Sent to you by Umesh via Google Reader:
Finding an accountant that understands the internet isn't easy and after going through half a dozen myself, I came up with some tips and approaches for finding the right one.
Taxes are a necessary evil in the course of doing business, but core to financing a government and living in a society. While the internet offers tons of tax advice both good and bad, I feel finances are important enough to warrant bringing in outside professional help. If you're a geek, the temptation is to think "this is math -- I know numbers!" but what you might be ignoring is the additional tax of having to learn an extremely complicated system. Leave it to the pros so you can focus on the thing you do uniquely well.
For me, having an accountant handle the complicated state of my finances also reduces the stress I get from using TurboTax each year and wondering if I did anything wrong. I want to state upfront that I'm not advocating cheating or cutting corners, but I've found in my own experience that the difference between a good accountant and a bad one can cost you thousands of dollars. A good accountant recognizes all the costs of running an online business, offers tips for good investments (that in turn, reduce taxes), and offers advice on how best to grow your business. Bad accountants miss out on all those things and simply give you a large bill due each Spring.
Compared to a traditional business, starting an internet business is trivial and carries a great number of advantages. You don't need a staff right away (as long as you do all the work). You don't need a storefront, inventory, or even anything to sell. You won't be limited by the hours of the day or your physical location. You don't need the permission of anyone to start. With just a single webpage you can start earning revenue through ads or other measures and begin from there building a business. I know people that have monthly expenses as low as $100 to rent a colocated server that brings in $10,000 per month. While that is amazing from the point of view of economies of scale, when it comes to taxes, it can be really problematic.
The rules governing taxes on business are geared towards the traditional, capital-intensive types of businesses (it always feels like half of the questions in TurboTax are about whether or not I own a farm). If you don't have to buy parts, pay a large staff, or purchase trucks to move products around, you don't have a lot of options when it comes to built-in deductions against your revenue. For the first few years I started making some money online, I only wrote off a minimum of computer equipment and a portion of my hosting and bandwidth fees. Every time I'd discuss taxes with friends, I'd hear new ideas for things I should have written off. After a few years of this, my finances and tax bills started to grow to the point where I felt a professional could help out.
Every Spring I'd take my 1099s to a new local accountant to run the numbers. What I found after using several local accountants was that they just didn't understand how the internet worked. They would ask me about equipment (minimal -- just a laptop), how much I drove (none, I do it all online from my home office), and how many employees I had (zero, though I've paid programmers and moderators as contractors for the past couple years). When asked for ideas of how I could reduce my taxes, they were stumped. I realized I wasn't using the right accountant when I ran my taxes through TurboTax online and found I saved several hundred dollars over what my own accountant was telling me to pay. And that was before paying the accountant.
All about shades of gray
While specific tax rules are fairly black and white, when you look at a tax return and consider there are thousands of decisions based on individual tax rules, the end result of where you balance revenue and deductions starts to become more art than science. I realized that several of my past accountants gave conflicting information and most would take a conservative approach by default. Only one accountant mentioned deductions from retirement accounts. I would argue with most accountants over things like how much goofing off I do using my laptop or my cable modem, even though being a "professional blogger" kind of meant that any and all web surfing might end up as content on my sites.
Earlier this year, I stumbled upon this post from someone offering tax tips for creative professionals. While I didn't think I'd use most of the tips, it definitely was a step in the right direction and I ended up ordering the book by the author. The book is loaded cover to cover with creative ideas on how to bend tax rules to your advantage and even though in my opinion about 1/2 of them seemed really dodgy and probably left you open for an audit, the book served as a good reference point when talking to accountants. The ideas in the book were beyond my comfort zone of things I'd do with my own finances, but I wanted to find someone that was somewhere in the middle.
By the time I read the book, I was getting advice from a local and very conservative accountant. On a zero to ten scale of conservative-to-creative accounting attitudes, I'd place that accountant at a 1 or 2 while I'd put the advice in the book at a solid 10. As April 2007 began approaching, I realized I was looking for an accountant to handle my upcoming taxes and I needed to find someone closer to my line of thinking, maybe at a 7 on my internal scale. Aggressive, but still safely within generally accepted accounting principles.
Finding the right one
I've gone through five local accountants in three years by simply scouring the phonebook and talking to them. It's not the best way to go, but you can eventually find someone to work with this way. After three years of searching I found a great (non-local) accountant by asking around among friends that are also involved with internet businesses. I'd definitely suggest using your personal network of friends and colleagues as they're likely to have found a tax pro familiar with the industry.
If you have a lawyer you're happy with, ask them who their clients work with. Like in any social network, the people who are the best at what they do tend to be connected to other people who are also very good. Or at the very least they can let you know if they've heard bad things about a potential accountant.
Go with loaded questions
Interviewing accountants is pretty straightforward. Once you decide on a specific accountant, you schedule an hour with them and they'll ask you about your business and your finances. This will be the first indication of whether or not the accountant is familiar with online businesses. Then they'll let you ask them questions and you'll be able to hit them with anything on your mind. Usually they'll charge you for an hour of their time and it is typically around $200 or so.
When you ask questions, it's good to feel them out a bit by asking very specific questions using your actual revenue numbers. If you've read the book or blog post I mentioned earlier, you might want to ask an accountant about some of the ideas you are comfortable with, as most find them fairly unconventional. If you ask about something the accountant disagrees with or warns against doing to save taxes, make sure their explanation makes sense and their demeanor is something you can work with.
My best piece of advice is to ask a prospective accountant questions that you already know the answer to. If you build websites, chances are you can deduct at least some part of any device that displays HTML and that you use for testing your sites and apps. Ask an accountant if you can write off a new iPhone (hopefully they ask if it's your official business phone and how you'd use the device). If you run a topic-centric blog or write about a specific industry, ask them if you can write off purchases that you review extensively on the site. While the accountant might not give you an answer 100% in the affirmative, it's good to gauge their response against your personal thinking on the issue. You should also ask about specific deductions that apply to you. If you have kids, ask about childcare tax credits (I knew I qualified for this but one accountant missed it on my taxes last year) and be sure to ask about retirement accounts. For most small internet businesses, you can setup a SEP-IRA that deducts money you put towards retirement right off your total revenue. It's not a 1-to-1 deduction but you can reduce your total taxes while you plan for the future. Only two accountants I spoke with even mentioned IRAs when I first talked to them. Only one of those two explained each and every option before I had to ask.
Accountant Showdown 2007
By April of this year, I had a local accountant I was wary of, I had a big city accountant suggested by a friend, and I had my old familiar buddy, TurboTax Online. I figured my finances were worth getting a second opinion about, so I decided to spend the money to have my taxes done all three ways. My local accountant charged about $350, the big city one was about $550, while TurboTax's business level with all the options ran me $99.
In the end, the big city accountant asked me the right questions and figured out a couple deductions I didn't know I qualified for, and saved me $1500 below what TurboTax came up with. I probably could have gotten my TurboTax return to match but I probably mis-read one of the hundreds of questions lobbed at me during the online process. The local accountant I wasn't a fan of turned out to be the worst option, coming up $1200 over my own TurboTax return. I suspect she left off a few business expenses I listed.
What's the point of having an accountant, can't I just use TurboTax and Google?
After doing my taxes online for 8 years and going through six accountants in the past four years, I've come to a few conclusions:
- TurboTax Online is pretty dang good and can get you 80% of the way
All but the best accountants I've worked with didn't do any better than me using TurboTax on my own.
- If you have time to do research and read up on tax info, TurboTax + your knowledge is probably equal to most accountants
This is a big "if", but if you have the time and you won't be satisfied unless you handle it yourself, a few books and a lot of reading at MotleyFool.com can you pretty close to the best advice you'll find in the wild. Then again, if you're dealing with thousands of dollars and you're busy, it's best to try out an expert instead.
- Quarterly tax payments are your friend
If you've ever run your own business or been a freelancer, you know the pain of scrambling to pay an unexpectedly large tax bill. Be aggressive with the amounts you pay on your quarterly payment schedule and you'll spare yourself a lot of pain down the line.
- Even if you handle taxes yourself, you should see a trusted accountant every December with your estimated year-end totals on revenue and spending to figure out where you'll stand come April
Every tax day for the last four or five years I've owed the IRS thousands of dollars. For the last two years, I've met with an accountant in December to handicap where I'd stand come April. It's been a godsend because I've been prepared both times for the worst, and had plenty of savings ready to pay the bill. A December accountant visit is also good for determining if your estimated taxes are inline with your earnings -- whether you should be putting away more or less the same amount the next year. Since first quarter estimated taxes are also due around April 15th, it helps to know that ahead of time as well.
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