Have you ever been totally irritated with your accountant? You thought that the "bean counter" could surely find better things to do than ask such detailed questions that consume your valuable time.
Well, let this "bean counter" give you a few good reasons to pay more attention to the details and how you will profit financially by doing so.
Let's focus primarily on smallwares. If you don't have a full service restaurant you still invest in many smallwares. Smallwares are items used for food and beverage preparation, storage, and service. Here's just a sample of items to consider: dishes, pots, pans, cutting boards, spoons, spatulas, pastry & grill brushes, knives, scales, timers, and bowls. Smallwares also includes small appliances – appliances that cost $500 or less. Most of the time if you write a description on a check then it may say something generic like "equipment". Why bother with the details?
- First of all, restaurant equipment is depreciable over five years versus seven years for other assets that fall into this category. It's also important to distinguish what you wrote the check for because it may be considered fully deductible as repairs and maintenance or supplies.
- Another reason for details is that your depreciation schedule can clearly describe assets so that if that asset is sold, abandoned or becomes obsolete then it can be dealt with properly by changing its status. Many times your depreciation schedule ends up reading "Equipment" for every equipment purchase. This may not seem like a big deal but try going back five years and deciding what that "equipment" represents.
- What difference does it make whether you classify your initial smallware bundle as equipment or start-up costs? You will either amortize the start-up costs over five years or depreciate the equipment over five years.
- First of all, according to IRS guidelines, the initial smallwares purchase for a restaurant is a start-up expenditure. However, the good thing about following this guideline is that the smallwares do not show up on your property tax return. Therefore, if you simply lumped everything together as "equipment" then you have paid unnecessary property tax. Also, any smallwares purchased after start-up are to be expensed the same as incidental materials and supplies. In other words, you get a full deduction for the expenditure in the year you spend the money and you don't pay unnecessary property tax on misclassified smallwares.
- For each dollar of investment in Section 179 property in excess of $200,000 in a tax year, the maximum Section 179 is reduced. Thus, if you misclassify smallwares, then you may inadvertently lose your Section 179 deduction.
This is one area where the Internal Revenue Service actually tried to cut out the red tape. They don't want the small business owner to keep up with small items on their depreciation schedules. If you have items currently being depreciated or included in inventory that are considered smallwares then consult with your accountant regarding making an election to change your method of accounting.
Taxpayers who want to change to this method of accounting for the cost of smallwares under this revenue procedure must file a change in accounting method with the IRS and reflect the entire net amount of any adjustment in computing taxable income during the year of change.
There are many other areas where details count. For instance, why would it be to your benefit to inform your accountant of all the details of your worker's compensation policy including such things as rates for the different classifications? Wouldn't you rather your accountant be calculating the true worker's compensation expense based on the policy? If the accountant does so then there should not be a big surprise at your yearly worker's compensation audit. You should know how much additional premiums will be due or how much will be refunded. As with any aspect of your business, better planning allows you to manage your cash flow.
Another area that poses tension between you and your accountant is the request for provision of details from your credit card. Many small business owners charge multiple types of expenses to their credit card. The accountant needs to know how to classify these properly for income tax reporting purposes. The meals and entertainment are not fully tax deductible. Other items may need to be capitalized. It sure is easier to provide these details now than to try and reconstruct your records during an audit 3 years down the road. Remember, if you can't prove that it was a legitimate business expenditure then it is likely to be thrown out by an IRS auditor. If your accountant is not "bothering" you for details, then you may need to find somebody who will.