There are countless factors to consider when choosing a business structure for your RIA firm. At the top of the list: tax implications. These vary between each structure, so it’s important to understand them in full. Only then can you make a sound comparison—and choose wisely for your firm.  

For RIA firms, we typically recommend a multi-member limited liability company (LLC), partnership, or S corporation. To help you determine which is best for your RIA firm, here’s what you should know about tax implications. 

Tax implications of a multi-member LLC or partnership:

Structuring your RIA firm as a multi-member LLC or partnership, such as a limited liability partnership (LLP) or limited partnership (LP), gives you substantial tax advantages as well as flexibility. 

Each of these structures allows you to tax-efficiently convert to an S corp, making them a good starting place for your firm. (It’s not as seamless or tax efficient to go from an S corp to a different structure.) As we tell our clients: When in doubt, start with an LLC or partnership. 

Additional benefits of an LLC or partnership: 

• Allows you to give a key employee ownership in the entity (by issuing a profits interest) without causing an immediate tax to the employee.

• Offers flexibility in succession planning (more tax-efficient than an S corporation). 

• Gives you more flexibility in the structure of your RIA firm. The owners don’t have to be individuals—they can also be other entities. This enables you to tax-efficiently bring in non-individual investors. 

• Provides complexity and flexibility in ownership structure including distribution and profit allocations.

Tax implications of an S corporation

Because S corps aren’t as flexible as LLCs and partnerships, they’re simpler. The tax rules surrounding S corps are established and straightforward, making the cost of tax preparation less expensive. What’s more, tax planning for an S corp involves less uncertainty. 

Additional benefits of an S corporation: 

• Although owners of S corps must pay themselves a reasonable compensation, there isn’t a bright line on what is reasonable.

• Flow-through income from an S corp is not subject to self-employment tax, which can provide a 2.9% to 15.3% tax savings when compared to an LLC. However, the Build Back Better Act, if passed, may reduce or eliminate this advantage.

• Offers flexibility to use year-end bonuses to owners to pay for any tax due, allowing you to avoid the administrative hassle and need of quarterly estimated tax payments. 

What about C corporations and single-member LLCs?

We often steer RIA firms clear of C corps for two reasons: First, a great deal of uncertainty exists around the future of corporate tax rates. Second, it is expensive and often tax-inefficient to change from a C corp to another structure. In other words, you could be stuck in a tax-inefficient structure because the costs to convert are prohibitive. 

Single-member LLCs that are taxed as sole proprietors carry the highest audit risk, so we typically avoid this structure as well.  

Which business structure is best for your RIA firm? 

Looking at potential tax implications is a great place to start when choosing a structure for your RIA firm. What we’ve covered here is not an exhaustive list—it’s important to do your research and consider other factors as well. 

If you’d like to explore business structure options for your RIA firm, we can help. To learn more, contact us today.

When one of your clients receives a bonus, you may be among the first to know if they wish to invest it. Before you do, however, it’s important to make sure your client fully understands the tax obligations that come with it. 

Often, supplemental payments—such as bonuses, equity compensation, and even exercising non-qualified options—can leave the recipient with an unexpected tax bill. Here’s how you can help your clients avoid this rude awakening.  

How does a supplemental payment lead to a surprise tax bill?  

A supplemental payment is a one-time compensation that falls outside of an employee’s regular payroll. The federal withholding rate for supplemental payments under $1 million is 22%; the rate jumps to 37% for anything over $1 million. 

This is where things get complicated: The 22% federal income tax bracket is capped for individuals at $86,375 and for married couples filing jointly at $172,750. If your client were to fall in a higher income marginal tax bracket, this would create a withholding rate differential between the supplemental payment and their regular payroll.  

For instance, say your client is in the 22% tax bracket, but they receive a supplemental payment that bumps them into the 32% tax bracket. Now the 22% withholding on the supplemental payment is no longer adequate. Because the client was bumped into the 32% bracket, the supplemental payment they received was under withheld by 10%—which undoubtedly will show up on their tax bill. 

When can a surprise tax bill become a problem? 

Clients are often confused about this because they know withholding was on their supplemental payment—they just didn’t realize it wasn’t enough. 

Unfortunately, many individuals use supplemental payments for investments or luxury purchases. This means the money isn’t readily available to pay the additional, unforeseen tax. It can quickly become a cash-flow problem. 

This is largely a federal tax issue; most states keep their supplemental payment rates closer to or the same as the income tax rates. 

What should do you as an RIA? 

If your client comes to you and wants to invest their supplemental payment, consider pumping the brakes on their enthusiasm. Make sure your client understands their tax obligations, so they won’t be hit by unexpected tax due in April. 

Your job: Be the hero. 

As you know, expectations make all the difference. If you can step in early and say, “hey, let’s make sure you won’t owe anything else on this bonus,” you can be the hero who saves your client from a surprise tax bill.

If you think your clients could benefit from this type of tax advice, we’re here to help. We can work as your in-house tax advisor to make sure your clients aren’t left scrambling to deal with unexpected tax payments. To learn more, contact us today.

Helping individuals experience financial freedom is what you do best. But what if you could also support your clients’ tax planning needs? There are a few reasons why you might want to add this service to your offering. With the right CPA firm on board, it could be easier than you think.

Here are a few benefits of partnering with a CPA firm for client tax planning.

Differentiate your RIA firm.

The investment advisory space is highly competitive. Giving your clients access to unique service offerings—such as tax planning for their investments—is one way to set your RIA firm apart. The more value you bring to your clients, the more loyal they will be to you, which can also increase your firm’s valuation.

Avoid tax surprises.

It’s critical to understand the tax consequences of the investments you make as an RIA. You don’t want your client to get hit with a significant tax bill on April 15—and you certainly don’t want to be the reason for it. But with tax laws constantly shifting, assessing tax consequences can be difficult and time-consuming. Having a trusted CPA on your team can help to take this stressor off your plate.

Be a hero.

It’s tough to be an expert in both investments and taxes. Partnering with a CPA firm lets you quickly bring in a tax expert for your clients when needed. This frees you to identify potential tax issues without worrying about how you’ll help your clients solve them.

If you spot a potential tax issue with a client’s investment, asking the client to consult their tax preparer may be like rolling the dice. Lots of people don’t have one. Those who do may not get a timely answer, especially if it’s a one-off question. What’s more, it can be hard to know the quality of advice you’re getting from someone’s tax preparer. Not everyone gives good advice!

Partnering with a CPA firm allows you to quickly connect your client to a CPA who can provide quality advice without costing your client money. Even a half-hour of focused tax planning advice can be hugely valuable for your client, especially if they can’t get it anywhere else.

Partner with the right CPA firm.

The right CPA firm is one that specializes in the investment advisory space and aligns with your service model. Having this level of comfort with a CPA allows you to seamlessly support your clients’ tax planning needs, allowing you to increase the value your RIA firm provides.

At Elevate, we not only have RIA expertise but also a history of business and individual tax planning. In addition to supporting your RIA firm with tax and business consulting, we can partner with you to offer tax planning to your clients. To learn more, contact us today.

 

Brian Nuttall and Rick Wilkens were recently interviewed by FinancialPlanning.com to share insights about tax for financial advisors starting their own RIA firms. Read the entire article here.

Image compliments of FinancialPlanning.com.

Maybe you see a way to standout from competitors by offering tax preparation services, maybe you see a way to grow revenue, and maybe you feel tax preparation services are an easy add-on service. Whatever your reason, read this article before you include tax return preparation services.

Is your RIA firm thinking about offering tax return preparation to your clients? The Elevate CPA Group and its sister firms have been providing tax services for over half a century combined. We understand the pros and cons of a tax preparation business and before reading on, we suggest you watch this short video.

For tax accountants, this video is hilarious (let’s face it, accounting humor is rarely widely accepted as funny) mainly because it is true. Here are some items to consider before starting a tax preparation service for your clients.

1) Your Tax Team: Who and How Many?

Tax professionals are in high demand, especially experienced tax preparers. Keeping a tax professional is also difficult due to a shortage and strong competition. Your services will be very contingent on this person. How big will your tax team be? Tax returns are complicated. Most tax firms use a review process to make sure to check work for accuracy. Who is going to be that reviewer for your tax returns? I personally only file my own return without review, every other return I work on is reviewed and most of the time, there are changes to be made. I have survived 25 busy seasons and still need and want my work to be double checked.

2) Your Firm’s Approach to Tax Compliance

Ask yourself these questions:

1. Does your firm take a conservative by the book approach?
2. Does your firm take aggressive positions?
3. Does your tax team share this same approach and who is monitoring them?
4. When the returns are viewed by 3rd parties or the IRS, are you comfortable with the quality of the product?

Our firm has an opportunity to see other firms’ work when meeting with a potential new client. A surprising amount of the returns we see have easily identified errors or missed opportunities. Some clients are unaware of aggressive or incorrect positions taken on their return. Will this lead to you losing an investment client due to bad tax work discovered by others?

3) Deadlines and Clients Who Just Don’t Care About Them!

Significant time and effort is spent by tax preparers collecting all the relevant tax documents and questions for tax return preparation. The most difficult part is getting clients to respond and send you the info. Imagine it is April 1st and you ask a client for a 1098 Mortgage Interest Statement. What goes through the client’s mind?

1. What the hell is a 1098 and where do I find it?
2. Taxes, I HATE taxes.
3. Why do they need this?
4. It is only April 1st; the deadline is in two weeks. I will get it next week to them (and likely forget about it).

Now, imagine this multiplied by the number of clients you are preparing tax returns for! The result is a stressful deadline with long hours for your team. Clients are often frustrated with the last-minute nature because…

4) Tax Returns Are a Grudge Purchase!

None of us would voluntarily complete tax returns! Rarely can someone prepare their own return if they have investments correctly. Clients are faced with paying money for a service they don’t really want. This is far different from the value proposition you bring as an investment advisor.

5) The Economics of a Tax Practice

The backbone of a profitable tax practice often lies with the efforts of the owners. Yes, tax practices make some money off the team, but a significant portion of the profit comes from the efforts and hours billed by the owners. Programs and resources can be costly. You need a good tax preparation program and a good tax research program at a minimum. There is also licensing continuing education and insurance.

Now, re-watch the video. Pretty funny right?

Running a successful business is hard work whether it is an RIA firm or a tax preparation firm. At Elevate CPA Group, we believe your firm has unlocked value and potential. We help RIAs unlock that potential and focus the owners on enhancing the value of their business. Make sure you are unlocking the value of your core business before chasing ancillary services. Contact us to start the process of unlocking the true value of your business.