Whether you're a small business owner or you're getting ready to launch a business, you may be wondering when, or even if, you should hire a certified public accountant (CPA). While you can certainly take care of the day-to-day accounting yourself – especially if you have good accounting software – or hire a bookkeeper, there are instances when the expertise of a CPA can help you make sound business decisions, avoid costly mistakes and save you time.
First, it's important to understand how a CPA differs from an accountant. While both typically have accounting degrees, CPAs have passed the Uniform CPA Exam – a rigorous exam that tests one's understanding of tax law and standard accounting practices – and they have obtained a state license, which has good character and ethics requirements. The CPA takes professional education courses to maintain his or her license, and they may lose their license if convicted of fraud, negligence or ethics violations. The CPA also has unlimited representation rights before the IRS.
You don't necessarily need to hire a CPA as a full- or even part-time employee to benefit from his or her knowledge of the ins and outs of business finance, as many offer their services to small businesses as consultants. Here are four times you should hire a CPA.
1. Before you start your business
When you're launching a business and money is tight, the idea of paying hundreds of dollars for a few hours with a CPA may seem extravagant. However, like many other startup costs, it's an investment (and it's a deductible expense).
A CPA can help you set up your business correctly so you can avoid mistakes that could cost you much more to fix. Here are some of the decisions a CPA can assist you with as you get your business up and running. You might not need help with all of these decisions, but if you do, it's useful to know who can give you professional advice.
CPAs can recommend the best business structure for your specific business. The legal structure you use to set up your business – sole proprietorship, partnership, LLC, corporation or co-op – affects your taxes, liability and reporting requirements. It can also be difficult to change later on, and may require you to reapply for licenses, get a new EIN, notify your bank and insurance company, among other things.
They will help you determine whether cash or accrual accounting is the best fit for your business. When you're setting up your accounting software, one of the first decisions you're asked to make is which type of accounting you use. Generally, new businesses use cash accounting, as it's simpler, but there are instances when the IRS requires accrual accounting, such as if you sell goods to consumers and maintain an inventory. The difference is that with the accrual method, you record income and expenses when they're billed rather than when you receive the money. In a blog entry from QuickBooks, Carrie Smith writes, "The upside to using the accrual method is that it gives small business owners a more realistic idea of income and expense during a certain period of time." [Looking for accounting software? Check out our best picks.]
2. At tax time
CPAs can prepare tax documents, file tax returns and provide tax planning advice to help you strategize how you can minimize your tax liability for next year. Also, as mentioned above, CPAs can represent you if the IRS has questions about your return or you're audited, which is an important consideration.
Keep in mind that business taxes are very different from personal taxes, so even if you've always done your taxes yourself, you might want to hire a CPA – especially if your tax situation is complex. For instance, if you have employees, or if you sell products to customers in multiple states or countries, having a CPA handle your taxes can save you time and ensure they're done correctly.
Here are other ways CPAs can assist you with your taxes.
CPAs help you understand and comply with tax changes. When the tax code changes, such as with the recent Tax Cuts and Jobs Act, a CPA can help you understand if and how the changes affect your business.
They help you understand which deductions you qualify for. While you want to take as many deductions as you're entitled to, you also don't want to make questionable deductions that may trigger an audit. A CPA can help you decide when you should or shouldn't take certain deductions. Here are some examples of instances when you might need a CPA's advice.
- If you're starting a business and need to know which startup costs are deductible and how much you can actually deduct.
- If your business started out as a hobby but you're not yet turning a profit, and want to know how the IRS will classify your business and which deductions you can take.
- If your home and small business intermingle, and you're not sure which expenses are deductible. For instance, can you deduct your home office if you also have an office at your business location? If your vehicle is primarily used for work, should you or your business own it? Is your cell phone a business expense? If you take a business trip and extend it a few days for vacation, which expenses can you deduct?
- If you have children and want to know if there are any tax breaks you can take advantage of if you hire them.
3. When special circumstances occur and you need expert accounting advice and assistance
As you run your business, there may be specific instances when you need a CPA's expertise. For example, if you receive a letter from the IRS notifying you that you're being audited, or even if it simply requests additional information about your return, you should hire your CPA to represent you.
CPAs have experience dealing with the IRS and can help you respond appropriately, supply the information it needs, and resolve the issue as painlessly as possible. Mark Kohler, CPA and tax lawyer at Tax Slayer, notes in a CNBC article that even though a letter requesting information from the IRS may seem simple enough, "if you handle it incorrectly, it can turn into a big deal quickly."
Here's are some additional examples of situations that may prompt you to hire a CPA.
If you're thinking about taking out a small business loan. A CPA can help you decide if business financing fits in your long-term business plans. He or she can recommend the best type of loan for your business, figure out the ideal size of the loan and how payments will impact your cash flow. He or she can also prepare financial statements for loan applications.
When events in your personal life have the potential to affect your business finances or structure. You may need to hire a CPA if a family member who is a business partner dies or if the business is a marital asset and the business owners divorce. CPAs can advise if the event has tax implications, help calculate the value of the business or prepare financial statements to prepare the business to be sold.
4. When you decide to acquire, merge, sell or close
When you're facing significant structural or operational changes to your business, such as if you're considering buying a business, merging with another business, planning to sell or close your business, or deciding to take on a new business partner or dissolve a business partnership, you should consult a CPA about the tax implications for your business and for yourself as the business owner.
If you're purchasing a business, a CPA can help you analyze the business's financial records, verify its assets and assist with due diligence. Or, if you're selling your business, a CPA can give you an idea of what the fair market value of your business is and prepare your financial reports and statements.
A blog post for the CPA firm Bedinghaus & Co. explains that "a serious buyer will expect perfect accounting records as well as an accurate valuation," and you may lose potential buyers and receive a lower price if you don't meet these expectations.