Understand Your Income Tax Return
Many small business owners fail to spend the time with their tax preparer in understanding their tax return. Whether you are a sole proprietor (schedule C), a partnership (form 1065), a corporation (form 1120), or S corporation (form 1120S) the starting point is your accounting records. Your preparer will need an electronic copy of your records or a hard copy of various reports from these records before starting to make adjustments to come up with your taxable income. The end product, or taxable income, can be quite different from the profit before tax you see on your end of year income statement.
Ask your tax preparer to prepare a schedule reconciling the profit on your income statement to the taxable income on your tax return. The starting point is your profit before income tax followed by the listing of each adjustment made to come to the resulting taxable income. Take the time with your preparer to discuss each adjustment – to your understanding. Over time these adjustments will become clearer to you. Keep in mind, individually each adjustment will not be that difficult to understand. This sit-down discussion can also effectively be the beginning of your tax planning for the following year.
Your relationship with your tax preparer is comparable to your relationship with your customers − you fall into a routine on how you believe they want their services provided. Unless you hear otherwise from the customer, you assume he/she is satisfied. Your tax preparer may believe you are receiving all the services you want or need unless you indicate otherwise. Let him know you desire to be more knowledgeable on how your taxable income is computed and what decisions he made for you in preparing the tax return.