Does anyone out there have any idea how much it costs to do the accounting necessary to complete a corporate return? That is, not the cost of preparing the return per se, but the costs of collecting and maintaining all of the needed data. Does having a corporate income tax impose additional costs on running a corporation that wouldn’t exist in its absence (that is, are some data tracked that the corporation wouldn’t care about in the absence of the need to file a return)? Also, how much do things like depreciation schedules skew capital purchase decisions?
10 thoughts on “A Bleg For Corporate Accountants”
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I’m a lawyer, not an accountant, but I can say from the deal side that you would not believe (or maybe you would?) the billable hours spent on making deals tax-advantageous. Further, many deals are done solely for tax purposes, even though they’d make no business sense without the tax implication (For instance, a software company with high earnings buying a capital-intensive manufacturing company solely because of the depreciation schedules).
I don’t have any numbers though, that’s just my personal impression from working in the field.
How big? My brother used to be VP of Tax at Aetna; he had a staff of about 30 CPAs who worked all year on it. Add in the legal help and that’s probably upwards of $10 million a year just to manage the process.
It would be difficult to split off the cost of collecting the data, because it’s all tied into GAAP; you’re essentially asking how much simpler would GAAP be without the corporate tax.
The answer to the depreciation question is “lots” and that’s very much tax related. But without the tax issues, you’d still have to have depreciation schedules, deal with useful lifetime, and such, so depreciation wouldn’t just go away.
In small companies, we spend a lot of time on taxes (though less money, of course). Depreciation schedule completely dictate how/when equipment will be bought – all the money spent is up front, post tax money. Depreciation sucks for us little companies.
I’m not entirely sure that removing the need to do a return would necessarily effect the overall accounting burden of a large business all that much, absent changing a bunch of other regulatory and expected activities.
We used to estimate that it cost us $2M a year to handle the accounting overhead demanded by the stock markets to be a listed company (versus private) vis-a-vie proper valuation information. i.e. “accurate” income statements, accurate quarterly profit/loss figures – the market demands all of those for listed companies and would whether or not they paid tax.
Likewise you need the depreciation information for the balance sheet regardless of the nature of corporate taxation – assets will depreciate over time regardless of how you write that amount off against your tax bill.
It’s really hard to work out how much of this would go away if you didn’t do corporation taxes because so much of it is standard practice for running a business of any kind – there would be some improvements – for example – once I move my current startup out of the “shelter” of startup tax regs I’d have to start depreciating certain development activities over time rather than as a one off outsourced cost.
But when that happens I’ll also be accounting for developed product as an asset on the balance sheet which will be necessary for handling valuations which will impact investment decisions and stock value.
Depreciation sucks for us little companies.
Yeesssss…. but… the depreciation isn’t just about tax, it’s about the actual value of your business.
You could argue that absent tax rules you could work out the net present value of the company & assets at a point in time, but it’s fudging the issue of depreciation a little bit.
I certainly agree that it has a dismal impact on cashflow and P&L.
However, I have to keep an eye on the balance sheet to remind myself of the upside.
actually small companies under $10M in annual revenue are able to use cash accounting rules. the most tedious part of IRS rules are Meals and Entertainments accounting particularly for owners.
Daveon, what do you mean by:
“the “shelter” of startup tax regs”
?
Jack: Yes you can use cash accounting rules, but if you’re thinking of taking on investment Angel or Formal, you need to be keeping one eye on the formal accounting stuff too. 🙁
Although, I was told that if you’re running as an Inc/LLC, then for Meals and Entertainment you formally pay these as expenses out of operating funds and then claim that as a pure business expense for tax purposes.
Of course, that depends on how you’re paying your personal tax.
David: According to my accountant there are some excellent one-off tax breaks for startups investing in a new business which are separate to the new-hire breaks.
There’s something like $250K available for one-off capital purchases for a new business. I don’t know what the time limits or rules are… I outsourced that 🙂
There’s also a bunch of credits available for “R&D” for software companies.
One thing that drives me potty with the IRS/US is that while the taxes are lower than, say, the UK – the complexity of the rules is moderately insane – see above comment about having the 50% rule for certain types of Meal and Entertainment.
Rand: a more interesting question, at least for me, is how much does it cost businesses to administer and operate separate State and City tax systems for everywhere they do business in the US?
Currently I’m reporting employee hours worked at a federal level, to 3 different state organisations (using different forms) and the city we’re based in. I also have had to take external advice on the structure of our product licensing and deployment to handle the sales tax implications for every state we potentially could do business in.
That’s separate to paying a local Business and Occupancy tax to the State and City that depends on *where* I deliver business to, AND, tracking state sales taxes should I sell something locally.
Five years ago my company switched from Cash to accrual basis.
Since we were healthy and believe in paying our suppliers early,
the switch was really painful, as we had zero accounts payable and a
significant accounts receivable. No change in the business, just a change in accounting that caused me a tax bill comparable to my mortgage balance. (Got to spread it over 5 years, but it was still painful)