By EMILY MALTBY
For the first 15 years that the Cheshire Cat, a gift shop in Grayslake, Ill., was in business, owners Sherri and Scott Comstock managed their own tax paperwork with minimal professional help. Today, they spend $40,000 a year for an in-house bookkeeper and $6,000 annually for an outside accountant.
“There is no way a small-business owner could track [the tax code] and run their business,” says Ms. Comstock. “There are not enough hours in the day.”
As financial-reporting rules fluctuate, small-business owners say they must increasingly invest in professional accounting support. Many are also bracing for the onslaught of 1099 forms they’ll need to file in 2012 if a new tax regulation that was tucked into last year’s health reform isn’t repealed.
Over the past decade, the tax code has ballooned in size, to its current 3.8 million words from just 1.4 million in 2001, according to the Internal Revenue Service’s Office of Advocacy. As the economy has weathered two recessions, lawmakers have shepherded numerous packages of temporary tax relief through Congress – from patches for the fluctuating Alternative Minimum Tax to limited extensions of the Bush tax cuts – averaging about one revision a day to the tax code.
Amongst small businesses, “we are seeing more demand for accounting and bookkeeping professionals,” says Katherine Spencer Lee, a senior district president with Robert Half International Inc., a staffing firm based in Menlo Park, Calif.
Indeed, accountants and auditors are expected to experience faster-than-average employment growth over the next decade, in part because of “changing financial laws and corporate governance regulations,” projects a 2008 Bureau of Labor Statistics report, the most current available.
While it’s difficult for large businesses to keep abreast of changing regulations, small businesses pay a disproportionate amount to adjust to new rules. In general, the cost of tax compliance at smaller firms is $1,518 per employee, compared with big companies, which pay about $517 per employee, according to a 2010 study from the Small Business Administration’s Office of Advocacy.
To be sure, many of the most recent revisions were intended to bring tax relief to small firms, such as hiring and health-care credits and larger expensing limits.
“As I think about the changes that have occurred over the years in the tax code, the [main ones] that come to mind are beneficial to businesses,” says Larry Nannis, a CPA and partner at Levine, Katz, Nannis & Solomon, P.C. in Needham, Mass., who also serves as the National Small Business Association’ s chairman. “But in spite of that, the provisions have created a need to incur additional expertise or to provide additional information.”
And when the tax code lacks permanency, business owners have a hard time planning and must spend even more time and resources to map out the best routes for growth, says Bill Rys, tax counsel for the National Federation of Independent Business, a lobbying group in Washington.
The Comstocks started asking for more tax help about five years ago, after they became spooked when the IRS notified them that they weren’t filing their taxes correctly. They began worrying about penalties or unexpected tax bills – both of which could cause a hit to small company’s cash flow.
Other business owners have tapped professional help more recently.
Tim Mossberg, who owns clothing manufacturer TLM Industries in Fort Walton Beach, Fla., began paying for a second accountant last year, after he launched a new clothing firm, Mojo Sportswear.
Mr. Mossberg’s first accountant in Atlanta now spends more time, at a higher hourly rate, preparing TLM’s tax returns. When seeking a second accountant, he sought the services of a local professional, with whom he could have monthly—rather than quarterly—meetings. “What used to be fairly easy to do….takes double the time,” he says.
Mr. Mossberg, who is using cash reserves to pay $150 an hour for TLM’s accountant and $90 an hour for Mojo’s accountant, says he would prefer directing cash instead into marketing, inventory or technology to streamline operations.
Meanwhile, back at the Cheshire Cat boutique, the Comstocks are hard pressed to name all of the tax forms they have to file. They rely on their bookkeeper and accountant to keep abreast of what tax breaks the business qualifies for and how to file all the necessary paperwork to make sure their tax returns are complete.
“There were days when Scott was on the phone for hours with tax people trying to figure out what he was supposed to do in order to comply,” Ms. Comstock says. “Finally we just decided to hire someone who understood the changes.”
Write to Emily Maltby at email@example.com