The cost of preparing taxes for small businesses
Preparing small business taxes is a cost of being in business. One of the main differences in how much it costs from one business to the next lies with how the owners choose to accomplish the task. Some small business owners do their own taxes using pencil, paper and a calculator, while many others use software. Still others will turn the whole process over to an accountant or tax preparer. A small business management education makes it easier for the business owner to understand taxes and manage how they affect the business.
Information collection and tracking
The basis for any small business tax return is the accounting record of the business. It takes time and materials to track expenses, receipts and other tax-specific information, so those become part of the cost of preparing the business’ taxes. Most business owners somehow have this cost built into their cost of doing business, so they actually do manage to get reimbursed for their time and materials expense by the customers who buy their products and/or services. The cost of the business accounting is included in the cost of the products or services.
It is a rare business today that doesn’t use some kind of business accounting software package, or the services of an accountant. Those costs also become part of the cost of preparing the taxes. However, tax preparation costs are only a portion of that expense since the accounting software, or accountant services, also contribute to satisfying other business needs such as tracking receivables and balancing the business’ accounts.
Self preparation
Small businesses are classified by the Internal Revenue Service as those with assets of $10 million or less. According to the Small Business Administration, small business accounts for 99.7 percent of all employer firms and 52 percent of those are home-based businesses. It is apparent, then, that many small businesses are using tax software, or pencil and paper, to prepare their business taxes. For those using software, the cost of the tax software is also a cost of preparing taxes. In early 2011 the cost of tax software that will handle the needs of a small business, including online offerings across three vendors, was between $51 and $75. Vendors also charge additional fees for doing the state portion of tax preparation, and that can range from $30 to $40. Generally the electronic filing portion is free for a single return. These costs are deductible expenses for the business.
Hiring it out
Many small businesses have tax situations that are not handled well by tax preparation software. That’s because the software is only as good as the user’s understanding of their own tax situation, and their understanding of what input the software requires to do the proper calculations. Tax software also may not alert the user to additional deduction opportunities, or offer advice on taking one deduction over another when only one can be selected.
There are other reasons some small businesses hire out their tax preparation. Many have longstanding relationships with their accountants and simply feel more comfortable leaving tax preparation to them. Since the cost of the accountant’s time is part of the cost of tax preparation, that amount is a deductible expense for the business. Other businesses use the services of a tax preparer. In 2010 one account reported the average fee being charged by preparers was $229 with fees ranging between $551 and $2,044 for various specific forms such as Form 1120 and Form 706. Those fees assumed the client collected and organized all the information necessary to complete the return. Again, these expenses are allowable tax deductions that can be taken the following year.
