June/July 2009

Passionate About Small Business

With IRS Commissioner Douglas Shulman pressuring small businesses, and the Congressional Committee on Small Business pressuring him to stop, there is no better time to provide small business tax advice.

"Ask any entrepreneur what time of year they most dread, and they will tell you it is tax season," said Chairwoman Nydia M. Velázquez (D-NY). 

Velázquez questioned Shulman about the rising number of IRS small business audits. A recent study shows that although IRS audits of large businesses are at an all-time low, entrepreneurs are being audited at nearly twice their rate. In fact, the IRS audited smaller companies 41% more often in 2007 than in 2005, and companies with $10 million to $50 million in assets were 29% more likely to be investigated in 2007 than two years previously, according to a new study from the Transactional Records Access Clearing House at Syracuse University. Meanwhile, companies with more than $250 million in assets were nearly 40% less likely to be audited than in previous years.

"I find the IRS' recent shift in auditing attention from large companies to small businesses troubling," Velázquez said. "Our nation's entrepreneurs are having a difficult enough time without the IRS stacking the deck against them."

"Entrepreneurs don't have the resources to hire armies of experts like large corporations," Velázquez said. "Nothing strikes fear into the heart of a taxpayer more than an IRS audit, and yet entrepreneurs are being audited more often than their larger counterparts."

"We need our entrepreneurs to revitalize our economy," Velázquez said, "and the IRS can help by ensuring these small companies start benefiting from small business tax relief under the Recovery Act."

Therefore, for our annual Business Tax Prep Issue, the editors of CPA Magazine, NPA Magazine and Tax Magazine turned to three professionals who work with small business clients and are experienced with small business tax return preparation, including forms 1120S and 1065. We interviewed Steven Zelin from New York, NY, who spends his spare time entrenched in the lighter side of accounting, singing parodies he writes about the industry. "The Singing CPA" performs at trade shows and holiday and office parties. He has received press coverage from The Wall Street Journal and ABC Nightline. For more about Zelin refer to his website: www.thesingingcpa.com. 

Also contributing was Robert L. Cross, from Northglenn, CO. Cross serves as First Vice President for the Board of Governors for the National Society of Accountants (NSA). Cross started out in the publishing industry as a manager of information technology, specializing in integrating accounting systems with other information systems unique to the publishing process. A buyout in 1983 prompted him to join the public accounting practice his wife started 10 years earlier.

We also spoke with Marilyn Niwao, from Wailuku, Hawaii, on the island of Maui. Niwao also serves on the NSA Board of Governors as Governor of District XI. Her entry into accounting was a long and winding road, a path that allowed her the invaluable opportunity to learn by "being in the trenches," as they say.

We asked each of these professionals about current happenings in the industry  and the impact those events have had on their clients. The trio also offers advice for small business owners. Read on for the enlightening responses.

Editor: Tell us about how you got into the public accounting field and what you enjoy about it?

Steven Zelin: In 1998 I graduated from Alfred University with a B.S. in accounting. Of about 15 job offers, I narrowed them down to two — Arthur Andersen and Pricewaterhouse. I wasn't very good at shredding documents, so I chose Pricewaterhouse.

I'm passionate about providing the highest quality audit and advisory services to nonprofit organizations and small businesses. I love testing audit objectives, isolating differences and making management recommendations.

Robert Cross: Our initial vision was to add computer consulting to the services the firm offered to clients. Over time, those services evolved into additional management consulting and eventually into tax research and planning services. What I enjoy most about our practice is helping clients use budgets, trend comparisons, cash flow analytics, emerging technology and tax strategy to grow their enterprises.

Marilyn Niwao: My career path was unconventional. Unlike most accountants, I was not an accounting major in college. Instead, I earned a bachelors degree in mathematics, a masters degree in biostatistics and a law degree. In law school, I took a number of tax classes and was surprised to learn that taxes, at the 70% maximum rate at the time, could reduce a taxpayer's net earnings by a significant amount. I also learned that the U.S. tax code is the most complicated statute in the world, and I was challenged by the fact that working in taxes is like working on a giant mathematical puzzle. 

Before graduating law school, I learned that I could obtain more experience in the tax arena by working for the large "Big Eight" international CPA firms rather than a law firm. So I started working for one of them in Honolulu, performing tax research, writing tax opinion letters and preparing tax returns. However, I was frustrated by my lack of accounting knowledge. I worked late every night, trying to reconcile trial balances and figure out adjusting journal entries. Keep in mind, I hadn't taken any accounting courses. I survived in the field because I had  patient and helpful co-workers. I supplemented my work experience with self-study workbooks and night classes in accounting, and I subsequently passed the CPA exam a couple years later.

After practicing over 30 years in public accounting (24 years with my own CPA firm), I continue to enjoy working with business and individual clients. Although I do not practice as an attorney, I use my legal knowledge performing litigation support as an expert witness and master of the court. I also enjoy serving as a volunteer lobbyist for my state professional accounting organization (Hawaii Association of Public Accountants), which represents local public accounting practitioners throughout the state.

Editor: What is different today about representing small business clients?

Zelin: Small business owners want to know about entity structure. They are worried about estate taxes, business continuity planning and retirement planning.

Cross: Today, our clients accept without question that technology is essential to success. So now we can focus on managing cash flows, use emerging technology to drive new profit centers and offer efficient customer service. The use of innovative software and the Internet has changed our practice dramatically, and as new technologies emerge, they provide additional opportunities to help our clients find success.

Niwao: Practicing in today's environment is not as much fun because the tax code and accounting rules do not allow as much creative tax planning. Lower tax brackets and getting rid of so-called "tax shelters" over the years have made it more difficult to plan. In addition, the change in year-ends of S corporations, professional corporations, partnerships, and trusts from fiscal year-ends to calendar year-ends significantly increased the workload during tax season.

Editor: What advice do you have for other practicing accountants concerning assisting small business clients?

Zelin: Never tell the client what they should do. Always give them options and address the issues most important to them.

Cross: Don't let communication technology replace face-to-face time with clients. Frank discussions about business visions, emerging trends and periodic measured progress can yield big dividends.

Niwao: Learn as much as you can about tax and business laws because the advice and assistance you give directly affects the livelihood of others.

Editor: What are three ways that small business tax clients save taxes, and what is the most important strategy from your perspective as a small business accountant?

Zelin: 1.) Choosing the best entity structure; 2.) filing tax returns correctly and on time; and 3.) expensing business equipment. The most important strategy in reducing taxes for a profitable business is to set up a pension plan. This enables the business owner to expense the contribution to the plan and reduce the business' tax bill.

Cross: Payroll is normally the biggest expense for our clientele. Outsourcing and pre-tax benefits are common elements of an overall strategy to address that issue. Balancing Section 179 expenses with predictable depreciation scheduling are elements of using a capital expenditure budget to enhance available cash flows. Maximum deductions in the current year do not always serve a business' longer-range goals.

Another strategy we use is comparing tax rates/brackets for closely held entities. Although the S corporation election is an excellent tool, it is not always the best choice.  We have found instances when segmenting a business among multiple C corporations is more beneficial provided you anticipate and avoid the obvious downside implications. LLCs with C corporation members can also offer advantages. Entity selection should not be viewed as an either/or exercise. Know the treasury regulations and study the revenue streams of the business.

Niwao: From a big-picture point of view, three common ways to save taxes are: 1.) Defer taxable income; 2.) exclude income from taxes; and 3.) shift taxable income to others. From my perspective, deferring taxable income was the most useful strategy in the past. However, because tax rates are at historical lows, I've reconsidered this strategy. In many cases, paying taxes at the current low rates is preferable to subjecting income to higher future tax rates.

Editor: How effective have the latest incentives been for your small business clients?

Zelin: It's too early to tell. My profitable clients, however, will no doubt expense up to $250,000 worth of business equipment the year it's placed in service. For other equipment, they can claim 50% of the asset's basis as "bonus depreciation." The net operating loss provision was expanded to allow a company to go back five years for losses incurred instead of only two years. This means they can get refunds for taxes paid during those last five years.

Cross: Section 179 and special depreciation rules have provided the best opportunities for our clients. We have also found limited benefits with the capital gains rates for our real estate developers by converting corporate inventories to personal assets. But that requires following strict disciplines that are not always palatable to entrepreneurs.

Niwao: The latest tax incentives are not very helpful when businesses are struggling with lost revenues. I've advised clients who are C corporations to increase losses in order to take advantage of the longer net operating loss carryback periods and obtain tax refunds from earlier, more profitable years. Of course, this is not what bankers want to see, but bankers have been too conservative and are not lending sufficiently to keep businesses afloat in the current environment.

Editor: What is the most effective use of software and hardware technology in assisting small business clients?

Zelin: QuickBooks, always improving, is the best software for small businesses. It's now easier than ever for small business clients to back up and store their data.

Cross: Websites have had the biggest impact on sales and customer service. Budgeting/forecasting elements of software packages have been the most effective at giving our clients peace of mind and sense of control.

Niwao: We encourage businesses to use off-the-shelf accounting software if the staff is able to learn how to use it effectively. If not, we take over the bookkeeping. 

For individual clients, we regularly send them tax organizers. I have them answer the questions even if they don't fill out much of the financial information. In addition, we have increased the use of automatic scanning of documents (i.e., W-2s, 1099s, etc.) in the preparation of individual income tax returns to reduce manual inputting and to have electronic files rather than hard copy backup.   

Editor: What is the status of offering financial planning to small business clients?

Zelin: I am happy to help clients understand their options. I work with a team of specialists to provide specific solutions tailored for each client.

Cross: We don't plan to offer those services. The dynamics of financial markets and products just don't trip my trigger like the dynamics of growing a business enterprise. I suspect it's a control thing.

Niwao: In these difficult economic times, advice about managing cash flow and obtaining alternate sources of financing is important. Many businesses are struggling with high accounts receivable and reduction of credit lines from banks. Accrual-basis businesses with increased accounts receivable are left having to pay higher taxes with no accompanying cash flow.

Editor: What other services, such as payroll, write-up and computer services, do you provide to small businesses?

Zelin: While I do payroll for very small clients, I also have excellent relationships with large payroll service providers so my small business clients get large discounts. I also do write-up work, and I'm a QuickBooks ProAdvisor.

Cross: We offer payroll, write-up and software consulting services for six different accounting packages. Installation/implementation services generate the bulk of the fees we garner from those sources. We plan to transition our payroll to a website-only application in the near future.

Niwao: My firm is full-service in that we provide bookkeeping and payroll services; tax preparation and consulting; compilations, reviews and audits of financial statements; litigation support services; and management consulting. We also offer personal counseling to our clients.

Editor: What interesting client story comes to mind that you can tell us about?

Zelin: I provide accounting services to an architecture firm and have developed a good working relationship and friendship with the managing partner, William. Recently, at dinner with his wife, he told me about a business idea that he was working on with his father and asked for my opinion.

A few weeks later, I saw that Fordham University (where I received an MBA in marketing and finance) was holding a business plan competition open to alumni. I mentioned to William that this might be a good opportunity to focus on the venture. Even though the plan was due April 10, on the brink of Tax Day, I gladly offered to help. We had meetings, exchanged emails, had conference calls and made a mad rush for the deadline. To our amazement, we made it to the final four. On May 1, we will present the plan for the judges. Stay tuned for how the story comes out.

Cross: In the late 1990s, we took on a small retail client who was in big trouble. During the first year, we helped this client implement strict disciplines for internal control. We did staff restructuring, cash flow budgeting and developed a capital budgeting process. The company welcomed the structure and followed the plan with diligence. Using the process, the client opened two more stores in the next three years, added three new lines of imported products and created two categories of paid services. Today, the company has seven stores in three different cities and is still growing. Its website rivals all stores for product sales. Local customers praise the buy-on-line/pick-up-at-the-store process. Store traffic and impulse purchases are trending up significantly as a result.

Niwao: Many years ago, I advised a client to keep a diary of her business travel expenses so that she could deduct them. The next year, she produced a diary that contained everything she did on the trip, down to the smallest personal and private details. From that, I learned I needed to be more precise with my advice to clients and to speak in everyday language rather than tax jargon.

Another instance involved advice I gave to a client who was a famous international author. After he passed away, his son published a biography that mentioned my name and some of the confidential tax advice I had given his father. So much for confidentiality.

Editor: If you could change anything about your practice serving small business clients, what would it be?

Zelin: I would like to team up with partners who are creative, fun, knowledgeable and as hungry as I am to build a firm providing the highest quality of service to clients.

Cross: Taxes and uninformed (albeit well-intentioned) regulatory reform are the biggest external threats to every small business. All too often, legislation at the local, state and federal levels is driven by political trade-offs rather than a principled consideration of how to truly serve the public interest. 

So if I could wave a magic wand, I would imbue every lawmaker at every level of government with the clarity of thought and the prudence of action that accompanies a thorough acquaintance with those principles of economic freedom that were so eloquently presented by Adam Smith, John Locke, Edmund Burke and the other thinkers who inspired the founders of our nation.

Niwao: If I could change something that would make my life easier, it would be to allow S corporations and partnerships to be on year-ends other than calendar year-ends. That way, I could better manage my firm's workflow during tax season. The younger generation of accountants (and us baby boomer accountants) do not want to work crazy hours during tax season to satisfy "financial aid requirements" for schools.

I also dream of not having to fill out timesheets and send out billings in order to get paid.