Beyond Deductions: 10 Questions to Ask Your Tax Accountant
By William Perez, Enrolled Agent
With tax season upon us, many of us are sorting through piles of documents and receipts and getting ready to meet with our accountant. Clients often think to ask questions related to taxes, such as what they can deduct.
But tax accountants can help entrepreneurs on a wide range of money matters beyond just preparing the annual tax forms. For example, did you know you can ask your accountant about how your business compares to your competitors? Here are some other questions your tax accountant can answer, and why you should be asking them.
What’s my cost basis?
My client Alex bought an office building in 2016 and began making substantial repairs to the roof. Alex should be keeping records of these additional costs above and beyond the original purchase price of the building, as they increase what’s called his cost basis in the property. Cost basis becomes relevant for tax purposes when an asset is sold, as the owner will need to report how much income was generated (or lost) by selling the asset.
Increasing the cost basis of an asset—in this case, the original purchase price of the property plus the improvements Alex makes—reduces the amount of profit, which in turn reduces the amount of tax due on the profits. And that, of course, means reducing the amount of tax you pay.
Trying to figure out the cost basis years later will likely prove difficult, especially if papers have been lost, destroyed, or gone missing, as they so often seem to. That’s why it’s a good idea to track your cost basis from the beginning, when the asset—be it a building, piece of equipment, or other item—is first purchased.
You can ask your tax accountant to make a spreadsheet or work paper in which you can document cost basis, capturing the data while it’s fresh and the documents and receipts are easily accessible.
How does my business compare to my competitors?
Of course, we can’t, and wouldn’t, share another business’s confidential financial information, but accountants can compare your business with national industry averages or local competitors. Using data already contained on your tax return, accountants can apply a financial ratio analysis and benchmark your business locally and nationally, using websites such as BizStats and SizeUp.
This financial analysis can identify opportunities to strengthen your bottom line or to spot red flags that might trigger an IRS audit.
Is there anything on my tax return at risk for an audit?
Just what does the IRS look for when selecting a tax return to audit? Two things: missing information and items that seem large, unusual, or questionable. The IRS’s computers are very good at comparing all the filed W-2s and 1099s filed against what’s reported on a person’s 1040. And IRS auditors are trained to look for numbers that seem too large in comparison to the rest of the return, or unusual deductions that don’t make sense for a particular situation.
Does anything stand out on your return? Ask your accountant to look at your tax return through the eyes of an IRS auditor. Once your accountant has identified three or four things that might catch an auditor’s eye, ask how you can organize your documents and data to support those potentially suspect entries found on your tax return.
When will my tax return be ready for review?
Because it’s very easy for tax accountants to get backlogged, consider asking your accountant to provide you with a date when your tax return will be ready.
This helps accountants commit to finishing up their work by a specific date, which in turn helps them prioritize your return in their workload. This especially important if there’s a chance you might need your tax return earlier than normal because you are applying for financial aid or buying a house.
Can we agree on a fee upfront?
All too often, clients don’t know how much having an accountant to prepare their tax return will cost until after the work is done. Because many accountants charge by the hour or by the form, your accountant may not know how much to charge you until they finish their work.
Consider negotiating a flat fee up front, before the work begins. This forces your accountant to do a careful job of estimating how long it will take to do the work. But the extra negotiation pays off handsomely for both parties: you get a fee you can afford, and your accountant doesn’t have to worry about a client suffering from sticker shock.
Looking for more tax tips? Check out more from our experts on the Townsquared YouTube channel!
What metrics are important for my business?
aka How would you value my business?
If you’ve watched “Shark Tank,” you know that most entrepreneurs struggle to put a dollar figure on how much their business is worth. You can get a leg up on this challenge simply by asking your accountant how businesses in your industry are valued. Often, business valuation comes down to one or two core metrics.
You need to know which factors are important when determining the value of your business, but those factors aren’t necessarily obvious. Dental practices, for example, are valued using a much different formula than bakeries.
So knowing how to value your business—knowing which metrics matter—means you also know the core metrics you should focus on as you grow your business.
For example, gross margin is a key metric for food service businesses. This ratio condenses the relationship between inventory costs and sales revenue into a handy percentage. So, if a taqueria has a 50 percent gross margin, that means that, on average, for every $1 of sales, the taqueria spends 50 cents on food and other costs of goods sold.
Knowing the gross margin helps food service and other business owners make informed pricing decisions, such as on-the-spot discounts.
Find out which metrics are vital for running your business, and you’ll discover ways to strengthen your business.
Can you set up my accounting software so it is fully compatible with your tax software?
Tech savvy accountants can import data from QuickBooks or Excel, can download data about investment income directly from financial institutions into their tax software, or synchronize with a client’s cloud-based accounting system. Less data entry means your accountant can prepare your tax return more quickly and more accurately.
How do you store my financial documents?
Accountants have mounds of sensitive data in their offices: W-2 forms and profit and loss statements, Social Security numbers and dates of birth, even the names of all your kids. You should definitely know how your accountant stores all your data. Are paper documents filed away in a locked drawer? Are there passwords protecting the accountant’s software? (Does the accountant use two-step verification?) Does the accountant encrypt your data files? What about old files the accountant no longer needs? Do those get shredded?
Can you help me stick to a budget?
If your goal is to stick to budget, ask your accountant to hold you accountable. With the right feedback and coaching (or pressure) from your accountant, you can achieve your goals and navigate tough decisions. Coaching can mean words of encouragement, or stern counsel, the discipline of regularly scheduled meetings, and any other process whereby good habits are formed and bad habits rooted out.
One my clients had trouble keeping track of her money. I noticed she kept a notebook with her for doodles, notes, and to-do lists and took it everywhere. I encouraged her to start a notebook just for her finances, tracking what comes in and what goes out, and we touched base once a month to see how things were going. That process worked well for her. Your accountant can help you find a regimen that works well for you.
Will you walk me through my tax return?
It’s time for you to sit down with your accountant to review your tax return. This is your chance to really understand what’s going on with your money—and catch any errors. What’s on your tax return? How is it organized? Where did these numbers come from?
Understanding what’s happening to your money is particularly relevant for entrepreneurs preparing their tax return for the first time. This year was my client Robert’s first as a solo entrepreneur. I showed him how to keep track of his business income and expenses. At tax time, I’ll show him how all the data from his spreadsheet made it onto his Form 1040, so Robert can see the connection between the data he kept track of and the final results on his tax return.
Every so often we hear in the news about folks who’ve gotten in trouble with the IRS because their accountant took deductions on their tax return that the client didn’t know about. A walk-through, during which you can ask your accountant to explain anything you don’t understand or recognize on your return, prevents this problem and helps keep everybody on the IRS’s good side.
Tax accountants love putting on their thinking caps to improve the financial lives of their clients, so take advantage! From reducing the risk of an IRS audit to helping you stick to a budget, or identifying the core variables that add value to your business, a few extra questions can make a big difference in your business’s financial health.