The first part of the year is when most entrepreneurs change accountants. People are thinking about their tax work and its time to make a change.
After 37 years of practice, new clients come to me with the same stories I’ve heard hundreds of times before. And the solutions haven’t changed much in those years.
The first case I’ll relate is an entrepreneurs who’s been in business for 20 years. She operates a consulting business, is a single member LLC, and normally pays tax on about $200K every year.
The problem is that if you leave the taxation structure as is, you’re set up to pay the maximum amount of tax, legally allowable by law, for an active trade or business in the US. Single member LLC’s are treated like sole proprietorships from a tax standpoint.
As such, they’re required to pay both income and payroll taxes on all of their income. In this instance she was paying roughly 20% in income taxes and 15% in Social Security and Medicare Taxes.
35% of $200K is a ridiculous $70,000 income tax bill. But electing an S Status on this LLC allows us to save payroll taxes on about $160K every year.
Within the first five minutes of our conversation, I’d already saved her over $24K.
The second case I’ll share is a C Corp where the owners are taking out over $300K in salary and paying income tax at the corporate level on another $380K.
Switching to an S Corp is not an automatic thing. There are legitimate reasons to maintain a C Corp Structure which include…
1 – The company still has a Net Operating Loss which will shield it from taxes and should be used.
2 – The company was financed through the owner’s 401K. As such, it must be a C Corp.
3 – The company will go public one day.
4 – The company will be sold in the near term and wants to avail itself of the No Capital Gains Rule on the sale of a company that are part of OBBBA.
But this company and its owners didn’t have any of these reasons to retain the C Structure.
Electing an S Status would save the Federal Income Tax paid at the corporate level which will save them about $80K this year alone. And the excessive salaries once reduced, would save almost another $40K.
Within 5 minutes, I’d saved them $120K.
Let me leave you with this…
Whenever I run into cases like these, the owners always ask questions like, “Why would my old accountant not tell me about this? I’ve been overpaying my taxes for decades.”
I can’t actually say because I’m not in their prior accountant’s head and don’t know what they’re thinking but generally it comes down to time, sanity, and experience.
These cases were both instances where the only thing the accountant’s were doing was completing a tax return during tax season. In both instances, the clients were doing their own financials which were the basis for the ultimate returns.
As such, the accountants only saw the work once a year. In order to explain the issues, please think of the normal accountant’s day during tax season.
They’re working 10 or 11 hours, six days a week. And we’re not talking about regular work. They’re doing tax returns and they’re dead tired.
Even if they wanted to provide reasonable tax planning to a client, their brains won’t allow it. The sooner they can get done with one return, the sooner they can get on to the next one.
Tax Season is simply something that they survive.
They don’t have a large support staff of Bookkeepers, Staff Accountants, and CPA’s. Normally it’s just them and maybe a bookkeeper, so they’re doing all of this themselves. No one is checking their work and there are lots of mistakes.
This only adds to their work load and makes them even more insane.
And most of these accountants haven’t done the requisite 20 or 30 years of practice it takes to get the experience necessary to do proper tax planning. Many don’t even know what can be done to legally save a client money on their taxes.
So there’s no way they could give good advice even if their brains allowed them to do so.
They wake up, go to work, and pray that they’ll only get yelled at a couple of times a day by angry clients. It’s obviously not the type of environment necessary for a professional relationship where the client is properly advised, respected, and protected.
I hear these stories all the time from new clients bringing in their work.
If you find yourself in a situation like this, do yourself a favor. Don’t wait, don’t think about it, and don’t have a bad case of analysis paralysis. Realize one basic thing.
If you have a question, an issue, or even the slightest inkling that you’re getting screwed, you probably are. Click the button below, and schedule a complimentary tax planning appointment.
I’d love to help you. You’ll be glad you did.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
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