Hi,
I'm a newbie to real estate investing. My time has been spent educating myself over the past several months. I'm ready to begin assembling my team and get a corporate structure in order. My first team member I'm looking for is a real estate CPA. I would love some guidance on homing in on the skills and experiences the "right fit" CPA needs to have to ensure we have a solid working relationship.
What are your top 3 questions that you would ask during a CPA interview? What are three "red" flags you've encountered in working with a CPA?
Thanks a bunch for your wisdom and guidance.
Jenny
Thanks for inviting me to chime in here @Paul Timmins . Here are some tips I suggest:
1. Find out if they specialize in real estate. This is important especially if real estate will be a large part of your transactions during the year. You want to work with someone who understands your business and your industry so they can help you plan accordingly to minimize your taxes.
2. Make sure they are smarter than you and you are not the one bringing them strategies and ideas each year. If you find yourself in that situation, you may either want to upgrade to another CPA or you might as well do it yourself on Turbo tax.
3. Get references: references and testimonials from other investors is important. Everyone can talk about how wonderful they are themselves but its what other people say that is the key.
4. Fee arrangement: Understanding the fee before you start working together. A lot of CPA firms charge tax returns by the hour so if you are speaking with someone who does that, make sure you know how many hours your taxes will take so there are no surprises half way through the return. If you are given a set fee for your taxes, make sure you understand what that fee includes and what potential add-on costs there may be, if any.
I like dealing with a CPA that is a one man show. The guy that has been in business for 30+ years, might smoke in the back room of this office, works late, has a long list of longterm small business clients and someone you could call sat or sun ask a question and never receive a bill. You don't waste there time, you bring them a gift a couple times a year and they will have your back.
I agree with @Franklin Romine and would add that usually those CPA's are a little less expensive. I use a CPA with a mid size company and get charged a much higher rate than a few of the individual guys charge. The benefit of the bigger company is all of the knowledge/experience of the rest of the company. My CPA will also let me take him to lunch to ask some questions, as long as I don't abuse it.
It also depends on your strategy. Do you intend to flip, buy and hold, lease option, etc? S - Corps are one of the better entities for flipping. LLC's are generally the best for buy and hold and possibly lease options depending on how many you do. I know several buy and hold Landlords who use Series LLC's, not available in every state yet, but I believe are in DC. The have a Master LLC and then set up a different series under the master for each property. There isn't much case law on it yet to support separate liability for each series, but that is their goal. In IL its only $50 to set up a new Series, which can use the same bank account/tax return as the Master. Although that might be seen by a Judge as less separation than the Landlord wanted.
I would take a different approach to choosing a CPA. I was a CPA for a few years and worked in a large firm with 400+ CPAs and a small firm that employed 4 CPAs.
I would, respectfully, disagree with choosing a CPA based on them being a 1 man show that doesn't bill for every little thing you ask them. All CPAs are not created equal. Tax laws change all the time, so just because someone has been in business for 30 years, doesn't mean they are up to date on all the new tax laws. I worked with one CPA who was 75 years old, had been a CPA for his entire life, but all his clients were just as old as him and I wouldn't have wanted him to have any part in my taxes or tax planning. I would say finding a CPA who is familiar with real estate investing is the most important thing to look for, preferably one who is involved with real estate themselves, such as owning rental properties.
Everyone in business is in business to make money, and time is money. The smaller firm I worked for employed 4 CPAs. 3 of the CPAs did most of the work and the owner spent his time responding to emails and talking with clients to answer questions and solve problems. You might find with a 1 man show, that they are spread too thin, and response time may increase. I wouldn't expect to be billed for calling with a quick question, but I would also ask about something like that upfront.
@Kyle Samuel Thanks for the information Kyle. I do worry about a one man show--especially if that one man/woman has a life event that precludes me from getting my financial data. @Zach Morrison I'm looking to buy and hold. I am looking to have an LLC with the subsidiaries and that's what drives my question about interviewing a CPA who has that depth of experience and versatility. @Frank R. While I like the intimacy and relationship of a one man/woman show, my greatest worry is the life events that can impact and leave me hanging. Thanks all for the wisdom and guidance.
The CPAs I've delt with use the power of "extention" to solve their personal priorities problems. This is not saying something bad, just reality.
I have to put this out there because it's big and important. I took a Quick Books training course by a high end CPA who's left running a CPA company to running a real estate investment and funds raising company. So I take his advice seriously since he ran a medium sized CPA firm and then dumped that job for things he liked better.
He said fire your CPA. If you are running any kind of a real estate business you are already in deep with IRS regs that you need first hand knowledge about the implications of "maintenance expense" vs "capitalizable expense" and there's nothing like doing your own taxes to learn these details. IE I use turbo tax and REI is not complicated really. Even with a pass through LLC.
But I do use a CPA for my type S corp and quarterly filings.
Another story that needs to get out there. This is a BIG issue after you've hired a CPA. That another REI associate ran into and was also mentioned by the CPA I refer to. CPAs struggle to show their value to their customers and they are doing so by showing the huge deductions (reduction in taxes paid) they are getting you vs the previous guy. Well a friend was audited by the IRS BECAUSE OF WHAT THE CPA advised them to do. I feel that my use of turbo tax and studying what I'm doing and intentionally taking very (very) conservative deductions, expenses, mileage choices that I know every CPA would puff up to much larger. I also have an aptitude for taxation issues so I find doing my own buy and hold business taxes via my pass through LLC to be any effort at all thanks to turbo tax premium. We manage 13 properties and add 2-5 new properties each year.
I choose to save my CPA fees and rest better at night re audit risk. I think the reality is opposite of what most investors think re using a CPA vs IRS audit (a general statement of course). I'm certain I will get roasted by CPAs on this comment!!!!! Go ahead, I'm repeating what a CPA had said, my observation of a friend getting screwed and my own experience. LOL
I will finish though by saying that it is necessary to have your dream team that includes lawyers and CPAs. I'm just putting it out there that your CPA may not be doing you any favors re the IRS and audit risk. Watch out if your CPA brags at how he/she reduced your tax bill and how thankful you should be to them!!!!!
i DEFINITELY agree with curt on a few points. If you find your CPA bending tax law too much, it will eventually catch up with you. Numbers are what they are and nothing more. The main advantage of using a CPA is tax planning more so than taxes. An experienced CPA will be able to help you regarding when to take certain deductions immediately vs depreciating them over time which can make a big difference.
In the end, the IRS is going to get their money. And if your CPA is taking your actual expenses and inflating them to create a false sense of worth, then they are not a good CPA. This is short-term thinking and in the long-run will just create MANY more problems for you and your REI career
We are buy and hold investors with 15 rental units. Our tax guy is an Enrolled Agent (EA), not a CPA, and does very good work. He is personable, calm and patient in answering our questions. His turnaround time is good and he has saved us money over the years, because he knows things that we don't and he is much more efficient in doing the paperwork.
I used to do my own taxes, even did other people's tax returns with VITA (volunteer income tax assistance) when I was younger. I'm not shy about doing my own taxes, but would rather focus on my own professional work and hire a tax professional's time and expertise to do what they do so well.
The tax laws are more complex than "back in the day" and forever changing. Seek out referrals from local real estate investors who have a profile similar to yours or have a profile you would like to emulate. Find someone you like and stick with them. I love the fact that my EA keeps close tabs on what I amortize and what I depreciate, understands my real estate goals and is honest and frank with me, in a gentle way.
Of course you still need to understand the tax process and implications. The records you keep and what you give your tax preparer to work with are paramount. You will be held responsible in the end for what you submit to the IRS.
I think you would be good to hire an Enrolled Agent vs. a "CPA". Enrolled Agents can help you with your tax filings and often have more time to answer your questions without nickeling and diming you to death. An EA who specializes in real estate transactions can easily put together a Schedule E, or take care of any dispositions you have. Additionally, when you run into problems with the IRS, Enrolled Agents are authorized to represent you before all administrative levels of the Internal Revenue Service. Also, some EAs are admitted to practice before the U.S. Tax Court.
Additionally, take the time to interview anyone whom you hire to help you manage your financials. Just because they have CPA or EA behind their name, does NOT mean that they are competent. I wish you the best of luck in finding a qualified Accountant/ Tax Professional.
Your 'life event' concerns are very valid. I received a letter in January that the CPA we have been using is having health issues and will not be practicing this year at least, maybe longer.
@Steven Hamilton II and @Bill Walston may want to chime in here.
First choice would be an accountant who invests in RE. So that's question one.
Secondly, I'd inquire about their practice, any CPA can do work for RE but is RE the majority of their work?
Third, I'd want to know if they do tax planning and are actively involved in estate planning, trust accounting and asset management aspects.
If you get a positive response in all three of these areas you have a home run on the technical side.
Gauge their ethical manner, their personality, would they be trustworthy as an advisor (you don't want a drunk and there are many).
Know how they bill, ask about a quick question and any retainer fee and hourly rate.
If they do not have the CPA designation (not really required) ask what their education is and what certifications they do have. You don't want to get just a tax guy, someone who practices as a preparer is responsible to go to or answer to the IRS, that's not a qualification. Licensed to appear before IRS to represent a client is only to tax matters, they may not have an accounting degree but tax training. They don't have the same training requirements as a CPA. The plus to a CPA is they more extensive accounting and legal training and legal aspects of the Code. But they may be more than qualified if they are hitting on those three points above. Then you may fall into a bookkeeper category, many learn on the job and have some kind of accounting training. I'd bet that someone who has been doing the accounting, books and taxes in a real estate investment type business for 20 years could do fine too.
Ask for references and verify them. I'd bet the number one complaint would be over returning calls in a timely manner, many are much like a good attorney, they are busy. You don't really have emergencies in accounting so IMO cut them some slack. :)
Thanks for inviting me to chime in here @Paul Timmins . Here are some tips I suggest:
1. Find out if they specialize in real estate. This is important especially if real estate will be a large part of your transactions during the year. You want to work with someone who understands your business and your industry so they can help you plan accordingly to minimize your taxes.
2. Make sure they are smarter than you and you are not the one bringing them strategies and ideas each year. If you find yourself in that situation, you may either want to upgrade to another CPA or you might as well do it yourself on Turbo tax.
3. Get references: references and testimonials from other investors is important. Everyone can talk about how wonderful they are themselves but its what other people say that is the key.
4. Fee arrangement: Understanding the fee before you start working together. A lot of CPA firms charge tax returns by the hour so if you are speaking with someone who does that, make sure you know how many hours your taxes will take so there are no surprises half way through the return. If you are given a set fee for your taxes, make sure you understand what that fee includes and what potential add-on costs there may be, if any.