“If you can’t explain it to a six year old, you don’t understand it yourself.”
Not surprisingly, taxes…are…complicated! Reducing tax complexity has gotten a lot of press lately and even some congressional support! However, at least for the foreseeable future, we will continue to have a tax system that is downright difficult to understand.
Even without legislative change, there are ways to reduce tax complexity, ultimately lowering accounting fees (a good thing) while keeping your business running efficiently (an even better thing). Without further ado, here are some quick ideas to help keep taxes simpler:
1) Incomprehensible Operating Agreements
You have a fancy LLC operating agreement that all members signed and agreed to. There is just one problem – you can’t understand a word of it. Year after year, your CPA has to perform voodoo and sorcery to prepare your partnership tax return. You don’t understand how income is being allocated or how much money should be distributed to you. Ask yourself, what good is an agreement that no one understands? You should be able to read your LLC agreement and have a very good idea of what it is trying to accomplish. If you can’t, it may be time to rewrite it! It will be painful, but you’ll save yourself much agony in the long-run.
2) Spend A Little Now, Save A Lot Later
We know, we know, every time you send an email or call your CPA, you can just picture that invoice arriving in your mailbox. This might be our reputation, but it’s not necessarily reality. We don’t charge for every 10 minute phone call – really! In fact, we encourage frequent and open communication with our clients. The simple truth is that often, a quick check-in reveals some hidden opportunities that can save you from a tax disaster. No, we don’t need to know everything that is going on in your business or life but it truly pays to keep us in the loop on the big stuff like ownership changes, new states you’re operating in, upcoming retirement and gift planning, etc. If you think it might be important, send a quick email and we can provide a response that ranges from “no problem” to “significant issue!!” Even better – check in with us before you make the big decision. We can assist in structuring or finding a tax efficient solution to your problem. You’ll save a lot of money and heartache in the long run.
3) Accounting Staff that Fit Your Business
What should your accounting staff be doing and what does your business really need? Your answer will greatly depend on the size and complexity of your business. At a minimum, your accounting department employees should be able to provide you with accounting reports that make sense so you can assess profitability and performance issues, assist in budgeting your future income and expenses and generally provide information to outside parties such as banks, attorneys or CPAs without issue. If this is not happening, you may have to rethink your accounting needs. The best businesses have accounting staff that do all of this and more. It is well worth the price!
4) Gotcha – The Compliance Trap
There are plenty of items in the tax code that seem beneficial but can be compliance traps – sort of a “gotcha” by the IRS where complying is difficult at best and almost impossible at worst.
A quick example – your pet project that is like a second business to you: it is a labor of love and you spend your evenings, weekends and even a few Fridays on it. You have a website and customers; you designed a logo and spend your hard earned dollars on it. There is just one problem – you lose money on it every year. In fact, you haven’t made a profit since it started. Sound familiar? What you view as a business that is about to become profitable, the IRS views as a hobby. Oh, and all of those loses you have claimed in prior years? They’ll disallow them during an audit – “Gotcha!” What is the solution? If you have a profitable second business, by all means treat it as such. But if it’s truly a hobby, treat it as a hobby and limit those losses. You really need to ask yourself whether the risk of taking losses on a venture that could be considered a hobby, as well as the administrative burden of producing proof and documentation to the IRS may not be worth a few hundred or thousand dollars’ worth of tax deductions. For many taxpayers, the answer is simply “No, it’s not worth it!” These taxpayers may be giving up some tax benefits, but they are gaining simplicity and peace of mind – you can’t always put a price tag on that!
Of course, if you want help simplifying your “tax” life, you are welcome to reach out to us. We’ll be happy to help!
Author: David Shellan, CPA