Tax Preparation in the USA - Essay Example

This paper looks and discusses how tax preparations are done with the help of accounting and bookkeeping firms as in many cases, the tax filer is confused with all the complexities it entails for everyone. Although a tax form has been simplified, some 40% to 50% of all tax filings have been completed by the tax preparer, of which there are four types, namely: certified public accountants (CPAs), lawyers, an enrolled agent (someone who passed special examinations given by the Internal Revenue Service precisely for this purpose and has thereby gained IRS accreditation) and unenrolled tax preparer.

Discussion My decision as John (owner of the private accounting practice) is to accept Sue (client) because I think I can help her out with her problems. First and foremost, the most logical step is to reconstruct her financial transactions as best as possible by taking calculated estimates of her income and expenses. This will help me prepare her audited financial statements (balance sheet and income statement) but most likely, I will issue a qualified opinion on these statements. This will serve as guide and warning to whoever uses these financial statements to arrive at their own judgment as to the applicability and suitability of the statements for their own use, like a bank.

Because Sue operates her small business as a single proprietorship (presumably as based on case facts given, as she has only five full-time employees), then she pays business taxes in the same form as her personal income tax. It means that both she and the business itself are not taxed separately as they are considered as one and the same entities. The Internal Revenue Service or IRS calls this “pass-through taxation” as all profits pass through her sole proprietorship business before it reaches her as personal income.

A needed document is the profit and loss statement of her business (Schedule C of the IRS forms) together with the IRS Form 1040. Moreover, she also needs to pay her own “self-employment taxes” like the Social Security and Medicare systems. It is usually double the rate of what ordinary employees pay in terms of salary deductions because a sole proprietor has no employer counterpart for the contributions and so she must pay the entire amount due, which must be reported under Schedule SE (self-employed) of the IRS.

Present self-employment tax rate is now 15.3% (adjusted since last February 2012 from 13.3%) for the first $110,100 in reported income and then 2.9% tax rate for any amount in excess thereof. The box of receipts that Sue gave may not be of much help as some of her expenses and receipts for income were questionable, so the best approach is to just use the standard deductions which are fixed dollar amounts to some items. The IRS allows a business to deduct certain items and ordinary business expenses to lessen the tax due, to include operating expenses, advertising costs, travel and gasoline expenses, business-related meals and entertainment for business guests (IRS, 2012, p. 1); in order for an expense to qualify as a deductible, it must be necessary and also ordinary that is indispensable or helpful in pursuit of carrying out the trade or a type of business; not included are cost of goods sold, capital expenses (such as equipment) and personal expenses.