both know that taking the classes is certainly a start, but it’s no guarantee of learning or competency.
At this point in my career, I hire a CPA to do the taxes for my businesses.
Q: How did you select a CPA to do your taxes?
A: The first thing I did was to follow my own advice and decide what kind of services I needed. At the stage that my businesses are in, I’m very interested in tax planning. I don’t want someone to simply document the financial transactions that occur in my companies every year and put historical numbers on tax forms. I want someone to help me figure out ahead of time the best ways for me to structure and use employee benefit plans and retirement programs to get the maximum tax savings for me, my family, and my businesses.
Tomorrow, we'll continue the discussion and go more deeply into the criteria for choosing a CPA/tax adviser....
Sheryl Schuff is a licensed and bonded CPA who has been in private practice since 1976. You can find her online at No More Bookkeeping Headaches. She is the Founder of the Business Startup Success Club and the author of “ Save $100s in Taxes With a Home Office Deduction.” Ms. Schuff developed the tax curriculum for the Business Ownership Initiative of Indiana and she teaches workshops about taxes, recordkeeping, and business shart-up. In addition, she is the financial guru for the Web Sellers Circle and she serves on the panel of experts at the International Association of Solopreneurs.
Section 1244 stock is stock for small business. It can allow relatives assist other relatives in starting a small business. To issue the stock you have to qualify as a small business. The qualification that the aggregate amount received from stock initially issued be less than $1 million dollars. This stock allows relative to participate in your venture without the safety net of a tax deduction. If stocks are issued and the transaction properly documented if the business fails the relative loaning the money can write off the loss as a business loss. However, if there is not documentation the worst case scenario is there wouldn’t be a write off best is it would be a non business loss that has tax limitations. It is a great safety net for a lender but a possible trade-off for a borrower. Finally to issue the stock you have to be a corporation.