Getting Value from Your CPA
How did you fare on April 15? Did you file on time or extend? How was your tax bill? Did you owe money or receive a refund? We won’t talk about whether you paid too much tax because no matter the amount, all Americans feel they pay too much tax. So how did April 15 treat you? Regardless of your answer, if you didn’t consult your CPA during the year, you may have missed out on his or her real value.
You see, most people think the value of a CPA comes only in that short period of time between January 1 and April 15, but the true value comes throughout the year when you consult your CPA on financial matters. The matters can be simple, such as how much to withhold for federal and state taxes or complex like when you are negotiating the purchase or sale of a business.
For example, let’s take a look at a typical business purchase. Say you get the chance to buy an established business. The current owner tells you the average annual income is $100,000, he wants $350,000 and you can pay it over 10 years at no interest. Let’s see, you get net cash income of $65,000 ($100,000 - $35,000) and build your own business asset in the process. Considering you only make $35,000 right now, that sounds great, doesn’t it?
Well, let’s ask some questions a CPA might ask. First of all, what does the balance sheet look like? What assets will you get with the purchase? Are there any receivables or inventory? Are there any real assets like equipment or buildings? Is the $100,000 really consistent and does it come from the good name of the business or a few contacts the owner has that will disappear when you purchase the company? Is the net income before or after taxes and does it represent real cash available for your living expenses or will cash flow be significantly less?
Not only must you look at the basic business questions, but the manner in which you structure the purchase is critical. If the business in the preceding example is a corporation, you have two choices. You can either purchase the assets or you can purchase stock. Let’s say the only asset of the company is its good name, commonly called goodwill. If you buy the stock, your basis in the company is $350,000, but you won’t be able to deduct any of that cost until you sell the company. If you buy assets, you will have a $350,000 asset, the cost of which you can deduct over 15 years. If your effective tax rate is 30% that saves you $7,000 per year. Would you rather pay less tax now or later?
There are numerous tax and legal matters that come into play when buying a business and the fact is you shortchange yourself if you fail to involve the proper professionals before, during and after the acquisition.
Even the simplest of tax planning techniques can have major consequences. Are your tax withholdings appropriate? If you withhold too much, you are giving the government an interest free loan. If you withhold too little and spend every dime you get, April 15 will be very hard on you. Why not talk to your CPA and determine what your proper withholdings should be?
The preceding are just two quick examples, but you will make numerous decisions in the coming year. Why not spend a little extra with your financial advisor to make sure you make the best decisions possible? Ultimately, every transaction in which you engage has a consequence. Sometimes the consequence is minor; sometimes a negative consequence can ruin you financially. Tax consequences can be severe if you design a transaction incorrectly, invest in the wrong asset for your retirement account or make other financial decisions without knowing all the ramifications. Consulting your CPA before finalizing a deal can help you avoid needless emotional and financial difficulties. If you and your accountant haven’t looked over the results from last year and what you expect in 2008, give him or her a call and make sure you’re on the right track. If you don’t have a CPA, give us a call. We are here to help you make the right decisions for your life.
Have a terrific May.