Nightmare on Tax Street
You don't always get what you pay for
I’ve often talked about investments on this space. However the bulk of my work is actually not in investment advisory but rather tax advisory. After a recent episode where two friends brought me their S Corp taxes, I figured it’s probably time to write a bit of a warning about taxes.
The purpose of investing should be to grow your wealth, and what better way to grow your wealth than to avoid giving it away to your rich Uncle Sam. However in an effort to side step Uncle Sam, some have fallen into pits of schemes where the money they once were paying to him, now goes to some offshoot of the accounting/finance industry such as payroll or bookkeeping. Or worse, where unethical non credentialed professionals are filing inaccurate and even fraudulent returns.
To say it bluntly…if you own/operate a small business or even work as a contractor, you need a tax professional or at the very least you need to have a conversation with one. That conversation can center around optimizing your entity selection for either tax benefits, retirement planning, health care, etc. A good tax professional can add value.
The problem is understanding what makes a good tax professional. Credentials are important. Are they a JD, a CPA, an Enrolled Agent? If not, why not? If they don’t have credentials you should probably walk out the door. This coming from someone who once thought that credentials were meaningless. Having done both tax and investments, put bluntly, tax credentials are far more difficult to come by than investment ones. However just having credentials doesn’t mean they are the right person for the job.
Does this individual talk about your financial goals and situation? Most CPAs and EA offices are completely booked. Many I know are no longer accepting clients. The ones who may squeeze you in, might just be doing that, squeezing in your returns without the necessary financial goals conversation. It’s the goals conversation that really can add value, especially when an individual has control over certain benefits structuring and accounting methods.
Speaking of goals, a realistic view of business goals is critical. The jump from sole proprietor to being a S or C Corp is a large one. Most businesses are making the jump before they are ready. This sets a tax trap under the new strengthened IRS. The IRS has made it known that one of the things they will be pursuing more aggressively is the reasonable compensation rules which many S Corp Shareholders are unaware of. In order to meet the reasonable comp guidelines, you have to set up payroll. You also have to have proper accounting to be a corporate entity. This amounts to 1000s of extra dollars that most small business owners have never planned for, and are unaware of when unscrupulous individuals pitch them on certain entities.
Currently I’m going over my friends 2022 individual tax return. The preparer didn’t realize they had 2 S-Corps, 1 of which hasn’t been filed yet. The 2nd S Corp which I believe was filed by this business, was done improperly and possibly needlessly (as they set their Amazon sales account under their personal name not the corporation name). Their AirBNB was filed improperly and they missed the depreciation on the house. They also missed nearly 4500 in eligible EV credits by overriding their software to produce the minimum credit on a vehicle eligible for the maximum credit. All while maxing out Section 179 depreciation (which given that the QBI deduction currently is set to sunset in 2025…may not be strategically the best thing for the family).
While this may sound like the tax return for a very wealthy family, it’s not. He’s an HVAC contractor from a middle class family. The problem is we are at the intersection of a growing, digital platform economy and an arcane tax system. One that has become more complex with the Tax Cuts and Jobs Act, CARES Act, Secure ACT and now the Inflation Reduction Act.
Unlike markets where the best of advice can still have a poor outcome, tax has a more stable ROI…if you choose the right expert. We are at the point of the article where for the first time I’ll shamelessly plug my firm. We specialize in helping small business owners and those who’ve recently experienced large capital gains or other financial windfalls. But even if your situation doesn’t fall into one of those buckets, if you ever want a once over of what your current expert is doing, visit my website and book an appointment.