A buzzword appeared in the world of small business about a decade ago: the accountant as “most trusted adviser.”
As a certified public accountant, I’m flattered that we’re consulted for a growing range of business needs, including rising taxes. But with the increasing complexity of modern business and regulations, and a worsening shortage of CPAs, the truth is that small-business accountants rarely help clients optimize their tax strategies.
Dedicated tax-planning services are a must-have for most business owners, as the IRS’ tax codes are bloated with ever-newer reporting requirements. But accountants never should have been expected to do anything beyond their job description, much less act as an adviser to a business.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
That’s no dig at my fellow CPAs. Accountants are trained to record transactions, rather than to look forward and create plans. So while your accountant may be doing great work tracking the ups and downs of your business and helping it stay in compliance, expecting her to advise on complex, time-consuming tax-mitigation strategies is a bridge too far.
It’s understandable that business owners haven’t thought of ways to get more out of their accountant. Everyone is wearing more hats and juggling more balls these days. Still, the failure to recognize the importance of proper tax planning adds up. Depending on your state and business type, at least a third of your profits will go to various layers of government. And overpaying taxes not only prevents owners and employees from accumulating wealth or enjoying more income, but it also starves a business of capital, restraining growth and making it more vulnerable to economic downturns and other adverse events.
Sometimes the best way to improve a company’s return on capital is to better manage tax liabilities. The dramatic impact that a favorable turn in tax-related flows can have was demonstrated by the Employee Retention Credit, the refundable tax credit given to companies during the COVID-19 pandemic. A similar boost was the Tax Cuts and Jobs Act of 2017, which slashed corporate taxes to a 21% rate. A good tax strategy can be akin to having such a tailwind every year, with a 40% reduction a realistic benchmark.
Meanwhile, it is hard to overestimate the pending tax burdens facing small-business owners. Many of the benefits of the 2017 tax bill, including the qualified business income deduction and bonus depreciation, are set to phase out in the next two years. And that prized 21% corporate rate might soon go away. The upshot: Taxes are going up — big-time — at least for those who are not planning ahead.
So what should business owners do?
The first step is to avoid frantically Googling for a tax lawyer or those who give specialized advice, which can run the gamut from comprehensive tax planning for small businesses to transaction-specific services. Instead, you ought to get a better understanding of your firm’s financials and current tax situation — what is on your tax return and why — and otherwise take ownership of the process.
The second step is to sit down with your current accountant, once the rush of the tax-filing season is over, and do a deep dive on your company’s books. Ask your accountant what specific proactive steps she would have taken to reduce taxes in the past — and those in the next couple of years. And if the answer is “none,” don’t be disappointed. After all, tracking your business’ transactions and keeping you in compliance is, essentially, an accountant’s job, nothing more.
Instead, the responsibility falls on the business owner, who reflexively sends her accountant information without taking the time to ask whether anything is being done to minimize tax obligations.
Meanwhile, remember that “planning” is exactly that. You can’t begin work on a tax plan in mid-December and successfully execute a new strategy right after the holidays — not to mention enjoy benefits for the year that has gone by.
I like to encourage business owners to look at the problem as if it’s a supply-chain issue, such as a shortage in a component that’s necessary for their business. What do you do? You investigate the problem. You ask questions and talk to people you know and trust about what they are doing. And above all, you don’t assume that someone else is going to solve your problem if you aren’t.
Finally, if you decide to explore the option of specialized tax planning, be rigorous in asking about the potential benefits. A professional in this niche should have success stories about companies such as yours.
And don’t assume your business is too small to be their next success — especially as everyone’s business taxes, including theirs, are soon about to get much bigger.
-
Smart Strategies for Paying Your Child an AllowanceBy giving your kids money to spend and save, you’ll help them sharpen their financial skills at an early age.
-
The Mulligan Rule of Retirement — Seven Mistakes You Can FixUse the Mulligan Rule to undo these seven costly retirement errors. While you can’t go back in time, some retirement choices allow for a “correction shot.”
-
From Pets to Paintings: The Little Things That Can Cause Big Estate TroubleSentimental items might have little monetary value, but their disposition can cause hurt feelings. Talking about who wants what and labeling items can help.
-
The Clock Is Ticking: Take Advantage of These Retirement Tax Benefits While They LastRecent tax changes, including an extra $6,000 deduction for those 65 and older, present a golden opportunity for retirees to reduce their tax bills.
-
I'm a Financial Adviser: This Is Why Unmarried Same-Sex Couples Need an Estate PlanWhen illness or death occurs within an unmarried same-sex partnership, family members can step in and push the surviving partner out. An estate plan is vital.
-
A Financial Planner's Guide to a Stress-Free Adventure AbroadStart by looking at flight/accommodation costs, have a flexible schedule, seek out credit card rewards, prep for health issues and plan to cook your own food.
-
I'm a Financial Planner: This Is How Smart Women Can Plan for Financial Freedom Despite Life's CurveballsProactive planning and professional guidance can help to build your confidence and give you clarity when you're navigating major life transitions.
-
Parents and Caregivers: Don't Miss Your Roth Conversion WindowCaring for a child or parent can mean a drop in income and a lower tax bracket. Why not take advantage by moving money into a Roth account? Here's how it works.
-
Testing the Retirement Waters in Florida? A Partial Plunge May Negate Tax BreaksMost folks know Florida is a tax-friendly state, but they might not know that part-time residents may not qualify, as our cautionary tale shows.
-
Catch-Up Contributions for Higher Earners in 457(b) Plans: What You Need to KnowGovernment 457(b) plans are about to get more complex as new Roth catch-up requirements come into force. Here's how to prepare for the changes.
