Maybe TurboTax isn’t as easy as it looked. Maybe you’re seduced by H&R Block’s claims that they save the average tax payer $1800. Maybe you just don’t know how categorize that shoebox of receipts you keep under your desk, but chances are, you’ve wondered whether you should hire professional help.
This tax season I bit the bullet and hired an accountant. I hired a guy who is both an accountant and a lawyer, and I figured that he would know enough loopholes and secret deductions to more than make up for his $375 price tag (for comparison purposes, H&R Block charges about $300 in San Francisco). That did not turn out to be the case, but I’m still glad I hired him.
It turns out, partially due to the research I’ve done for this blog, that I would have paid the right amount of taxes had I filed them myself. This meant, however, that I did not have a lot to explain to my accountant during our one-hour session and got to spend most of my time asking questions and receiving advice. Here are some of the things I learned:
- Unless you run a business that is really open to litigation, you may want to think twice before changing your sole proprietorship to an LLC. LLCs require a lot of paperwork and things like officers and meetings. Also, in California, the annual filing fee is $800, which is a lot more than your typical liability insurance premiums, so you’re better off just getting insured.
- Watch your inventory. You can only deduct the cost of inventory you sold last year, not all the inventory you bought.
- Always look out for standard deductions (like 48.5 cents/mile for car costs) and compare them to your itemized deductions. Very often one will be much higher than the other.
- If you use bookkeeping software like QuickBooks (which works great with TurboTax), file your taxes according to cash accounting reports, not accrual accounting reports.
- Gifts under $12,000 are always tax free for the recipient, so that birthday check from Grandma is not taxable income.
- You can’t deduct your home office if your self-employment income does not exceed your expenses, but the deductions keep carrying over from year to year until you post a profit, so keep track of them as they pile up.
In the end, the knowledge I gained from my meeting was well worth the expense. I am new to self-employment, and I liked having the peace of mind that I had prepared things correctly. Since next year will be my first year of inventory, I will probably hire my accountant one more time. In my third year of business, however, I am aiming to strike out on my own and file my taxes by myself.