When your tax returns need to tell a story
When I first meet with a prospective client I love to see what â€˜storyâ€™ the tax returns are trying to tell.
Typically, Iâ€™ll ask you what you understand your tax return to be, like whether youâ€™re a corporation, a partnership, an LLC, or whateverâ€¦
Iâ€™ll even start asking you some of the hard questions like WHY you are what you are.
From here, I need to see the tax returns, all of them, Business and Personal, State and FederalÂ so I can see if your story plays out.
For instance, if you tell me that youâ€™re an employee of your corporation, Iâ€™m going to ask questions when your corporate tax return shows zero compensation to the owner and your balance sheet says that you owe your corporation $500,000!
Or, I see , in addition to your corporation tax return, that you also have your own businessÂ on your personal return, and youâ€™re taking deductions there.
Or, youâ€™re complaining about all the taxes that you pay for your S Corporation restaurant, and I see all the profit that you have, and itâ€™s because your tax return very clearly says that you have $1,000,000 as CASH in your bank account, and you tell me that there canâ€™t be any more than $10,000 in your bank account!
The â€˜storyâ€™ has to play. Maybe thatâ€™s where my strength is, since Iâ€™m going to look at the big picture. Are we telling the State of New Hampshire (or neighboring states) a story consistent with what weâ€™re telling the IRS, taking a reasonable compensation at the same time. In the end , itâ€™s all got to be consistent.
When Iâ€™m sitting across from the auditor, I need to be able to tell them this â€˜storyâ€™, so itâ€™s important that whatever the â€˜storyâ€™ is, it needs to be credible. For instance, if your tax return says that you owe your company $200,000, youâ€™ve got a loan document to support this. If I walk in the door, and youâ€™re the owner, and introduce me to the â€˜presidentâ€™, well that president better be an employee, and not a â€˜sub-contractorâ€™â€¦
Do you know your story? Do you understand your tax returns well enough to know whether they tell the same story? Is your story credible?
If you want to learn more about this, check out Appletree Business Services' Business Financial Confidence Map.
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Copyright 2014 by Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire, with more than twenty- five years experience on Federal and New Hampshire issues affecting small business, and specializes in keeping his clients OnTrack with bookkeeping, tax, and payroll services for a fixed monthly fee. Learn more about Steve's exclusive SIX Step system developed for small businesses at www.appletreebusiness.com/map.