CPA’s (certified public accountants) prepared tax returns, but sometimes bookkeepers also prepare tax returns.  Which should you use for your small business tax preparation?

Most people would look at cost first.  The CPA likely has a higher hourly rate than a bookkeeper.  The CPA may be fast.  However, the total fee will likely be higher with a CPA.  So bookkeeper right?  Not so fast.  The tax preparation fee is not the only cost involved in tax preparation.  The CPA may be more knowledgeable at finding all possible tax deductions. This is particularly true or relevant when you have a more complicate tax return. If you just have a W2 and no possible deductions why not just choose a bookkeeper, or some other low cost alternative.

It is also possible that your tax will be higher if the tax return is prepared by a CPA. The CPA may be aware of certain restrictions that the IRS may place on deductions. The bookkeeper may prepare the return with these deductions included. This could result in an audit, tax penalties, and interest.  This could significantly outweigh the savings offered on the tax preparation fee from the bookkeeper.

The only thing we have considered so far is the actual tax return prepared. You should also consider the potential future tax savings offered by CPA tax preparation versus bookkeeper tax preparation.  By preparing your tax return the CPA (or bookkeeper) will learn about your small business.

With this understanding of your small business, the CPA (certified public accountant) may be more qualified to provide tax advice for reducing your taxes in the future than the bookkeeper.  Again, if you have a more complicated tax picture, this is more important.  If you have a small business, there is more the CPA can do to reduce your tax.  If you just have modest W-2 income, perhaps a CPA is not needed for your tax preparation.

A real example may drive this point home.  I prepared a tax return for a client.  As part of that process, I reviewed a couple prior returns prepared by a different tax preparer.  One return had a significant net operating loss.  The loss occurred during a tax year in which taxpayers were allowed a loss carry back of five years.  Although the return was technically correct, the significance of this net operating loss was never communicated to the taxpayer.  Just prior to the expiration of the three year statute of limitations, I was able to prepare amended returns to carry back this net operating loss, resulting in a tax refund from a couple returns, four and five years earlier.  This generated a tax refund of over $44,000 for the taxpayer.

You could look at your tax preparation bill like your insurance bill.  It is unlikely your house will burn down next year.  Fire insurance can provide significance savings if there was a fire.  Even without fire, you receive piece of mind by the fact that you are insured.  It is unlikely that on any tax return, your CPA will generate additional tax savings of $44,000. You may want to pay the additional cost just to protect yourself from making such a huge error.  Additionally, you’ll enjoy the peace of mind.

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