Tax consequences should be evaluated in every significant transaction. It is extremely important at year end. However, the tax tail should not wag the dog. Items to consider at year end would be the deferral of income into the next year and the acceleration of expenses into the current year. However, a business should not automatically go out and spend money just to reduce taxes. If you expect to be in a higher tax rate in the subsequent year you might want to recognize income in the current year and move deductions to the subsequent year. If a tax benefit will be lost in the subsequent year you might want to take the deduction in the current year.
Beware of tax shelters promoted on the basis of tax reduction. A typical comment is that many tax deductions work only in the 100% bracket and then you will only break even. A tax shelter or investment should have an economic benefit.
Do the tax research before entering into a transaction. If you properly research the issue and plan a transaction around the tax research you will have a much better chance to prevail in the event of an audit. It is much easier to defend a position that has been researched than to plug a hole after the transaction.
Beware of tax firms that try to push past the limit or do not know the limits. A tax firm that has a bad reputation with the IRS can increase your probability of an audit. Also, beware of firms who put down the IRS agents as not being competent. The caliber of IRS agents is very high. Our firm works from the basis of respect for the agents and we take the extra steps to provide documentation to support a position taken on a return.
This is directed to all small businesses and is not directed to any one client. Generally a small business does not have the resources of a large business to implement and monitor internal controls. We all like to think we can trust everyone on the accounting staff. However, a high percentage of small businesses have a greater exposure to misallocation of assets and embezzlement, especially when the business has a one person accounting staff. Yet there are controls that can provide significant protection against misappropriation of assets by embezzlement.
First of all, the owner or manager of the business must personally and closely supervise the accounting staff. All bank statements should be sent directly to the manager or owner of the business and should be reviewed before they are forwarded to the accounting staff. The owner or manager should periodically review accounts receivable, accounts payable, cash disbursements, cash receipts, journal entries and other accounting records.
A problem with some software is that a person can issue a check inappropriately and then change the payee in the software without a journal entry. The owner should insure that the accounting staff can’t change entries without leaving an audit trail. This can usually be controlled by the software.
Obviously the above is not written to include all procedures to protect the small business. However, we can assist clients in selecting procedures that are tailored to their needs.