Frequently Asked Questions
How much should I withhold from my paycheck?
The answer depends on many factors. Do you prefer to withhold more today so you get a refund next year? (Your money is really an interest-free loan from you to Uncle Sam). Or are you disciplined enough to save some of your paycheck today to pay your taxes next year? (You could invest the money in the meantime).
Considering your prior year tax liability, do you know how to avoid an underpayment penalty?
My lender is requesting financial statements prepared by a CPA. Why can’t they accept my income statement from my accounting software?
If you approached a lender to obtain a loan for your business, they may request CPA-prepared financial statements. The terms and amount of your loan will depend on the financial condition of your business. The lender will need assurance that the financial statements accurately represent the financial position of your business. Often these financial statements will need to be provided initially and every year after until the loan is paid off.
There are three levels of assurance related to the presentation of financial statements—audits, reviews and compilations. Be sure to clarify which level is being requested by the lender:
- Audit – Highest Level of Assurance – Audits provide the highest level of assurance. An audit is a methodical review and objective examination of the financial statements, including the verification of specific information as determined by the auditor or as established by general practice.
Included with this is a review of internal controls, testing of selected transactions, and communication with third parties. Based on the findings, a report is issued on whether the financial statements are fairly stated and free of material misstatements.
- Review – Limited Assurance
Less extensive than an audit, but more involved than a compilation, a review engagement consists primarily of analytical procedures the CPA applies to the financial statements, and various inquiries made of a company’s management team. If the financial statements or supporting information appear inconsistent or otherwise questionable, there may be a need to perform additional procedures.
A review does not require the CPA to study and evaluate a company’s internal controls, or verify data with third parties, or physically inspect assets. Rather, a review report expresses limited assurance in the form of the statement: “We are not aware of any material modifications” for the financial statements to be in conformity with the Generally Accepted Accounting Principles (GAAP). Reviewed financial statements must include all required footnotes and other disclosures.
- Compilation – Lowest Level of Assurance
In compiling financial statements for a client, the CPA presents information that is the “representation of management” and expresses no opinion or assurance on the statements. Compilations don’t require inquiries of management or analytical procedures. Instead, the CPA relies on knowledge of accounting principles and a general understanding of the business. Some compilations do not require footnotes or even a Statement of Cash Flows. These compilations are called “limited or non disclosure compilations.”
What if I have estate, gifting or asset protection concerns?
Before making a serious and perhaps irreversible decision about shifting assets to other individuals, trustees, guardians or planning the transfer of your estate, consult a qualified professional about how to take advantage of the many tools available to preserve your assets with the least tax and transaction costs. Consulting a team of an attorney, investment advisor and CPA is generally the best way to develop the appropriate plan to meet your goals.
Is it worth the cost of a CPA to get your tax return prepared?
While many options exist for preparing your tax returns, the complexity of the tax law continually increases—and in recent years the pace seems to have increased. If you experienced anything out of the ordinary in your life, you’ll need more than a checklist in a software package to determine if you handled all your financial affairs in the best way possible on your tax return. A serious conversation with a tax professional may open opportunities for tax savings you might have never considered.
Should I consult a CPA if I’m starting a new business?
Yes. You’ll need to discuss the best organization for your company for tax purposes as well as numerous other issues relating to operations, including pricing, inventory, payroll, liability and profit margins. How will you handle your bookkeeping, banking, payroll and bill payments? Don’t wait until year-end to hold these discussions. You could make decisions without the proper advice, which could hurt you financially or legally.
Do I really need to pay a CPA to prepare my financial statements? Couldn’t I save money doing it myself?
You could…but how valuable is your time? What could you be doing to build your business with that time? Could you earn more than what a CPA would cost? Also, don’t forget: a CPA knows the formatting standards that the readers (bankers, investors, etc.) of your statements expect, and you’re more likely to answer these questions differently as your business grows.
Moreover, ask yourself if you possess the skills and desire to do it yourself. Will you need to learn these skills and then keep yourself up-to-date? Do you really want to crunch numbers? Do you want more than just a report when you’re done—do you want to understand what the numbers mean?
How can I increase my child’s financial aid?
Several strategies exist that may increase the amount of aid your child is eligible for:
- Try to avoid putting assets in your child’s name. Investments owned by a child can impact negatively aid eligibility.
- Reduce your income. Income for financial aid is generally based on your previous year’s income tax return. Reducing your taxable income is key in the years immediately prior to and during college.
- Detail any financial hardships. If you experience any financial hardships, tell the deciding authorities (via the statement of financial need) exactly what occurred, if your situation isn’t clear from the application.
- Determine if your child is independent. Your income won’t be considered in determining how much aid your child will be eligible for.
- Income tax incentives. Don’t forget the income tax incentives of either the education deduction or credit.
Are there any benefits to filing early? And what happens if I file after the deadline?
Filing before April can make your tax refund come back faster, but filing too close to the deadline could cost you money.
What is the difference between certified public accountants (CPAs) and other accountants?
CPAs achieve high standards of education and then pass rigorous examinations. In addition, they’re regulated by their resident state, must meet strict continuing education requirements, submit to peer review, and adhere to a stringent set of ethical standards.
If audited by the IRS, who can represent you?
CPAs, attorneys and a tax professional known as an enrolled agent (EA) are authorized to represent taxpayers in an IRS audit. An EA has proven their competency by passing an IRS exam in taxes but hasn’t received the advance training and oversight of a CPA. A (non-certified) accountant can only represent a taxpayer before the IRS if he or she is an EA.
What do banks consider when reviewing a loan request?
The bank’s primary concern is repayment. Many loan officers will order a copy of your business credit report, and perhaps your personal report, to determine your likelihood of repaying. Using the credit report(s) and the information you provide, the lending officer will consider the following issues:
- Did you invest your own funds totaling at least 25-50% of the loan requested? A lender or investor won’t likely finance 100% of your business.
- Do you demonstrate a sound record of credit-worthiness as indicated by your credit reports, work history and letters of recommendation?
- Do you hold sufficient experience and training to operate this business?
- Does your loan proposal and business plan demonstrate your understanding of how to succeed in this business?
- Does the business generate sufficient cash flow to make the monthly payments of the loan request?
What should I consider before hiring a CPA?
Your first step is to decide how best we can serve you. The more you understand what you need, the better job we can do together of matching our services to those needs. And if you’re not sure where to start, we can assess your situation and offer you guidance. Different CPA firms provide different styles and levels of experience and services. Some general questions you should ask yourself might be:
- Will you need help with personal financial issues, individual or corporate tax returns, retirement, estate, or college planning?
- Are you seeking investment guidance?
- Do you need business financial statements? Do those statements need to be audited, reviewed or compiled? How often? Are you required to provide specific financial reports to government entities?
- Are you confident in your own ability (or your staff’s ability) to handle financial and operational issues? Do you want to do as much as possible yourself, or are you considering outsourcing some functions, such as bookkeeping and/or payroll?
- Do you need help preparing a business plan or a personal or business loan application?
- Do you need other consulting services, such as strategic planning, budgeting, or costs analysis?
- What can you budget for CPA services?