Did you have a surprise on your tax return this year?
 
Was it a good surprise or a bad one?
 
When I was in my first year as a tax preparer, something happened to a client (we’ll call him Karl) that has stayed with me my whole career. We had taken Karl on as a new client in January. He needed his tax return prepared for his business for the previous year, which we were happy to do.
 
As I prepared the returns for his business I noticed a significant amount of profit. Good news for Karl, but that usually leads to tax issues. Sure enough, as I prepared his personal return for him and his wife, I noticed a substantial amount of tax due.
 
Like $30,000 susbtantial.
 
I went to my manager to explain what I had seen and to make sure I hadn't made a mistake. I was 23 years old and this was one of the first returns I had ever prepared. I didn't know that people could owe so much money. It was almost what I made in a year!
 
Surely this couldn't be right.
 
My manager shrugged and said, "That's what happens when you have a good year." He told me to finish up the return. I did, and a week or so later we met with the client to give him the bad news. He was shocked, of course, and he said he didn't have the cash in his accounts to pay the amount due. He told us that he had an idea that his business had done well, but he had also invested a lot of money in his shop the previous year so he wasn't sure where he would get the money to pay his bill.
 
One of the partners in the firm that I was working for joined the meeting and told the client, “I'm sure you'll come up with the money,” and sent him on his way. The whole experience left me shocked. That was it? Here's a $30,000 bill, it's due in two weeks, figure it out? I couldn't believe that was the only expectation of us as accountants.
 
It was not Karl’s fault that he owed the money, though my boss acted as if it was. Karl wasn’t a tax professional; he owned a distributing business. He thought that since he ended the year with only a few thousand dollars in his bank account that he couldn't have made that much profit. He didn't understand the relationship between inventory, fixed assets, prepaid expenses, cash and profit. And why should he try to figure it out? That's what he paid us for.  
 
The following November we called Karl to ask him to drop off a copy of his business’ books so we could perform “tax planning.” After I ran his numbers, we determined he would be facing a big tax bill once again. I met with Karl in December to break the bad news. He was not as shocked this time, and luckily he had a few more months to deal with the situation. But something he said as he was leaving stuck with me: “I wish I would have known this could happen in June before I put all of my cash into my building.”
 
Boom, I thought. Year-round tax planning. That's what I would do for my clients when I started my own practice. Why should it be up to the client to know what his or her tax liability will be? Shouldn’t we as accountants be keeping an eye on this for our clients?
 
Tax planning is an important piece of the financial puzzle for any business owner. Especially now, with the Affordable Care Act kicking in and the penalties/new taxes associated with it. Every decision you make, like buying a truck, hiring a salesperson, writing off an old debt, or taking money from your business, has tax consequences. While you don't want to make decisions solely based on tax implications, you need to make sure you understand what those consequences are.
 
I think Karl would agree.
 
If you recently experienced a tax surprise like Karl, it’s time to work with someone year-round who can help you minimize your tax hit and budget for any tax obligations you’ll need to meet.
 
Robert J. Rickert CPA, PC focuses on giving its clients timely, accurate and relevant financial information to help them make informed decisions about their businesses. The firm provides customized solutions to meet the specific needs of its clients. Services offered by the firm include CFO and controller services, crisis management, interim financial management, acquisitions and business buying, divestitures and business selling, litigation support, business tax services, and tax dispute assistance for individuals. For more information, visit rickertcpa.com, call 910-319-9127 or email [email protected].