Business Tax, Tax Planning

Business Tax advisory and tax preparation

Business Tax advisory and tax preparation

  • Tax preparers are NOT tax advisors, so know the difference
  • Almost all tax preparers do not provide meaningful tax advisory and planning, they simply prepare tax returns as quickly as they can with minimal surface-level advice
  • Most tax preparers are not legally qualified and able to represent a taxpayer if there is an audit and contested
  • DIY – Do it yourself business owner tax preparation is a virtual certainty of paying more in tax than the cost of quality advice

This is our center of our universe. When it comes to business taxation, unless a tax professional is advising the business owner, there’s simply no reasonable way a business owner is able to maximize their after tax income. Quite simply, there’s too much to know, and too much time will have to be spent attempting to save money. Worse still, it’s VERY likely the business owner will make mistakes due to the complexity of the tax code.

An easy way to explain what I mean is to use an example most business owners understand well. Ask yourself this, can someone start and operate your type of business by only spending 15-25 hours reading about your industry and watching a few hours of YouTube and tiktok videos?  Maybe in some cases, albeit at an expert level as well as you can, and when a large amount of money is at stake?

Also, would YOU hire a tax professional that said they’re new to the world of tax advisory, albeit they watched a few videos and read a few things online, so they’re ready to advise you on taxation? Because that’s exactly what some small business owners are doing, they’re either hiring a professional who works full time and also has the necessary training, experience, and learned knowledge, or they’re hiring themselves with whatever little and incomplete knowledge they pick up.

I can’t emphasize this enough, if there is enough money that it matters, then there’s enough money to do it right, because a tax advisor should save multiples of what they charge in fees. Let me repeat that important message, a tax advisor should save multiples of their fee vis-a-vis doing it yourself (and you’ll spend more time doing other productive income earning activities and/or time doing the things you want to be doing. In other words, hiring a quality tax advisor is like paying $50 for $100 bills.

But I’m really smart and/or highly educated….. Again, unless you work in taxation, it’s especially important for you to engage a tax advisor because it’s likely you’re making enough money that it matters. Be smart enough to know what you’re good at and where the limitations in your subject matter are.

Running a business is demanding, and while many business owners may especially take pride in handling tasks themselves (as a business owner you’re first a problem solver), doing their own taxes without the guidance of an experienced tax advisor can be a costly mistake. At first glance, preparing and filing taxes on your own may seem like a way to save money, but in reality, the potential pitfalls far outweigh the immediate savings.

From overlooked deductions to audit risks, navigating the complex and ever-changing tax landscape without a professional can leave a business owner vulnerable to financial and legal repercussions. Here are the key reasons why business owners should always consider working with a tax advisor.

Overlooking Key Deductions and Credits

One of the most significant risks of doing your own business taxes is missing out on valuable deductions and credits. For instance, the Qualified Business Income (QBI) deduction can allow eligible business owners to deduct up to 20% of their qualified business income. However, the rules surrounding this deduction are complex, and only certain types of income and business structures qualify. Failing to fully understand these rules may result in lost savings.

Additionally, many business owners are unaware of industry-specific deductions and credits they could be taking advantage of. For example, a tech startup may qualify for R&D tax credits for innovation and product development, while a retail business may benefit from Section 179 expensing or bonus depreciation on certain equipment purchases. Without a tax advisor, these opportunities could easily slip through the cracks.

Understanding how bonus depreciation and other expensing strategies interplay with the current and future years to maximize after tax income is essential.

 

Increased Risk of an Audit

The IRS pays close attention to small business tax returns, especially those that raise red flags such as excessive deductions or irregularities in reported income. Filing your own taxes without the help of an advisor can increase your chances of being audited. If errors are found, even if unintentional, the IRS can impose substantial penalties and interest.

A tax advisor understands what the IRS looks for and can help ensure that your tax return is accurate and compliant. They will also keep meticulous records and documentation in case of an audit. If your business is audited, having a tax advisor in your corner can help you navigate the process and minimize any penalties.

It’s a lot cheaper to hire an advisor before filing than it is to hire a tax professional to help solve a problem or mistake that results in an audit. It should come as no surprise that the IRS (like any government agency) gets it wrong from time to time. Either way, often audits can be avoided altogether if a tax return properly explains a position that may otherwise become targeted for audit and review.

 

Tax Planning and Strategic Advice

Tax advisors do more than just file taxes; they offer strategic advice to help your business grow while minimizing tax burdens. An experienced tax advisor will help you structure your business in the most tax-efficient way, plan for upcoming tax payments, and advise on timing for major purchases or capital investments. This is crucial for long-term financial planning.

For example, depending on your business’s income level, it may make sense to transition from an LLC to an S-corporation to take advantage of reduced self-employment taxes. A tax advisor can help you evaluate the benefits and drawbacks of these choices and guide you through the process of restructuring.

Without this proactive planning, you may end up paying more taxes than necessary or miss opportunities to reinvest in your business. Advisors also help with retirement planning, estate tax strategies, and more—areas that can impact your personal finances as well.

 

Time Savings and Peace of Mind

For most business owners, time is money. Every hour spent on tax preparation is an hour that could be spent growing your business or serving clients. Taxes require meticulous record-keeping, data entry, and constant attention to detail. Doing your own taxes can take countless hours, especially if you’re unfamiliar with the process.

Hiring a tax advisor frees up your time, allowing you to focus on what you do best—running your business. Beyond the time savings, working with a professional also provides peace of mind. Knowing that your taxes are in good hands reduces stress and helps you avoid costly mistakes.

 

Managing Changing Regulations

Business tax laws are constantly evolving, and new legislation can have a profound impact on your tax strategy. Recent changes, like those in the Tax Cuts and Jobs Act of 2017, dramatically altered corporate tax rates, deductions for meals and entertainment, and how pass-through businesses are taxed.

Staying on top of these changes and understanding how they apply to your business requires significant expertise. A tax advisor can interpret these laws and make sure your business takes advantage of any new opportunities or avoids pitfalls. For example, in 2023, rules related to Section 179 deductions and bonus depreciation were adjusted, and knowing how to handle those changes can significantly impact your bottom line.

 

Tax compliance is critical for avoiding legal trouble. If you make a mistake on your taxes, you could face penalties, back taxes, or worse, legal action. The IRS has broad enforcement powers, and an unpaid tax liability can result in wage garnishments, bank account levies, and liens on business property.

A tax advisor helps ensure your business is always compliant with tax laws and that returns are prepared accurately. In the unfortunate event of a legal tax issue, having a tax advisor to represent you can be invaluable, as they can help negotiate penalties, resolve disputes, and represent you in front of the IRS.

 

Advisors are Specialists

Business owners are experts in their fields, whether they run a construction company, a law firm, or a retail business. But tax preparation is a different specialty, requiring years of education, certification, and practical experience to fully understand. A tax advisor brings this specialized knowledge to the table.

Tax law is nuanced and highly detailed. By working with a specialist, you benefit from their depth of knowledge, understanding of your specific industry, and experience in navigating the most efficient paths for tax savings. Doing your own taxes may give you a basic understanding of your obligations, but it won’t provide the same expertise a tax advisor can offer.