Choosing the wrong accounting method might not trigger an audit, but it can sure cost a business money.
To sustain organic growth in your firm, you need to find ways to distinguish yourself from your competitors. Sometimes the other firms might make it easy by forgetting to ask an important question or failing to recognize the low hanging fruit of a particular election. But many of the most desirable clients on your wish list will likely be dealing with quality accounting firms that cover the basics pretty well and provide solid advice when it comes to planning.
When you’re up against a quality firm, it helps to have some go-to areas on the tax return where even seasoned professionals miss opportunities. Tax accounting methods is one such area.
The tax accounting method choices that a business makes frequently provide opportunities for improvement for two reasons:
- Cousins DILLY and SALY: When a firm prepares returns for a business over the course of a few years, it’s easy to fall into the pattern of “do it like last year” (DILLY) or “same as last year” (SALY). Good firms work diligently to make sure their clients incorporate law changes and regulations into their strategies, but they sometimes fail to challenge bedrock assumptions like accounting methods.
- Bad accounting methods aren’t illegal, just expensive: In most cases, taxpayers choose accounting methods that are permissible under IRS rules. However, either because of poor advice on the choice or a change in circumstances over time, they don’t always choose the one that provides the best result for tax purposes. This choice is unlikely to trigger an audit because the taxpayers aren’t doing anything wrong. They’re just missing a chance to be right and have a lower tax bill.
The best way to review a business’ tax accounting method choices is to look at its returns. However, there are a few questions you can ask and assumptions you can challenge even in casual environments like networking events or golf games.
- Is your business on the cash or accrual method for tax purposes? Are you required to use that method, or should you review your options? We recently encountered a case where a preparer assumed a business had to be on the accrual method because they had over $5 million in sales, but the tax return preparer hadn’t considered a recent Revenue Procedure that allows the use of the cash method to continue in certain circumstances on up to $10 million in revenue. The tax return preparer didn’t realize they met the requirements, so the company and its owners overpaid their taxes for a number of years.
- How do you treat property tax and insurance payments? Even businesses that are required to use the accrual method for tax purposes are permitted to use the cash basis for these expenses in certain circumstances.
Once you have a chance to look at the return, there are all kinds of things you can learn. If you’re not familiar with reviewing accounting method choices on tax returns, you can also outsource the review to us or we can train your staff to find the opportunities that potential clients may have missed in this area.
CSP360 professionals bring an in-depth focus to a review of fixed asset schedules and depreciation method changes that few accountants can match. We frequently help our clients deliver value to their clients by identifying the use of impermissible accounting methods, most often by correcting depreciation methods resulting in significant tax savings.
For more information on accounting method changes or to inquire about a review of a taxpayer’s tax accounting elections, please contact us.