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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:
- Does your firm take a conservative by the book approach?
- Does your firm take aggressive positions?
- Does your tax team share this same approach and who is monitoring them?
- 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?
- What the hell is a 1098 and where do I find it?
- Taxes, I HATE taxes.
- Why do they need this?
- 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.
The transition to the Biden administration shines a spotlight on potential regulatory and tax policy changes that could go into effect as early as this year. Of course, nothing has happened yet, and it’s possible nothing could happen at all. Nevertheless, it’s important to be prepared for these five potential changes so you can act quickly if needed—and help your clients to do the same.
1. Removal of preferential rates for qualified dividends and long-term capital gains for taxpayers with income over $1 million
Under Biden, we could see qualified dividends and long-term capital gains taxed as ordinary income. Given the Senate deadlock, it’s hard to say whether Congress will actually implement this change. Even so, consider accelerating any planned sales for diversification (i.e., to remedy concentrated positions), capital raises, or other reasons to take advantage of current rates. That said, don’t let the tax tail wag the dog.
2. Increased top ordinary income tax rates from 37% to 39.6% at the $400,000+ income level
To the extent that your client will receive income in 2021 and has control over the timing, the earlier they receive it, the better. Consider accelerating wages for S corporation owners, guaranteed payments for LLC/partnership owners, and wages for C corporation owners to avoid having these be subject to a potential tax rate hike. This is not the year to wait until the last minute.
3. New limitation on tax deductions for charitable contributions
Similar to the two situations mentioned above: If you or your clients are planning a charitable gift in 2021 or 2022, consider making it as early as possible. Also, consider accelerating 2022 planned giving into 2021.
4. Expansion of Social Security wage base to more than $400,000 of earned income
This presents a significant incentive for converting from an LLC to an S corporation. Doing so can help to avoid self-employment tax on flow-through earnings, thereby mitigating the impact of this change. Business owners have only until March 15 to make an entity change election for 2021 without triggering late election rules. The time to act is now.
5. Decreased unified tax credit for gift and estate taxes and the elimination of the step-up basis at death
These potential changes could greatly limit the amount individuals can gift to other parties tax-free. For high-net-worth individuals, it’s important to establish a contingency plan for quickly executing a gifting plan if needed. Keep in mind documents related to gifts and trusts take time to execute. Having the documents and plan ready to execute should be a high priority for all high-net-worth individuals.
The bottom line: Be prepared—and make sure your clients are, too.
Although you don’t need to act now, you do need to have a plan—one that can be executed quickly if needed. Elevate CPA Group can help. We provide tax support to RIA firms and can help you provide value to your clients in planning for tax law changes, too. If you’re concerned about how these potential changes could impact you or your clients, contact us today.
Property for Services Series: Part 5 of 5
As we have discussed previously in our Property for Services Series, when property is received in exchange for services, it is taxable as compensation to the service provider. One of the most common situations we encounter is when our clients hold options to purchase stock of their employer. It is important for stock options holders to plan and to understand their options’ tax consequences and timing.
Options are not considered property for Section 83 purposes as long as they do not have a “readily ascertainable fair market value.” As a general statement, most employers will issue options that do not have a readily ascertainable value, but it is essential to understand a company risks an 83 issue if the options are issued with a strike price lower than the fair market value of the stock at the date of grant. Most companies use options to incentives an employee to contribute to increasing the value of the employer. For employees, this provides some significant advantages:
- A risk-free investment in the employer while the options remain unexercised; and
- Delayed taxation until the options are exercised.
The positives are often forgotten when it comes time to exercise the options and recognizing the tax consequences of the options.
The following equation measures compensation at exercise:
Number of Options Exercised x (FMV – Strike Price)
There are two types of compensatory options, with very different tax treatments.
1. Incentive Stock Options (ISOs)
Incentive Stock Options (“ISOs”) have favorable but confusing tax treatment. For our RIA clients, the essential points to understand are:
- There is no REGULAR tax income when exercised.
- Alternative Minimum Tax (“AMT”) may be due and depends heavily on the employee’s tax
situation and AMT income based on the above equation.
- The employee can ultimately receive long term capital gain on the difference between the
ultimate sale price of the stock and the strike price if the stock is held
- One year and one day from date of exercise; and
- Two years and one day from the date of the option grant.
- If not held for this period, the income is ordinary income.
The significant consideration with ISOs is when the employee exercises the stock option, owes the strike price, AMT tax, and wants to hold the stock long enough to get long term capital gains. Consideration needs to be given to the risks associated with a decline in stock value post-exercise. The gamble is converting a risk-free investment to putting funds at risk to gain a tax advantage. You and the client’s tax advisor should work closely to analyze and understand the risks of the exercise and hold strategy, including the applicability of Section 83(i) is beyond this blog’s scope.
2. Non-Qualified Stock Options (NSOs or NQSOs)
Non-Qualified Stock Options (NSOs or NQSOs) are not as tax favored as or complicated as ISOs. Very simply, at the date of exercise, there is compensation income based on the equation above. From a planning perspective, NSOs should always be exercised and sold on the same day. There is no reason to hold the stock as that converts a risk-free investment to an at-risk investment.
Not all clients have a tax advisor that can help analyze the tax consequences of holding and exercising options. Elevate CPA Group provides our RIA clients with a fractional tax department providing a competitive advantage over competitors. If you have questions about property for services taxation, give us a call.
Property for Services Series: Part 4 of 5
Why is IRS Section 83, property transferred in connection with the performance of services, so important for our RIA clients? It is a central issue when selling your RIA firm and succession planning. Succession planning is like estate planning—something business owners know is important, but don’t usually address. Succession planning is important for principals of RIA firms to recognize the value built in the firm. Often the firm is the largest asset the principal owns. Recognizing the value for the principal is crucial to long term financial security.
In general, Elevate CPA Group encounters two types of transactions in succession planning:
- an arm’s length transaction with a third-party buyer, or
- a sale to key employees.
When the succession planning involves a sale to employees, Section 83 is something to think about. Some questions to consider are:
- Is the fair market value properly determined? Does it include appropriate and allowable discounts and is the key employee paying the fair market value?
- Are terms in shareholder agreement, buy/sell agreement or operating agreement unintentionally placing a substantial risk of forfeiture that may cause a delay in taxation?
- Are options or profits interest being used to transfer ownership?
- Are the shares, whether bought for full market value or not, subject to vesting?
Elevate CPA Group is uniquely qualified to help RIA firms navigate succession issues. We help our clients build value, develop a successful succession strategy, understand and minimize tax issues, value the firm, educate successors and provide a strong relationship to help guide the firm to continued success.
Selling the firm you have built over years is an important part of an RIA firm’s lifecycle. Elevate CPA Group are here to help you make the process successful. If you are planning on selling your firm someday, make sure you have reliable expertise to make the process as simple as possible. If you have questions about property for services taxation, give us a call.