Small business accounting: Getting it right from day one

Without proper training, dollars saved from a family-member bookkeeper may end up costing you

Working at the computer

Large companies may have impressively-sized bank deposits and built-up equity, but that doesn’t happen overnight. Even the most successful businesses start out small and their bright future is determined, in large part, by the firm financial foundation that was laid in the early stages of growth.

Nancy D Iannarone, a certified public accountant (CPA) since 1979 who works at NW Accounting Professionals in Battle Ground, shared that it’s common to see the spouse of a small business owner fall into the role of bookkeeper for a new venture as a cost-savings method. However, without proper training, the dollars saved may end up costing considerably more if the tax man comes knocking.

“What we can do for a small business is to train a bookkeeper on functions or do payroll or excise tax returns and then as the bookkeeper progresses they take over some of those functions,” Iannarone said.

With 25 years in the field, CPA Scott Salsbery of Peterson & Associates dispelled the practical myth of taking on an unfamiliar task.

“For a small business person who says, ‘I’m going to do it myself,’ the time it takes to do accounting competes with the time spent doing what you opened a small business to do. Sometimes accounting sort of gets pushed off, which can cause problems,” Salsbery said.

The accounting options available to small businesses range from software to a bookkeeper, accountant, controller, EA (enrolled agent) and CPA, but according to industry experts, it’s a coordinated team of professionals who will ensure the greatest accountability and seamless tax preparation come springtime.

Julie Irons, owner of Julie Irons Consulting, has been a controller for nearly 18 years. She’s seen enough well-intentioned business owners go awry with their financial records that the first five years of her business was spent on nothing but cleaning up systems. She now specializes in QuickBooks, payroll, new business and accounting system set-up, as well as accounting clean up. She will also go into companies, hire their accounting staff for them and oversee the system put in place on an as-needed basis.

Controllers are often viewed as a luxury that only larger companies can afford, but as Irons explained it, there are contract controllers who handle the same types of responsibilities on a smaller scale out of their own office and can be an indispensable liaison between a well-trained bookkeeper and a CPA.

Irons went on to explain that while bookkeepers are proficient at data entry, they are not by default trained to understand taxes, tax reporting and legal requirements. A controller can work with that person on essentials like 1099 reporting, L&I requirements, contractor’s licenses, the Affordable Care Act and a host of other industry-specific fulfillments. He/she will also understand the different business entities such as an S Corporation, Partnership or Sole Proprietorship to be able to set up accounting software to match the chosen entity.

Iannarone clarified that, within software options, QuickBooks is the most user-friendly, catering from the novice up to the professional. Another popular option is Sage 50, which has more security features and requires greater accounting knowledge to operate. From there, higher-end software is available for more specific tracking needs.

An EA and a CPA can represent a business owner before the IRS should the need arise, but there is no formal education to become an EA aside from multiple IRS-administered tests. According to Salsbery, a CPA is set apart by two more years of schooling beyond an accounting degree, most likely holds a master’s degree, must pass a licensing exam and fulfills yearly continuing education requirements. That’s not to say an EA couldn’t possess the knowledge a business needs – just as with the levels of bookkeepers where some will possess a high skill-set while others will function within specific parameters.

EAs or CPAs should come into play from day one to handle income tax information for the purposes of filing but also for tax planning. Iannarone explained that Northwest Accounting meets with most of their business clients in October/November to review where they are to-date, look at options of what to do by year-end to put them in a better tax position and estimate taxes owed to ward off big surprises come April.

Some common mistakes found when a small business owner does decide to consult a professional is making decisions that have unintended tax consequences, such as withdrawing money from their retirement account for their business or purchasing equipment versus leasing it. Salsbery and Iannarone both noted that the number of different agencies surprises people; not all monthly, quarterly and annual reports are filed on time or can be missed altogether; and that sales, use and excise tax are commonly underreported. Even workers hired as independent contractors may actually be considered employees, which triggers a host of tax obligations not originally planned for.

Irons stressed that setting up a business correctly is paramount.

“It’s worth the investment in the beginning because you just end up spending money cleaning it up. People realize the need for this when they end up being audited,” Irons said.

Lining up an accounting A-team doesn’t have to be arduous. The first place to start is by asking colleagues for their recommendations. Find out the experience level of the professional, what industry they specialize in, whether they bill by the hour and what their range of fees is. Salsbery said that a CPA should want to see the books and tax information before quoting an estimate to be as accurate and transparent as possible.

Small business owners have options when it comes to accounting. Proper and detailed records help make better business decisions and streamline tax reporting. As these industry experts pointed out, avoiding this vital part of running a business could cause a host of legal issues in the long-run.

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