Why Small Businesses Need a CPA

Wednesday, November 8, 2017

Every business, no matter how small, needs a financial and tax advisor. But your business needs a Certified Public Accountant (CPA)​, not just an accountant.

CPA vs. Accountant

"Accountant" is a general term, referring to financial and tax professionals who follow specific rules and regulations, including Generally Accepted Accounting Principles (GAAP), which are rules and standards set forth by the Financial Accounting Standards Board (FASB).

CPA's are accountants who have passed a licensing examination in a state. So, you could say that all CPA's are accountants, but not all accountants are CPA's.

Many small businesses use the services of an accountant, and there are many competent accountants serving small companies. For a very small business, an accountant may fill some of the accounting needs, but there are specific circumstances in which using the services of a CPA has advantages.​

Advantages of a CPA for Your Business

Even if you have a very small business or a single-person business, you probably need the services of a CPA, for several reasons:

CPA's are licensed; accountants are not.

A CPA is licensed by a state, and must keep current with tax laws in order to maintain a license in that state. Accountants aren't licensed. The CPA exam is a rigorous process over several days, including many facets of financial and tax expertise.

After they are licensed, CPA's also must comply with continuing education requirements in order to maintain their licenses; accountants don't have this requirement. You can learn more about the standards that CPA's must follow by checking out the CPA professional organization, the American Institute of CPA's (AICPA).

CPA's are more familiar with tax laws.

While not all CPA's specialize in small business taxes, almost all CPA's are more familiar with tax laws than are accountants. Knowledge of the tax code is a big part of a CPA's licensing exam and many CPA's take tax courses every year to keep up to date on the Tax Code. An accountant also may be able to prepare and sign tax returns, but the designation of "accountant" does not provide assurance of certification, nor does it give the accountant the ability to represent you before the IRS, even if this person has signed your tax return. Accountants are classified by the IRS as "unenrolled preparers."

The IRS requires all tax preparers to have a preparer tax identification number. and the IRS distinguishes between preparers who are enrolled agents, CPA's, or attorneys, and other preparers (considered unenrolled preparers. Accountants who are not CPA's are considered unenrolled preparers. An unenrolled preparer's ability to represent a client in a tax matter before the IRS is very limited.

CPA's can do financial analysis.

Bookkeepers perform routine tasks of records input (input of business income and expenses into a financial software program, for example); accountants review this input and prepare and analyze the financial reports (balance sheet and P&L).

CPA's do more detailed and thorough analysis and they advise on tax and financial matters. Although the designation of "CPA" doesn't mean this individual is giving you the best advice, a CPA is more prepared and puts his or her license on the line by giving tax and financial advice.

A CPA can support you in an IRS audit.

Probably the biggest reason to use a CPA for your business taxes is that a CPA is eligible to represent you before the IRS in an audit, while an accountant is not. As noted above, accountants who are not CPA's can only represent clients in a very limited manner. (Enrolled agents may also represent you with the IRS.) If you are paying to have a professional do your tax preparation, make sure this person has full authority to represent you in an audit and to execute claims on your behalf.

In other words, accountants do the routine work and they can complete tax returns, while CPA's can analyze the work, represent you at a tax audit, and help you make more high-level business and tax decisions. Sure, CPA's charge more, but you get what you pay for.

Working with CPA's:

Find a CPA firm that includes a bookkeeper and accountant. Then you can separate the more routine financial jobs from the tax and financial analysis done by the CPA. Or hire a bookkeeper for those monthly, quarterly and yearly financial reports, then periodically consult with your CPA and have your CPA do your business taxes. You can also ask that the CPA review and sign off on your tax return that may have been prepared by an accountant working under the CPA's direction.

By Jean Murray for The Balance