Business Taxes

Important Dates In American Tax History Post-1812 Up to The Civil War

We start today’s journey through tax history the year after the war of 1812 with Great Britain. Congress doubled the tariff schedule to fundraise the war.  But it turns out, trading across oceans is very difficult when your navy is just 18-years-old. Comparatively, the British fleet had the power of being the world’s most powerful seafaring nation.

Photo by Dirk Spijkers on Unsplash

Photo by Dirk Spijkers on Unsplash

It was able to effectively strangle commerce on the eastern seaboard, which made up the entirety of young America’s trade paths with other parts of the world.

1813

Due to the conflict and Congress’ need to raise revenue to continue to fund the war, it levied about $3 million in internal taxes on things like refined sugar, distilled spirits, and carriages. These were designed to be repealed after the war was over. To collect this tax, the federal government offered a 15% tax discount for those states that collected the taxes themselves, which caused many states to take advantage of the arrangement.

1816

With the conflict with the British and French behind them, Congress passed the Tariff Act of 1816, which levied 25% duties on items to encourage local manufacturing.

1819

This was the year of the Panic of 1819, which is the crisis sparked by a drop in world agriculture prices. This caused more protectionist policies to be pushed to keep cheap European agricultural interests from flooding the market.

1820

The house pushed a bill that would enact a 5 percent tariff on cotton, wool, clothing, iron, and hemp. The law was never enacted, but it set the stage for similar laws to be passed. The North was split on its opinions of the tariff, but the South was firmly against it. It was losing its voting power in Congress regionally as the population dropped slightly there and rose slightly above the Mason-Dixon line.

1824

Henry Clay served as speaker of the House this year and appointed John Tod, a die-hard protectionist, to head the Committee on Manufactures. He implemented a 35% tariff on imported iron, wool, cotton, and hemp.  This caused American-produced goods to finally be cheaper than the British goods, which in turn stirred up support in states that had been against protectionist measures in the past.

1828

This year, the tariff on imported goods expanded to cover hemp, wool, fur, flax, liquor, and imported textiles. It was also raised to 50% of the value of the goods. This was good for the north and Ohio valley, but bad for the South. They didn’t get the benefits of manufacturing these products in their region. The reduction of cheap British goods isn’t a positive either, as the South relied on the British to buy their cotton in exchange for those cheap goods.  That cotton was often sold back to the states as finished goods, so the tariffs significantly disrupted this system.

1832

In July, Congress reduced tariff rates slightly, but kept the high rates on products like iron and manufactured cloth. South Carolina passed a Nullification Convention, which declared the tariffs unconstitutional and ceased collecting them in the state.

1833

In response, Jackson passed the Compromise Tariff, which reduced tariffs automatically between 1833 and 1842. Simultaneously, he levied the Force Bill, which said that the president could use force and arms to collect tariffs.

1837

By 1837, an extended economic depression had settled in, driven by a financial panic from the reduction of British investment in the states. The depression lasted until 1843. This caused the Whig Party to gain national support for some of its economic development strategies (which included higher tariffs).

1840

In 1840, the Whigs won the presidential seat and implemented revenue tariffs that were to be partially distributed to the states to build roads and canals.

1842

The Compromise Tariff was abandoned due to the states’ need for revenue and many tariffs were returned to their prior rate or slightly lower than the prior rate.

1846

The Walker Tariff was passed, which slashed all duties to the minimum necessary for revenue. In Britain, Parliament repealed the Corn Laws, which levied tariffs on imported bread. Both measures set the stage for freer world trade.

1848

The custom and commerce programs were running so well that the American government was able to pay off the entirety of its debts in the Mexican War before the Civil War even started.

1850

Slavery was becoming a highly political issue and the Northern and Southern states were growing increasingly polarized. The economy was booming but the interests of the Northern and Southern states grew increasingly misaligned.

1857

Tariffs were lowered even further by the Democratic party, which plunged the nation into an economic panic. Government revenues plummeted 30%, which caused Republicans to demand tariffs be increased.

 

Important Dates In Post-Revolution American Tax History

The Revolutionary War was sparked in part by the British imposing taxes on the American colonists without their permission or consent.

Once the colonists had freed themselves from British rule, it was time to establish a government that could pay the debts it had incurred during the conflict.

Photo by Patrick Fore on Unsplash

Photo by Patrick Fore on Unsplash

1777 – Articles of Confederation

This was the first constitution of the newly formed United State. It favored decentralization of power, which means that Congress was not given the power to tax.

1781  – Report on Public Credit

Robert Morris, Superintendent of finance, wanted the federal government to own the debt it incurred then issue interest-bearing debt certificates while imposing tariffs and internal taxes.

His proposal was shut down by numerous states over the next few years.

1787 – Ratification of the Constitution

The ratification of the Constitution shifted the focus of power to the federal government and away from individual states.

This gave the federal legislature the power to impose tariffs and coin money, along with the flexibility to collect excises and levy taxes directly on individual citizens.

1789 – Tariff of 1789

This tax bill included the original 5% duty on imports, as well as a list of special items that would be taxed at specific amounts.

1790 – Report on Public Credit

This new tax plan worked on two basic principles:

  • Redemption – Congress would redeem at face value all the securities issued by the Confederation government. These old notes would be exchanged for new government securities with interest of about 4%. This plan aimed to intertwine the wealthy Americans who had financed the initial government with the new government.

  • Assumption – The national government would take on outstanding war debts of the states. This would concentrate the nation wealth into the hands of the wealthy merchant class so they would be able to invest in the nation’s economy and other critical innovations.

1791 – Whiskey Excise Tax

This was a tax specifically for spirit distillers and imposed a 7 cents to 18 cent per gallon tax. This was not a popular tax, as spirits were often used as a form of currency out west.

1794 – Uprising Quelled

North Carolina and Western Pennsylvania were in a state of civil unrest after being cited by the federal government for dodging taxes.

The federal government forced the states to send militia to occupy these territories and take down any organized resistance.

President Madison appealed to Congress for a Declaration of War against Britain as the tension between the two countries reached a head.

There was a lot of conflict over fundraising for the war, but Congress eventually settled on doubling the tariff schedule.

 

Required Health Insurance for 2014

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

What you need to know about required health insurance coverage for 2014.

Healthcare57

Beginning in 2014, the individual shared responsibility provision of the Affordable Care Act (ACA) requires you and each member of your family to have qualifying health insurance (called minimum essential coverage), have an exemption, or pay a shared responsibility penalty with your 2014 individual income tax return, Form 1040. Many people already have minimum essential coverage and don’t need to do anything more than maintain that coverage.

Do I have minimum essential coverage? You have minimum essential coverage if you have employer-sponsored coverage, coverage obtained through a Health Insurance Marketplace, or coverage through a government-sponsored program. Coverage under certain other plans will qualify as well. You must maintain this coverage for each month of the calendar year.

Am I eligible for an exemption? You may be exempt from the requirement to maintain minimum essential coverage if you’re a member of certain religious sects, a federally recognized Indian tribe, or a health care sharing ministry. You may also be eligible if you are suffering a hardship, meet certain income criteria, or are uninsured for less than three consecutive months of the year.

Will I have to pay a penalty? If you or any of your dependents don’t have minimum essential coverage or an exemption, you will have to pay an individual shared responsibility penalty with your tax return.

For 2014, the annual shared responsibility penalty is the greater of:

 

  • 1% of your household income that is above your tax return filing threshold, or

 

 

  • Your family’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285 for 2014.

 

However, the maximum amount cannot be more than the cost of the national average premium for a bronze level health plan available through the Marketplace in 2014.

 

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

Retention Guide: Personal Finance Record Retention Guidelines

Westchester accountant Paul Herman at Herman & Company CPA’s has all the answers to your personal finance questions! When it comes to storing your tax records, how long is long enough? Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the “three-year law” and leads many people to believe they’re safe provided the retain their documents for this period of time.

http://www.flickr.com/photos/redjar/113152393/

Avoid storing your taxes like like this with our handy record retention guide!

However, if the IRS believes you have significantly underreported your income (by 25 percent or more), it may go back six years in an audit. If there is any indication of fraud, or you do not file a return, no period of limitation exists. To be safe, use the following guidelines.

Business Documents To Keep For One Year

  • Correspondence with Customers and Vendors
  • Duplicate Deposit Slips
  • Purchase Orders (other than Purchasing Department copy)
  • Receiving Sheets
  • Requisitions
  • Stenographer’s Notebooks
  • Stockroom Withdrawal Forms

Business Documents To Keep For Three Years

  • Employee Personnel Records (after termination)
  • Employment Applications
  • Expired Insurance Policies
  • General Correspondence
  • Internal Audit Reports
  • Internal Reports
  • Petty Cash Vouchers
  • Physical Inventory Tags
  • Savings Bond Registration Records of Employees
  • Time Cards For Hourly Employees

Business Documents To Keep For Six Years

  • Accident Reports, Claims
  • Accounts Payable Ledgers and Schedules
  • Accounts Receivable Ledgers and Schedules
  • Bank Statements and Reconciliations
  • Cancelled Checks
  • Cancelled Stock and Bond Certificates
  • Employment Tax Records
  • Expense Analysis and Expense Distribution Schedules
  • Expired Contracts, Leases
  • Expired Option Records
  • Inventories of Products, Materials, Supplies
  • Invoices to Customers
  • Notes Receivable Ledgers, Schedules
  • Payroll Records and Summaries, including payment to pensioners
  • Plant Cost Ledgers
  • Purchasing Department Copies of Purchase Orders
  • Sales Records
  • Subsidiary Ledgers
  • Time Books
  • Travel and Entertainment Records
  • Vouchers for Payments to Vendors, Employees, etc.
  • Voucher Register, Schedules

Business Records To Keep Forever

While federal guidelines do not require you to keep tax records “forever,” in many cases there will be other reasons you’ll want to retain these documents indefinitely.

  • Audit Reports from CPAs/Accountants
  • Cancelled Checks for Important Payments (especially tax payments)
  • Cash Books, Charts of Accounts
  • Contracts, Leases Currently in Effect
  • Corporate Documents (incorporation, charter, by-laws, etc.)
  • Documents substantiating fixed asset additions
  • Deeds
  • Depreciation Schedules
  • Financial Statements (Year End)
  • General and Private Ledgers, Year End Trial Balances
  • Insurance Records, Current Accident Reports, Claims, Policies
  • Investment Trade Confirmations
  • IRS Revenue Agents. Reports
  • Journals
  • Legal Records, Correspondence and Other Important Matters
  • Minutes Books of Directors and Stockholders
  • Mortgages, Bills of Sale
  • Property Appraisals by Outside Appraisers
  • Property Records
  • Retirement and Pension Records
  • Tax Returns and Worksheets
  • Trademark and Patent Registrations

Personal Documents To Keep For One Year

While it’s important to keep year-end mutual fund and IRA contribution statements forever, you don’t have to save monthly and quarterly statements once the year-end statement has arrived.

Personal Documents To Keep For Three Years

  • Credit Card Statements
  • Medical Bills (in case of insurance disputes)
  • Utility Records
  • Expired Insurance Policies

Personal Documents To Keep For Six Years

  • Supporting Documents For Tax Returns
  • Accident Reports and Claims
  • Medical Bills (if tax-related)
  • Sales Receipts
  • Wage Garnishments
  • Other Tax-Related Bills

Personal Records To Keep Forever

  • CPA Audit Reports
  • Legal Records
  • Important Correspondence
  • Income Tax Returns
  • Income Tax Payment Checks
  • Property Records / Improvement Receipts (or six years after property sold)
  • Investment Trade Confirmations
  • Retirement and Pension Records (Forms 5448, 1099-R and 8606 until all distributions are made from your IRA or other qualified plan)

Special Circumstances

  • Car Records (keep until the car is sold)
  • Credit Card Receipts (keep until verified on your statement)
  • Insurance Policies (keep for the life of the policy)
  • Mortgages / Deeds / Leases (keep 6 years beyond the agreement)
  • Pay Stubs (keep until reconciled with your W-2)
  • Sales Receipts (keep for life of the warranty)
  • Stock and Bond Records (keep for 6 years beyond selling)
  • Warranties and Instructions (keep for the life of the product)
  • Other Bills (keep until payment is verified on the next bill)
  • Depreciation Schedules and Other Capital Asset Records (keep for 3 years after the tax life of the asset)

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford Hills NY, Katonah NY, Larchmont NY, Rye Brook NY, Pound Ridge NY, Purchase NY, Rye NY, Bronxville NY and beyond.

 Photo Credit: redjar via Photopin cc

Business Forms of Organization: FAQs

Scarsdale tax preparers at Herman & Company CPAs have all the answers to your personal finance questions!

Business Entity and Tax FAQs from Scarsdale NY accountant

Don’t let your business be a gamble when it comes to your taxes.

The following are FAQs our Westchester accounting experts regularly receive regarding business forms of organization and how to approach them. 

▼ Will some types of business organization or entity limit my liability to business creditors?

Yes. Limited liability companies (LLCs), limited partnerships, limited liability partnerships (LLPs) and corporations are the most common forms. General partnerships and sole proprietorships don’t restrict owners’ liability, whereas limited partnerships limit liability of some partners (such as limited partners) and not others (like general partners).

▼ How can I avoid the “corporate double tax” and what exactly is it?

A “corporate double tax” happens when a business corporation (or an entity that is treated as a business corporation for tax purposes) pays a federal tax on its income, and then its owners pay another tax as they collect corporate profits. The “entity level tax” is the tax on the corporation and so an entity taxed in this way is called a “C corporation” or C corp.

Here are ways to avoid the double tax:

  • Become an S corporation, which doesn’t change the nature of the business under state business law but rather eliminates federal tax at the corporate level.
  • The second tax, which is on the owners, can be deferred by suspending profit distributions to corporate owners.
▼ For tax purposes, what type of business entity is best?

Each business is different, although to save on overall taxes a “passthrough” entity is generally best, as it eliminates tax at the entity level. Owners of passthrough entities are taxed on the profits of the entity that they own. Owners are able to make tax deductions for startup and operating losses, against the income from other businesses or investments.

▼ What entities are considered to be “passthrough”?

The leading “passthrough” forms are limited partnerships, LLCs, LLPs, S corps, sole proprietorships and general partnerships. You have a lot of power over whether or not your entity is treated as a passthrough for federal tax purposes.

If you have a partnership of any type or a limited liability company, it is possible to choose if your business functions as a corporation or partnership for tax purposes. This is called the “check-the-box” system by tax and business advisors. You can qualify to have it treated as a passthrough by choosing S corp. status if your entity is incorporated or if you elect to be treated as a corporation.

This decision is binding. This means if you select one entity one year and a different one the next, you will have to pay the taxes as though last year’s entity was sold and use those profits towards this year.

▼ To avoid double tax and limit my liability, which entity should I choose?

Assuming you don’t select to have them function as corporations, the following types will avoid double tax and limit liability: LLPs, LLCs, and limited partnerships (only for the limited partners). An S Corporation is usually another option. If you are a sole owner, the only option is an S Corp (or in certain states, LLCs).

▼ Why are limited liability companies (LLCs) so great?

Limited liability and passthrough tax treatment are both combined in LLCs. This provides benefits that are unavailable from S Corps. The main benefits are:

  • The possibility of greater loss deductions.
  • Tax benefits can be disproportionately distributed among owners.
  • When a new owner becomes a member of the business, or when allocations are given to owners in business liquidation, taxes are avoided or reduced.

LLCs are sometimes permitted to have a single owner – laws vary by state. If permitted, the owner has the opportunity to elect to be under the check-the-box rules.

A good alternative where sole ownership LLCs aren’t permitted is an S Corp. This structure will also defer tax, in comparison to LLCs, when a corporate giant is buying out the business.

▼ If my business is a professional practice, what are the special conditions?

A major concern is the limitation of liability, especially malpractice liability. Against the liability of your own malpractice, there is no entity that will protect you. For protection against liability for malpractice of co-owner professionals in the firm and possibly for other debts, Professional Limited Liability Companies (PLLCs), LLCs, and LLPs, when accessible for professional practices, should be used. Depending on the state law, Professionals Corporations (PCs) might not offer protection from liability for a co-owner’s malpractice.

LLPs, PLLCs, and LLCs all have about the same tax rules that govern them while those for PCs are a little more liberal.

 If I change my form of business organization, what are the federal tax consequences?

A change of entity is an event that may need to be carefully planned and implemented to avoid a taxable event. It also may have significant future tax implications. You should consult with a professional before making any changes or decisions to your business organization.

 Is it necessary for state business entity rules to follow federal tax rules?

Bear in mind the differences between state tax law and state business law. Whatever tax status you select for your entity beneath the federal check-the-box system, keep in mind that you may be considered a different type of entity for state business law purposes. This means that if you choose corporate tax treatment for a partnership, it will not necessarily bring corporate limited liability.

A state normally treats the entity selected under federal check-the-box as the entity acknowledged for state tax purposes, but this is not always the case.

The law of a state may agree to passthrough status for an entity like an S Corp or an LLC, but still enforce some sort of tax on the entity.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us if you have questions about these provisions or any other tax compliance/planning issues, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Mamaroneck NY, Armonk NY, Rye NY, Scarsdale NY, Tarrytown NY, Chappaqua NY, Greenwich CT and beyond.

Photo Credit: roberthuffstutter via Photopin cc

Business Expenses

Westchester accountants at Herman & Company CPA’s have all the answers to your personal finance questions!

Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. Business-Expense-Tips-from-Westchester-Accountant

 

 

 

 

 

 

 

 

An expense does not have to be indispensable to be considered necessary.

It is important to separate business expenses from the following expenses:

  • The expenses used to figure the cost of goods sold
  • Capital Expenses
  • Personal Expenses

Cost of Goods Sold
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into figuring the cost of goods sold:

  • The cost of product or raw materials, including freight
  • Storage
  • Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
  • Factory overhead

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.

This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.

Capital Expenses

You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business.There are, in general, three types of costs you capitalize.

  • Business start-up cost (See the note below)
  • Business assets
  • Improvements

Note: You can elect to deduct or amortize certain business start-up costs.

Personal versus Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.

Business Use of Your Home

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.

Business Use of Your Car

If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Other Types of Business Expenses

  • Employees’ Pay – You can generally deduct the pay you give your employees for the services they perform for your business.
  • Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’, retirement.
  • Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
  • Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
  • Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
  • Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

Our Westchester accounting firm is here for all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Katonah NY, Mount Kisco NY, Rye NY, Bedford NY and beyond.

Business or Hobby?

White Plains financial planners here at Herman & Company CPA’s have all the answers to your personal finance questions!

It is generally accepted that people prefer to make a living doing something they like. A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take.

Scarsdale CPA Tax Tips

Some lucky people can call golf both a business and a hobby!

You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. You cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, come under this limit. So does an investment activity intended only to produce tax losses for the investors. The limit on not-for-profit losses applies to individuals, partnerships, estates trusts, and S corporations. For additional information on these entities, refer to business structures.

It does not apply to corporations other than S corporations. In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether: You carry on the activity in a business-like manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on income from the activity for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You, or your advisors, have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years and the amount of profit it makes, and you can expect to make a future profit from the appreciation of the assets used in the activity.

For more tax tips and information, please contact Herman & Company CPA’s, accounting firm in White Plains, NY.

How and Why I Hired My Tax Accountant

By JOHN CANTER

Until I owned my business, I had always prepared my own income-tax returns. No longer. I’m glad to say that I have an accountant.

 Finding the right person wasn’t easy. It took me time and some personal evaluation to decide on the best one for me. Here’s the process I went through.

Scarsdale CPA tax tips

Gambling with your income tax is one move you never want to make

First, I considered doing my own taxes — for about a nanosecond. I had always prepared my tax returns. Since I had only my income, and then my wife’s, to report, the process was straightforward. A couple of hours using tax software, and I was ready to file with the Internal Revenue Service.

That changed when I bought my hobby-and-game store. The complexities of owning a business and all the tax rules that come with it made the job much more difficult.

I realized this after spending hours on the phone with various city and state agencies trying to compile the tax-identification numbers needed to apply for a bank loan. I was astonished by how many taxes a small-business owner has to pay. Assessments may be levied at the city, county, state and federal level, and the rules and regulations change frequently. Complicating matters, a separate identification number is required for each tax. Failing to file just one of the returns triggers a penalty, something I didn’t dare risk.

In short, I quickly concluded this was no job for an amateur. Plus, for small-shop proprietors like me, time is money, and unless I hired a professional, I’d be doomed to taking the latest tax-preparation class instead of focusing on my business.

To find the right accountant, I first considered hiring a friend. I knew one accountant personally. He’s someone I hung out with during college, but he lives in another state. So I initially dismissed the thought of hiring him since I felt it would be better to have someone local.

I then interviewed several firms in my area. These ranged from independents to local offices of the Big Four. My criteria for choosing a firm were the amount of service I’d receive, the fees involved, their general philosophy and approach, and something I’ll call the “personal touch.”

Most of the firms offered similar services, such as federal-tax preparation and filing monthly local and state taxes, with a couple specializing in particular areas such as payroll taxes. The range seemed somewhat dependent on the size of the accounting firm, with the larger firms offering “one-stop” service — they’d do all my tax work — compared to the small outfits, which would do only payroll taxes. But hiring a big firm didn’t necessarily mean I’d be working with the most experienced people. Although I was meeting with the partners of the large firms, I learned lower-level staffers would do the work, and the “senior” accountants would simply sign off on it.

As for fees, I’d be charged by the hour, at rates that also varied by size of the firm. Although I expected some variance in the fees, I was surprised by the disparity. The larger firms charged between $150 and $300 per hour, while smaller ones cost between $75 and $100 an hour. For a small company like mine, paying $300 an hour isn’t an option.

In regard to tax strategies, I looked at how aggressive the firms would be. One accountant asked whether I had children. When I said I’d just had a baby boy, he started to pitch me on a tax shelter for my son. He said he had just read about it, and although the IRS had not ruled on it yet, he told me he thought it would likely get a favorable ruling. While I’m all for accountants being aggressive about seeking deductions, I wasn’t sure that my then-one-month-old son should be involved.

Finally, and most important, there was the personal touch. Financial decisions are touchy. Consider that disagreements over money are among the top reasons for divorce in the U.S. If discussing money is so difficult with your spouse, how are you going to talk candidly about finances with a stranger?

I sensed that my accountant would be my closest business confidant, and that when all was said and done, I needed to work with someone I could trust. I decided to forgo my prior requirement for proximity and hire my friend from college. John Reasbeck (a.k.a. Reas) and I have stayed close since graduation even though he lives in West Virginia and I’m in Kentucky. We’re the same age (32) and at the same point in our professional lives. He has been an accountant since leaving college and consequently has years of experience to offer me.

An accountant can — both directly and indirectly — drastically influence the success of a business. I already trusted and confided in Reas and knew he had my best interests at heart. Never mind that he wasn’t a “senior tax partner.” Those people weren’t going to be doing my work anyway. And the price is right at $100 an hour.

One year later, I know I made the right decision. My accountant-friend is a key member on my advisory team, not someone who just keeps track of my statements and prepares my year-end taxes. We talk by phone once or twice a week, but not necessarily about taxes. Often I seek his feedback on business ideas, such as possible expansion opportunities.

Some might question the wisdom of hiring an accountant from out of state. But West Virginia and Kentucky are adjacent states, so their rules tend to be similar, and my accountant has several other out-of-state clients. Still, if I weren’t comfortable with reading tax documents, I might feel differently, because agencies send notices and coupons directly to me, and I handle some of this work myself. But I have a finance background, and I already take care of tasks like bookkeeping and reconciling bank statements on my own.

I dislike organizing the paperwork (mostly receipts) necessary for me to properly file my taxes. But after seeing the results, I’m more than happy to pay my accountant’s bill because he’s saved me time and minimized my year-end taxes.

Westchester CPA Paul Herman is here to assist you with all of your personal finance needs. Please contact our Westchester accounting firm for all inquiries. We proudly serve the towns of Scarsdale NY, Purchase NY, Larchmont NY, Mamaroneck NY, Katonah NY, Bedford NY and beyond.

 

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.