Whether it involves designing their own websites or making their own deliveries, small business owners are often do-it-yourself types. But does it really make sense to do your own taxes?
“Do-it-yourself tax preparation is not like do-it-yourself brain surgery,” says Larchmont, N.Y.-based tax attorney Julian Block, the author of Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers.
Still, experts add that just owning a business can make it more likely you'll be audited. “There are so many things that can go wrong,” says Mike Ryan, director of the Twin Cities Small Business Development Center in Minneapolis.
Going it alone isn’t right for everyone. To help you understand if it’s really right for you, we outline five factors to consider before you DIY.
1. How comfortable are you with numbers? If you’re comfortable handling your own accounting, odds are you will feel comfortable doing your own taxes, says Vinay Navani, a certified public accountant and shareholder at Wilkin & Guttenplan in East Brunswick, N.J. “If you’re doing your own accounting, you can look back at the finished product and say, ‘Does it make sense?’” Still, he says that if the idea of doing your taxes stresses you out and the process of determining whether expenses are business or personal is confusing, you might need to leave it to an expert. "The whole idea about doing your own business taxes is if you’re comfortable with numbers, and it makes sense to you, and it’s not a stressful process,” Navani says.
2. How complicated is the business? More complicated business structures are another story. "If you’re filling out a Schedule C as a sole proprietorship, doing your own taxes might not be that difficult,” Navani says. “If you’re an S Corporation or an LLC, it gets a little bit more complicated because you’re dealing with a balance sheet. You need a stronger understanding of accounting,” Navani says. Ryan adds that those with employees and a payroll to manage face an added level of complication that likely requires a CPA. “If you have employees, definitely get a professional,” Ryan says.
3. Have there been any life-changing events? Owners who are generally comfortable doing their own taxes might still want to bring in a professional if there were major changes over the past year. “If you got a divorce or sold your home, you might need professional help,” Block says. A business owner who went through a divorce might have the ex-spouse owning a part of the business’ assets now -- and filing a separate return. People claiming a portion of home depreciation through a home office deduction could be stuck paying a “depreciation recapture” should they sell their homes for a profit. “I would say not to wait to file a return to contact a tax professional,” Block says. “If you wait after the year has closed to contact a tax professional, there’s not much you can do about tax-saving strategies.”
4. Has your business lost money? Ryan generally advises 30 to 40 small business owners per month in the Twin Cities. Since the Great Recession, more have been losing money. Sometimes businesses 'lend' money to the owner to avoid taxes, a tactic that could raise alarm bells with the IRS, Ryan says. It helps to have a tax professional at your side in such cases. Unless a business’ finances are straightforward and simple, Ryan advises business owners to hire a CPA because it prevents much costlier trouble with the IRS: “I want someone who says, ‘I know the rules, and they did it properly.'”
If you’re not sure if you should DIY, take comfort in a middle option. Says Navani, instead of spending hundreds of dollars to have a tax professional figure out your taxes, it is possible to pay them substantially less to review the finished returns. Some clients come to Navani on a Saturday in February and just have him look at the paperwork they’ve finished on their own. “We’ll spend an hour talking about it, asking questions, making sure it makes sense.” He says these are very high-level reviews, where he checks if any options have been left on the table. If you’ve already completed your taxes, consider taking your paperwork to an expert you trust before filing. The review might be enlightening and give you a sense for whether you should be going it alone in the future. He suggests this both for the education on deductions you might have taken but shouldn’t have and for "the chance to find things you might have missed,” Navani says.