What’s your CPA doing for you?
Although the economy has taken a few hesitant steps toward a lumbering recovery, business owners will be tentative a while longer. But before sales soar once more and days are crammed with supplying products and services, business owners should make sure they are getting their money’s worth, so to speak, from their accounting firm.
Suffice it to say, if you’ve never met your CPA, much less sat down for an assessment, you could be missing opportunities for retaining more of your money and sending less to everyone’s insatiable Uncle.
Whether looking for your first CPA firm or double checking that your current firm is working for you, here are some of the options to look for.
It’s important to find a CPA firm that is “committed to the growth of the client … rather than just mailing tax forms back and forth with no face-to-face,” said Mike Gutesha, managing tax partner at Clifton Gunderson’s Denver office.
Rather than having what he calls a “compliance shop,” business owners can enhance the value of their business by having a CPA firm that offers fixed asset depreciation studies, and help with strategy, growth-planning and, God forbid, the threat of bankruptcy.
During 2006, a manufacturing company in Denver with 150 employees was facing bankruptcy and needed a loan. As it turns out, the company was not aware it qualified for a $600,000 research and development tax credit. That discovery, along with a financial audit, a review of previous tax returns (which uncovered a $2.5 million error that resulted in an $800,000 tax savings) and a fixed asset study was a turning point for the company.
The bank granted the loan and the company became successful, and was later purchased.
While results and savings are not always so dramatic, even thousands of dollars in tax savings could be critical for many small businesses.
A fixed asset study (also called cost segregation) can typically reallocate between 25 percent and 40 percent of a company’s depreciable asset base to shorter tax lives, which translates into increased depreciation deductions, and thus increased cash flow through current tax savings. For instance, some property can be reclassified from a 39-year tax-life depreciation to a five-, seven- or 15- year tax life.
“You can go back in time to 1987 and get the deduction you didn’t take in a prior year, and use it for the current tax year,” Gutesha said. “It’s absolutely fantastic, and a lot of people are not aware of this.”
An accounting firm also should have the ability to grow with your company.
For instance, if a company has two employees and $1 million to $2 million in sales, and grows to $10 to $15 million in sales, Gutesha said, that’s “a totally different ballgame.”
Because finding tax dollars that a business is entitled to is not the only thing a CPA firm can and should do.
“A firm can run ‘what-if’ scenarios, to see if you’re utilizing your resources properly, analyze whether you have too much inventory, or too much cash in the bank and maybe you should pay some bills down,” Gutesha said.
For example, one way to add value to a company is to reduce unnecessary stock.
“In this day and age, you really don’t want to have too much inventory on hand,” he said. “Business owners can get too much into the nitty-gritty, but we (CPAs) can see from outside (the ways) to keep costs in line.”
And business owners should make sure an accounting firm has experience in their industry. For instance, some restaurant owners might qualify for refunds on taxes paid on napkins and paper products, or they might be able to claim federal income tax credits for FICA taxes paid on employees’ tips.
“You get what you pay for,” said David S. Mason, a partner at BKD’s Colorado Springs office. “You have to be proactive and analyze your tax situation throughout the year, so you have a cash flow plan and you know what’s coming,” such as loan modifications or renegotiations, or the possibility of covenant defaults.
For loans, banks often request an overall financial pro forma of the company, and it depends on “a business owner’s savvy and awareness, whether they can present the appearance of being fully engaged with their business and knowing what it will take to pull it through this (economy),” Mason said.
He also said that a cost segregation study is “an automatic thing a firm ought to have. But the firm shouldn’t be outsourcing it – it’s not as cohesive.”
Cost segregation studies show how a company can recover major capital improvement costs – on new buildings under construction, existing buildings undergoing restoration, purchases of existing properties or leasehold improvements – more rapidly.
A Colorado benefit that not many business owners take full advantage of is the Enterprise Zone program, which grants credits to businesses within certain geographic boundaries.
“The Enterprise Zone credits are significant,” Mason said. “They’re available to corporate entities or as a flow-through entity to business owners.”
Conservation Easement Credits also are still a “viable opportunity.” The credits can be purchased at a 15 percent to 20 percent discount, so Colorado taxes are paid at 85 cents on the dollar.
And, Mason said, “In light of the uncertainty in the political arena, business owners really need to be thinking about estate planning, succession planning, an exit strategy, an ESOP (employee stock ownership plan), or a strategic investment – bringing in a 30 percent silent minority owner – or putting the business up for sale.”
Mason said the challenge for CPAs is to get entrepreneurs to work on their businesses – not in them.
“While increasing sales is vital,” he said, “they need to be working on the company as a whole.”
Likewise, make sure your accounting firm is doing more than just tax returns.