Faced with a tax code which inevitably changes from year to year, many small business owners choose to use one of the many tax preparation software packages which are now widely available. These packages are available for both PCS and Apple computers, and most use a spreadsheet format.

Using tax preparation software will almost certainly result in a more complete and more correct tax return. As Keith Higginbotham reported in the Knight-Ridder/Tribune News Service, typical paper tax returns have an error rate of 20 percent. Thanks to built-in math calculators and other automatic checks, electronic tax preparation and filing reduces this error rate to less than 1 percent. Tax preparation software packages may also steer the taxpayer toward greater savings or little-known deductions, paying for themselves with the returns they yield. Even if no direct tax savings are realized through the use of the software, many analysts believe that business owners can save themselves a considerable amount of time by using the packages, thus freeing them to use their talents in other business areas.

Purchasing the software to prepare tax returns, no matter which package is purchased, will undoubtedly be less expensive than hiring an accountant. Of course, a CPA can be creative and intuitive about individual circumstances in a way that a computer program can never be. But unless the finances for the year are extremely complicated, the best of these software programs should be sufficient to meet the requirements of most small enterprises. "For people who have done their returns and feel comfortable doing them, software can be an excellent tool, as opposed to doing them by hand," CPA Bruce Bernard said in the Business Courier-Cincinnati/Northern Kentucky. "But you have a garbage-in, garbage-out problem. If you put bad information in, you're going to get a bad return." A major drawback associated with using one of the available packages, however, is that in the event of an audit, the small business owner will have to face the IRS without the expert knowledge of the CPA that originally prepared the tax return.


DATA ENTRY All of the software packages have more than one option for entering data into the IRS-accepted forms. The user can always opt for the simple method of entering figures into the forms without assistance from the program, using the software mainly to double-check figures and calculate final amounts. All of the software packages also have an interview function, which asks easily understandable questions to which the user responds by clicking yes or no boxes. This function specifies which schedules are required by the IRS, and which sections of the basic 1040 and schedules can be bypassed. Depending on the program, there may be a third route—a "fast track" interview, through which the user can select specific parts of the interview to fill out, speeding up the process and avoiding the sections which are not pertinent to the case at hand.

Many of the programs also have importing features, which allow the user to pull data from other programs directly into the tax preparation. Generally, these work primarily with Quicken and QuickBooks. If the small business owner already uses one of these applications to calculate tax-related expenses, it is relatively quick and easy to transfer information, cutting down on duplicated work. Almost all of the packages also allow the user to import last year's tax information, provided it was prepared with the same package.

FILING When it comes to methods of filing, most of the packages provide several options for the user to choose between. The forms can be filled out electronically and then printed and mailed to the IRS to be processed in a paper version. Some of the packages offer the abbreviated Form 1040PC, which is also submitted as a hard copy. And some of the packages allow the user to file electronically, although some charge an additional fee for this option (around $10).

FEATURES AND HELP All of the software packages automatically check for mathematical mistakes and warn of possible errors when questionable data is entered into a field. Most of the programs can offer advice—some from specific tax experts—about how to maximize the return and minimize taxes paid. Some of the programs offer complete IRS tax guides which can be directly accessed, and some offer only abbreviated versions of this information. Some of the programs even alert the user to potential audit flags resulting from data entered. Several packages offer a review option after the forms are completed; this option can provide advice on what to do differently to pay less taxes the next time around.

Most of the packages offer state tax preparation in addition to the federal forms. Some offer only a few states, while others offer all the states which provide electronic forms. These supplements may be included in the price, or may be priced separately. Prices for the packages range from around $20 to more than $50, plus state supplements and filing fees.


Choosing a package will depend on how involved the tax return is. A few of the products can manage even very complicated scenarios, while the few at the bottom of the price range tend to be better for simple personal tax returns. For the small business owner, who may be dealing with self-employment taxes, home-work environments, and partnerships, it is probably worthwhile to purchase one of the more detailed programs. As of 2000, the two most popular tax software packages were Kiplinger Tax Cut by H&R Block, and Turbo Tax by Intuit.

With the advent of high-speed Internet connections and improved Internet security, more and more tax preparation is taking place online. Growing numbers of small businesses are contracting with application service providers (ASPs) that specialize in tax preparation. ASPs provide tax preparation applications on their Web sites and also maintain huge databases to store clients' data. Users connect to the ASP's remote computer over the Internet, access their files with a password, and use the software provided to prepare their taxes online.


Dailey, Frederick W. Tax Savvy for Small Business. 2nd ed. Berkeley, CA: Nolo Press, 1997.

DeJong, David S., and Ann Gray Jakabcin. J. K. Lasser's Year-Round Tax Strategies. New York: Macmillan, 1997.

Frees, John. "Tax Software Can Be a Help, But Isn't a Cure-All Solution. Business Courier-Cincinnati/Northern Kentucky. February 25, 2000.

Higginbotham, Keith. "IRS Expands Electronic Tax Filing." Knight-Ridder/Tribune Business News. January 5, 2001.

Needleman, Ted. "Business Tax Prep Preview." Practical Accountant. October 2000.

Zarowin, Stanley. "Expanding into Cyberspace." Journal of Accountancy. September 2000.

SEE ALSO: Electronic Tax Filing

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