S. Elaine Lyttleton chairs the California Tax Education Council. (photo/alandeckerphoto.com)

With the March 15 corporate and April 17 personal income tax filing deadlines on the horizon, San Diego’s small business owners again face the daunting task of dealing with state and federal tax forms — and the cost of getting them done. Many folks will spend thousands of dollars and dozens of hours on the project, often unsure if they are taking the right steps and getting the right help. It’s a time when some people feel like they are hemorrhaging money, and they wonder when it will stop.

They are right to wonder.

Tax expert J. Scott Moody, testifying before a Senate committee several years ago, said small business costs for preparing taxes run disproportionately high. In 2002, American businesses spent an astounding $102 billion complying with federal tax requirements, Moody reports.

“Small corporations, those with less than $1 million in assets, spent at least 27 times more on compliance (with federal tax requirements) as a percentage of assets than the largest U.S. corporations,” Moody said, adding, however, that the large companies with lower proportionate costs paid 75 percent of the taxes.

Since nearly 97 percent of San Diego’s businesses employ fewer than 50 people, local businesses pay dearly to comply with the tax code — before ever shelling out the taxes they owe.

Is there hope for keeping tax preparation fees under control?

Yes, says S. Elaine Lyttleton, a California registered tax preparer (CRTP), enrolled agent and chair of the California Tax Education Council, a legislatively authorized organization that qualifies and registers tax preparers. Lyttleton also formerly chaired the Carlsbad Chamber of Commerce.

“If you are a small business operator and you’ve had a regular year, you can be well served by an enrolled agent or a registered tax preparer,” she says. “The average small business person doesn’t need a high level of accounting expertise to have his taxes done correctly.”

There are four types of tax preparers recognized in California: CRTPs, enrolled agents, attorneys and certified public accountants.

Those who are California registered tax preparers have completed 60 hours of education, are bonded and have been tested to earn their certification. After they’re certified, they must complete 20 hours of continuing education each year.

California is one of just two states that registers and regulates tax preparers — although many other states are studying the California model and considering creating their own regulations. Even so, Lyttleton estimates 10,000 people are illegally preparing taxes in California — a potential nightmare for the unsuspecting client.

Enrolled agents are people qualified by the IRS — there are 36,000 in the U.S. — who have worked for the IRS or who have passed a two-day examination. All must pass a background check. Enrolled agents are allowed to represent clients before the IRS, a significant distinction between CRTPs and EAs, although many CPAs and CRTPs are also enrolled agents.

The IRS doesn’t have a mechanism the public can use to verify the status of enrolled agent. But the National Association of Enrolled Agents will verify its 11,000 members.

Attorneys and CPAs, particularly at big firms, are usually more expensive than CRTPs and EAs. And they aren’t necessarily the best for tax preparation.

“CPAs should be conversant in tax preparation, but there are many who don’t do taxes,” Lyttleton says. “But you can also check CPAs with the state and see who has actions against them to be sure the person has done well for clients in the past.”

The big accounting firms, including Deloitte and Ernst & Young, say not every business needs a full-service accounting firm with national reach — and national billing rates.

“We send clients to smaller companies when they simply don’t need the range of services we offer,” says Theresa Drew, managing partner of Deloitte’s San Diego office. “They are better off with a full-service firm when they are looking at an initial public offering, at seeking venture capital, at interstate business or at significant growth.”

Technology has reduced the need for accountants to manage small businesses’ books in the past decade, says Larry Baber, a director with Leaf & Cole, an accountancy with a staff of 26 professionals.

“We still have a small bookkeeping department but it’s about 25 percent of what it was 20 years ago,” Baber says. “Accountants used to do a lot more bookkeeping but now there are very good software programs that let businesses handle payroll, accounts receivable and payable.”

Ken Miller, an Escondido-based CPA, teaches a course for the U.S. Small Business Administration on how to use QuickBooks software. It’s a very good program with few glitches, he says, but it requires users to have a different mindset.

“Most of the problems people have are accounting-related rather than software-related,” he says. “It helps a great deal with taxes and with planning because you can gather more information that’s accurate and organized.”

Tax preparers like seeing someone come through the door with their QuickBooks spreadsheets, says Debby Meilahn, an enrolled agent who works at Westax LLC in Coronado.

“With their books in good condition, we can start looking at preparing tax returns for about $400, but fees increase with the complexity of the return,” she says. “If there are a lot of additional forms, like depreciation, costs can go up to several thousand dollars.”

Real savings result from planning, not from looking for the cheapest tax preparer, she says.

“Planning and working with an adviser to decide what you need your business to be will save people money from the business’ beginning,” Meilahn says. “For example, people in a rush to incorporate should know that California corporations pay a minimum $800 franchise tax fee no matter what, but being incorporated also means no one can come after you personally. It’s important to talk to an experienced tax adviser before tax time and preferably at the point where you’re starting your business to get the most cost-effective tax structure.”

But most small businesses don’t operate that way. Often the business comes before the planning, and owners seek help only when things have started to go wrong, says Robert Gellman, a CPA with CBIZ Nation Smith Hermes Diamond.

“People rarely recognize when things have gotten too complex for them to just sign some papers and be done with it,” he says.

Gellman recalls a client who came in after things had gotten well out of hand.

“He’d bought a bulldozer and his wife was keeping the checkbook,” Gellman said. “They got in trouble right away, because he should have had a limited liability company protecting his assets. People don’t realize they need a wrapper like an LLC and that means you need to make a balance sheet, and that requires a separate bank account.”

Meilahn is right about thinking past the cost of the tax preparation fees, Gellman says.

“I know of a good-sized construction company that used a sole proprietor CPA to save money and they paid $3,800 in tax penalties alone,” he says. “How fast can you get up to $1,000 in mistakes? A mistake on the decision to buy or lease a $40,000 truck is a significant expenditure, and more than you’d have paid for good advice from an experienced financial professional.”