Why Do Unethical Clients Bother Working With Tax and Accounting Pros?

why-234596_1280I’ve been lucky to have not encountered too many unethical clients in my short time on my own in this business. But I have encountered a few, and they quickly become ex-clients.

What I don’t understand is, if you own a business and you’re all about gaming the system, not reporting income, not filing the required reporting forms, etc. — why would you even bother working with an accountant to begin with?

Things business owners have said to me:

  • “I’m not going to report my cash receipts. I know what I can get by with, and if I don’t tell you about it, there’s nothing you can do about it.”
  • “I’m not filing a tax return in (insert name of state where the company conducts extensive amounts of business).”
  • “I’m not collecting sales tax.” (The exact quote was “I’m not fu#king serving as a collection agency for the godd@mned government”)

These discussions end with the client looking elsewhere for an accountant.

What I want to know is, if a business owner has this type of attitude to begin with, why would they even seek out a licensed professional to work with?

How do they think I, or any licensed professional, will respond when they say “I’m not fu#king serving as a collection agency for the godd@mned government.” Do they think I’ll just give them a wink-wink, nudge-nudge and laugh about it?

The question can be applied more broadly to unethical taxpayers in general, including the non-business-owner individual who wants to play games on their personal tax return. Why would they come to a licensed professional to begin with?

I asked one of my peers about this and he said it’s because that type of person likes to feel important. They “have an accountant” and they can brag about it to their friends.

I think maybe it’s like how some people “doctor shop” til they find a doctor who will give them antibiotics every time they get the sniffles. Keep changing doctors til you find one who tells you what you want to hear. \

The unethical client tests the waters. If they discover that this accountant expects them to follow the law, they’ll move on til they find an accountant who will overlook their transgressions, or who perhaps won’t ask as many questions and thus won’t stumble upon their transgressions.

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Tips For Financing a Small Business: Part 2 of 5 — Use Your Accountant as a Resource

phone-487702_1280In February of 2014, I wrote a blog post titled “Financing a Small Business: 4 Items to Remember.” Over the next few weeks I’m going to expand on the 4 things from that post, plus a bonus 5th item that came to me later.

Today is Part 2: Work with Your Accountant

Good accountants and tax preparers can be excellent resources for business owners. I know good bankers, attorneys, investment advisors and insurance agents that I can refer the owner too. (I also know some “not good” bankers, attorneys, investment advisors and insurance agents that I can steer you clear of.)

Most people don’t realize that their accountant can be this type of resource.

As always, most of the blame for this lies with accountants for not telling our clients about all the things we can do for them.

When looking for a business banker, what should you look for? My experience with business bankers has been a mixed bag. Here are 2 things I look for when determining whether or not a banker belongs on my “good” list:

  1. Experience with businesses and familiarity with basic business terminology. A lot of times I’ll use terminology as a quick test to weed out the bad bankers. I can spot a clueless business banker by looking at their expression when terms such as “Schedule C” are used. (Schedule C is the reporting form used by sole proprietors; it’s a common term and a banker who works with businesses should not look confused when it’s used.)
  2. Professionalism. For me, this is more than just looking at the banker’s appearance and conduct. The key on professionalism (for me) is: is the banker thinking about the needs of the business, or is the banker just trying to hawk additional products? Some banks require their bankers to be constantly selling and pitching products. This isn’t really the banker’s fault because they’re just doing what they’re told, but that would be a bank I would not go to for a loan.

I take my professional network seriously. If a professional (banker, attorney, investment advisor) doesn’t meet my high standards, I will not refer clients to them. Period.

And yes, I have a formula I use to evaluate these connections.

Most accountants probably don’t go that that nerdy of an extreme, but the point is, use your accountant as a resource when seeking financing for your business.

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Handling Franchise Fees on a Tax Return

Scenario: client is a sole proprietor. They enter into a small ($5,000), 5-year franchise agreement. The client is paying the $5,000 ID-10028287over a 24-month period. The client is also paying ongoing royalties and marketing fees to the franchisor. How is all of this handled on the Schedule C?

Answer:

This scenario sounds complicated but the answer is straightforward.

  1. The $5,000 franchise fee is considered an asset. The $5,000 is deducted over 180 months (15 years). This is true even though the franchise agreement is only 5 years long.
  2. The monthly payments on the $5,000 are not deductible unless the client is paying interest, in which case the interest would be deductible.
  3. The ongoing royalties and marketing fees are deductible as paid.

What this means is, if the client renews the franchise agreement 5 years from now, they’ll have TWO franchise agreements to account for as an asset on their tax return — the one they entered into 5 years earlier, plus the one they just entered into.

This is true even though the old franchise agreement expired after 5 years — it’s still deducted over a 15-year period.

Image courtesy of Ambro / freedigitalphotos.net

Tips For Financing a Small Business: Part 1 of 5 — There’s Going to Be Paperwork, Deal With It

calculator-178127_1280In February of 2014, I wrote a blog post titled “Financing a Small Business: 4 Items to Remember.” Over the next few weeks I’m going to expand on the 4 things from that post, plus a bonus 5th item that came to me later.

Today is Part 1: There’s Going to be Paperwork. Learn to Deal with It

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Paperwork and bureaucracy are the bane of existence for small businesses. Most of the time, it seems like nothing is ever easy.

Everywhere you turn, there’s paperwork. Forms to fill out. Boxes to check. Hoops to jump through. Taxes or fees to pay.

Working with a bank is the same way. Banks will require you to provide them with a mountain of paperwork in the form of tax returns and financial statements. The bank will have a mountain of paperwork that you have to fill out and sign.

I once was working with a business that was applying for a loan to buy equipment. The owner said he HAD TO HAVE this equipment in order for his business to achieve its goals.

The bank asked for the usual things.

The business owner had nothing to hide.

But the owner thought all the paperwork was stupid and too much of a hassle. So he told the bank to “forget about it” and he walked away. He avoided the paperwork he hated so badly … but he also didn’t get the loan for the equipment he said he “had to have.”

If you’re going to a bank for financing, you’re going to have to jump through their hoops. That’s just the way it is.

The bank has the money. You don’t. You want some of their money. So you do the things they tell you to do.

I don’t like the paperwork either. But when I’ve applied for loans, I fill out whatever the bank says to fill out, because I’ve needed the money.

It’s like I tell my business clients about other things involving paperwork: the sooner you come to terms with the fact that there’s paperwork and “stuff” you might not want to deal with at every turn, you’ll be better off.

You don’t have to like the paperwork. No one does. But you do have to learn to cope with it.

A Little Bit About Sole Proprietorships, Part 2

19162227Sole proprietorships get a lot of bad press. A lot of accountants and attorneys like to run down sole proprietorship’s. But I don’t mind sole proprietorships — I operated my business as a sole proprietorship for a long time.

Here are some of the advantages of operating as a sole proprietor:

  • They are easy to get into. There’s no real paperwork to fill out. You just start conducting business.
  • They are simpler to administer and therefore your accounting and legal fees will generally be lower.
  • As your business grows you can always convert to something else. As you go up the ladder from sole proprietor to corporation, it’s easy. But it’s hard to go down the ladder from a corporation to a sole proprietorship.

There are also plenty of disadvantages:

  • The self-employment tax is a big hit because that’s 15.3% on top of any income taxes that you will owe.
  • You are not considered an employee of your sole proprietorship (except for self-employment tax purposes) so any money that you take out of the business is not deductible as wages.
  • Meaning, you are taxed on your net income even if you take no money out of the business. So say you have $50,000 of net income from your proprietorship but you live on savings or you live on your spouse’s income and you take no money out of your sole proprietorship for yourself. It doesn’t matter — you still pay taxes on $50,000. And even if you withdraw all $50,000 for yourself, that withdrawal is not deductible as wages, so you’re still paying tax on $50,000.
  • There is no way to split income. That’s a benefit of being a sole proprietorship – you get to keep it all. But it’s also a downside to being a sole proprietorship — you are taxed on all of it.
  • The tax treatment of health insurance is also much less “tax friendly” when you are a sole proprietor compared to when you are a rank-and-file employee. A full discussion of health insurance is another discussion for another blog post.