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Choosing the Right Tax Professional |
It’s extremely important to hire a tax professional who understands the unique tax rules professional can prepare their tax return accurately.
What questions should I ask a tax professional?
| 1. | What kind of training does the tax professional have? Look for someone who is an enrolled agent, or EA (a credential that is issued by the IRS after the preparer passes a test in tax preparation). A certified public accountant (CPA) is probably less likely to be familiar with family child care taxes than an EA. A tax attorney or tax professional who specializes in family child care taxes can be a good choice if the person is very familiar with this field and keeps up with the annual changes in tax laws. An EA, CPA, or lawyer can represent you before the IRS if you are audited. Tax professional without these credentials usually cannot. | |
| Many commercial tax preparation agencies give their employees training that is focused on income tax returns for wage earners, not the self employed. These professionals may know little about the business of family child care and may tend not to take advantage of all allowable deductions in preparing your return. Ask what sort of ongoing tax training for home-based business tax returns the person is taking. | ||
| 2. | How many family child care tax returns did the tax professional complete last year? Bear in mind that although experience is important, a less-experienced professional may have more motivation to learn about your business and keep up with changes in the law. | |
| 3. | Is the tax professional available all year or only during tax season? Do they do tax planning for the upcoming year? A tax professional who is in business year round will probably be able to offer you better service. | |
| 4. | How many family child care tax returns that the tax professional signed have been audited over the years? Was the professional at fault in any of the audits? Although being audited is not necessarily a reflection on the tax professional (many audits are chosen at random), you want to know if the professional is doing returns correctly. | |
| 5. | What does the professional charge? Is the fee based on a flat amount per return, a charge per form, or an hourly rate? Some tax professionals may quote you a range for the fee before looking at your particular circumstances. Make sure you ask about all fees up front | |
| 6. | Do you feel comfortable with the person? Is the person easy to reach and to talk to? You will probably maintain a better relationship with your tax professional if you share a similar philosophy about taxes. If you are very conservative in claiming deductions, look for a professional who understands you and will follow your wishes. Likewise, if you are more assertive in claiming deductions, find someone who shares your views. | |
| 7. | Ask for references from other family child care providers who use the tax professional. Ask them if the tax professional returned their calls promptly, was easy to work with, and answered all their questions. |
What questions should I ask that are specific to my business?
- Find out if the professional is familiar with:
- Computation of the business use of home (Form 8829 Business Use of Your Home) and the time-space percentage. Watch out if someone doesn’t ask you for all the hours you worked (including hours after the children are gone).
- The IRS standard meal allowance rate and the reporting of Food Program income. Watch out if someone doesn’t know the current meal rate.
- Depreciation of home, furniture, appliances, and equipment that are used for both business and personal purposes. Watch out if someone says that it’s not worth it to claim depreciation, particularly home depreciation.
Should I use Tax Preparation Software?
An increasing number of providers use commercial tax preparation software (Turbo Tax, Tax Cut, etc.). These programs can be helpful in calculating depreciation, doing the math, and filling in the many tax forms. They may help you catch mistakes. But they also have drawbacks. Specifically, tax software will not:
Remember, even if you hire a tax professional to do your taxes, you are still responsible for any mistakes on your tax forms, even if the mistake was made by your tax professional. You are also responsible for keeping good records to support the claims on your tax forms.
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Identify what is deductible for your business. It will merely give you the title of the lines on the forms (“supplies” for example) and it will be up to you to know what to claim. |
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Explain how to deduct items that are used for both business and personal purposes. You need to understand how to claim some supplies that are 100% business and other supplies that are shared. In general you will apply your Time-Space percentage to shared items. This is a key concept that affects many lines on your tax return. |
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Ask you detailed questions about the hours you worked, so that you will report the highest Time-Space percentage that you are allowed. |
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Catch all the special rules affecting your business. For instance, they will not tell you that reimbursements you receive from the Food Program for your own child are not taxable income, or that you should count all meals served to day care children (including extra meals not reimbursed by the Food Program). |
Because of these and other weaknesses (software programs can contain errors), I do not recommend using tax preparation software unless you are very familiar with all the unique rules affecting family child care providers.
This handout was produced by Think Small (www.thinksmall.org).
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