Tax preparation and tax planning are two valuable services offered by the best CPA (Certified Public Accountants)/EA (Enrolled Agents). In this article, I'll detail some ways a skilled accountant can help your business. Tax preparation is ensuring you and your rental businesses are complying with the required tax filings and deadlines. Tax planning is about proactively cutting taxes for the current year. This is where you and your advisor come up with a plan to reduce your taxes. The starting point is your prior year tax return. One thing to note is that while these two are interrelated, CPAs typically charge for each service.
For tax preparation services, this is more of a commodity business. It is a general expectation your CPA/EA knows the rules and knows what to do with the information you provide to them. Here are the ways tax preparers can provide value:
Ensure All Appropriate Deductions Are Taken and Ensure the Accuracy of the Return (Based Off the Documents Provided)
Incomplete or inaccurate records are provided for properties more times than not, in my experience. The role of a good tax preparer is to ask you questions about specific items that may be missing/incorrect. Some things I’ve seen in practice that are missing/incorrect are insurance, property taxes, and even not taking the appropriate amounts for depreciation, especially in the year of purchase. I would implore you to read some of my other articles as well to get the necessary education on allocating those specific expenses. As an example, if you receive a closing credit for property taxes in the year of purchase, you must expend the credit before being able to deduct property taxes.
Provide Estimated Payment Information (If Required)
If you are self-employed, own a business, or have substantial income outside of your W-2, you will likely need to make estimated payments. What ends up happening is that your CPA/EA will create this based upon your previous year’s income. If you expect significant changes in income, you should make sure that this is noted so the proper amount of estimated tax payments are made.
This is a bit outside the scope of tax preparation, however, when the services are complete, you can expect to receive a bill. On that bill, you will want to make sure that your Schedule C and E preparation are broken out separately (for individuals). The tax preparation services that are related to Schedule C and E are fully deductible. The remaining portion is typically not deductible for individuals. For business returns, the costs are generally fully deductible. If the accounting firm you work with doesn’t do this, I’d recommend reaching out to them and requesting a revised bill noting the Schedule C and E amounts.
The tax planning side is a bit more complicated. Each situation is truly unique and the role of the tax advisor is to come up with strategies suited specifically for individuals and businesses. Here are three ways tax advisors provide value with their tax planning services.
Creating a Plan to Reduce Your Taxes
It is often stated that taxes are one of your biggest expenses. Most people bury their head in the sand when it comes to this and just bite the bullet year after year. If you are reading this, you are likely not one of those people. You want to reduce your taxes by all legal means and that is what a great CPA/EA will do with a comprehensive tax plan that is catered to you and your business. However, just remember that YOU will ultimately need to be the one who enacts all of your CPAs suggestions. As Tom Wheelwright (Robert Kiyosaki’s accountant) says “You have to change your facts in order to change your tax.”
Provide Value Far In Excess Of What’s Billed
Great tax planning is never cheap. CPAs/EAs need to understand the tax law (no small feat given that it’s ever changing) and then apply it to your situation. Sometimes, situations are so complex that we need to do extensive research to ensure a certain deduction or credit can be taken for that specific situation. I’d recommend viewing tax planning as a return on investment (ROI) equation. If your CPA/EA is able to save you $25,000 in tax and you only have to pay $5,000, that’s a 500% ROI. There are not many opportunities that will yield such a dramatic result.
Provide Action Items For You to Achieve Your Tax Plan
As we all know, it is great to have a plan, but a great plan means nothing without action steps. As your trusted advisor, we want to see you succeed and the best way to do that is to provide specific actions you need to take to reduce your tax. Ideally, after your meeting, you will come away with specific actions that you will need to change your tax situation.
It is important to know the difference between tax preparation and tax planning. They are two very different things. You should also know how great CPAs/EAs can provide you value. I hope this article helps you identify a few key characteristics of a good CPA/EA for each service.
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