Common Mistakes Made by First-Year CPAs
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As with anyone new to a career, you’re bound to make a mistake or two. CPAs are no exception. You can learn, study and pass the Certified Public Accounting exam, but that doesn’t mean you’ll be able to practically apply that knowledge in the real world. Here are a few of the common mistakes that first year CPAs make that you can be aware of and ideally, avoid. Many of these common mistakes will be covered in your CPA exam review course.
- Treating sales as revenue before the product is delivered. Sales do not count as income until the product or service has been delivered to the purchaser. Counting sales as revenue before they are realized can cause business decision makers to think the company is more profitable than it is and make false projections. Only count sales as revenue when the product or service has been delivered.
- Confusing profits for cash flow. Track what a business is spending and selling. Just because there may be a profit, does not mean there is cash to pay bills. Make sure you are presenting the full picture to your clients or employer so they can make the right decisions by analyzing the profit-debt ratio.
- Dipping into cash reserves. Your business clients may be inclined to dip into their cash reserves and make a large equipment purchase or the like. While they will be able to claim depreciation over the years, it will hurt them when tax time comes around. Instead, encourage your client to take out a short-term loan or even lease the equipment if it will need updates over time. Leasing compared to outright purchasing can be of great benefit as there is no large sum of cash required nor do you have to pay for maintenance, etc. Weigh these options and present them both to your clients. Clients like options.
- Not reserving enough to pay estimated taxes. Many of your small-business or self-employed clients may be required to pay estimated taxes throughout the year. Make sure these clients have an accurate system that encourages them to put aside the necessary funds to pay their quarterly estimated taxes.
- Poor accounting system. Typical in small-business or self-employed environments, it is important to advise your clients on an appropriate accounting system if you are not involved in the day-to-day. They need to be able to record their deposits and expenses while maintaining a record of the transaction with ease. As a CPA you are in the perfect position to advise them on the proper method and software.
- Deducting expenses inappropriately. There is a right way and a wrong way to record tax deductions. Especially when it comes to clients with a small business. For example, you can save your client a lot of money by deducting business-related travel expenses as a business expense, versus as an unreimbursed employee business expense.
- Passive loss rules. If your client receives a K-1 from any investment, including a business, make sure they are not being limited by the passive loss rules. An active business owner should not be subjected to the passive loss limitation rules. This could mean the difference in thousands of dollars on your client’s tax return.
- Failing to elect real estate professional status. If your client is involved in real estate investment, be sure you have filed an election with the status noted. This status will allow your client to take advantage of a number of specific real estate investment deductions. If you miss this election, you cannot file an amended return down the road to correct. Any of those potential deductions are lost. Be sure to file the election for your real estate professional clients.
- Missing carry-forward tax benefits. Some tax credits or deductions can be carried forward to the next tax year if your client cannot use them in the current tax year. However, many professionals often forget about these carry-forwards a year later. Be sure you keep accurate records and are carrying forward your client’s tax credits and deductions where necessary.
- Not planning ahead for taxes. Tax time is a great time to sit down with your clients and plan for the future. There are only so many deductions and credits that can be taken advantage of without planning. Take some time with your client to analyze their current, past, and future tax and financial situation and determine where they can save on their taxes in the future.
These are 10 of the most common mistakes first-year CPAs often make. By focusing on the needs and goals of each client, and by following the suggested practices of both the National Association of State Boards of Accountancy (NASBA) and the American Institute of CPAs (AICPA), you will be acting well within your professional limits and will almost always satisfy your client(s) or employer.
–Grant Webb, Bisk Education. Bisk has been training accountants and financial professionals for more than 40 years. For questions or comments, Grant can be reached on Twitter @grantwebb2.