Let’s face it, most CPAs miss the mark when it comes to tax planning for their clients. There are several reasons, ranging from introverted CPAs who are averse to picking up the phone to those who haven’t created an offering to be able to monetize their services to those who are just too overwhelmed and disorganized to actually make it happen. Whatever the reason, it leaves the client in a tough spot when the one person that can help them make strategic tax moves can’t or won’t.
Many old school tax professionals got used to the tax return mill model where they crank out a bunch of returns during tax season, take a few months off, crank out some more returns during extension season, and then maybe reach out to clients at the end of the year to do some basic tax planning. For those tax professionals who make a point of doing a tax planning meeting before the end of the year, a lot of the suggestions they offer up are, well, quite pedestrian. Everyone knows they can buy equipment or a vehicle and depreciate all of most of it in that year. Everyone knows they can contribute to their 401(k). Everyone knows they can get a write off for charitable donations. These suggestions don’t drive value other than getting an understanding of the resulting tax savings at different dollar amounts.
If the above resonates with the tax planning experiences you’ve had in the past, or if you’ve never done tax planning before, here’s what you should be looking for from your CPA’s tax planning process. Before diving in, however, I will mention that tax planning isn’t for everyone. A lot of folks have simple tax situations and, thus, little room to maneuver to reduce their tax liability. If you own a business (or part of one), rental properties, have stock compensation, or just have a complicated tax situation in general, then you’re going to benefit from tax planning. Either way, the below is what you should be looking for.
A Clear Value Proposition
Tax planning engagements tend to be unorganized, ad-hoc and sporadic when provided by a CPA who doesn’t have an organized and consistent process. When it’s not an area of focus for the CPA, this is what happens. The ideal tax planning engagement has a transparent, value-based cost associated with the services (ideally a fixed fee, discussed at the end of this article), a clear roadmap for how the process will work and well-defined deliverables. At Dark Horse, we have monthly subscriptions that fall under one of two camps, on-demand and proactive. The former is best for those with fluid situations that don’t necessarily need the structured quarterly tax planning meetings in the here-and-now but have one-off questions that come up from time to time. The latter is best for those who normally make quarterly estimated tax payments and have substantial taxable income they are trying to offset as much as possible.
You’ve got to remember that when it comes to tax planning, the basic calculus is that you need to be paying less than the tax (and sometimes penalties and interest) savings you’re receiving as a result of the engagement. Tax planning, therefore, is an entirely value-based engagement whereas tax preparation is more connected to maintaining compliance with the IRS and state taxing authorities with a lesser focus on tax saving maneuvers. The reason is simple… after the end of the year, most of the items that can impact your taxes are already set in stone. Some things can be changed after the year ends, like an employer contribution to a profit-sharing plan, and certain strategic tax elections but the items that really move the needle often need to happen during the tax year.
So, if your CPA can’t articulate how they’re going to provide value in excess of the cost of the services, you may want to find one who can because they are either disorganized or trying to sell you something you won’t benefit from on a net basis.
Who’s Doing What and When?
Effective tax planning requires more than a one-off conversation. It requires a structured meeting cadence to ensure that opportunities are identified, strategies are modified as needed, and the plan is actually being executed. Unfortunately, CPAs often can’t execute a tax strategy entirely by themselves without the involvement of the client. This is because it often requires them to write a check, collaborate with other professionals (like an estate attorney, syndicator, or financial advisor) or take actions within their business or with their employer. So, while we can’t act in your place on everything, it is our duty to make sure we’re keeping you accountable to follow through with the plan or else the strategy, no matter how clever, is worthless.
Expected Timing of Cash Flows
It’s all fine and dandy when you’re CPA tells you that following a certain strategy will save you a boat load of taxes. But how long might you have to part with your cash for before you actually monetize those tax savings? A great tax planning engagement will bring this consideration to the table and identify supporting strategies to ensure you and/or your business are properly funded throughout execution of the tax planning strategy.
An Annual Recap Demonstrating the Tax Savings
This is the part where you get to see the return on your investment. For example, because we exercised your ISOs in a manner that created a qualified disposition, we got the majority of the gain on your stock taxed as long-term capital gains instead of ordinary income, saving you X dollars in taxes. If that went over your head, fear not, as it’s our job to know these things and to educate you along the way. The point I’m aiming to drive home is that you’re only going to know if the tax planning engagement was worth the cost if you have clarity as to the resulting tax savings.
One final note is that the best tax planning engagements are not done via hourly billing but rather via flat fee pricing. The reason is that engagements centered around hourly billings put a disproportionate value around the inputs (the time it takes to do the work). This results in a relationship where the CPA becomes less accountable for driving value and one where the client is hesitant to pick up the phone or click send on that email (in fear of the bill they’ll receive for the services) that could start a conversation that yields significant tax savings.
Happy tax planning!
About Dark Horse CPAs
Dark Horse CPAs provides integrated tax, accounting, and CFO services to small businesses and individuals across the U.S. The firm was founded to save small businesses (and their owners) from subpar accounting and tax services and subpar client experiences. These small businesses are Dark Horses among their larger and more well-known competition. Being a Dark Horse CPA means advocating for small businesses by bringing them the tax strategies and accounting insights previously reserved for big business. Get a quote today.