3 Tell-Tale Signs You’re NOT Running a Tax-Efficient Business

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As you are solidifying your 2016 New Year resolutions, you should take a hard look at your business operations and determine if there is any need for improvement. One of the many areas where you should consider exploring solutions revolves around taxation. Specifically, ask yourself the following question: “Am I running my business in the most tax efficient way possible?”

The majority of the successful real estate investors understand that running a tax efficient business boosts their bottom line and directly increases the return on investment (ROI) that their real estate rentals or business generates. These real estate investors understand how valuable reducing their effective tax rate is to their overall success.

If you’re not sure if you are running a tax efficient business, I’ve provided key indicators I often see from real estate investors and business owners who are not running a tax efficient business.

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You’re Still Using TurboTax

I get it: You’re an entrepreneur and you want to be great at every aspect of your business. I’m no saint either, as I have a hard time giving up various aspects of my business to others. However, you need to realize that being decent at everything but a master of none is not an efficient way to run your business. Running your business in such a way costs you real dollars.

Solution? Hire an expert.

Experts have thousands of hours of education and experience in the one process you are trying to improve. Experts can think creatively, weigh your risk tolerance, and determine an appropriate path forward that’s parallel to your goals.

Related: Cost Segregation Study: Could This Strategy Dramatically Reduce Your Tax Bill?

Some of my new clients in 2015 were reading the IRS Publications to get a handle on their tax situation. Combined with TurboTax, they thought they had it covered. While I applaud leaning about your situation through research, what you may not realize is that the Tax Courts have continuously ruled that you cannot use what you read in IRS Publications as evidence to support the way you report your taxes.

tax-extenders-2015

The IRS Publications can come chock full of errors. You’d be surprised.

Instead, you must have specific code sections or Tax Court cases that support your tax position. Trust me, unless you love taxes like I do, it’s not fun to read thousands of pages of code — but that’s where an expert’s value add comes into play.

CPAs read the tax code (not IRS Publications) and determine how the code applies to a particular tax scenario. Such a skill is learned only through years of education, training, certification processes, and hands on experience.

Many new real estate investors feel that the fees of an expert aren’t justified for the level of real estate investing they are currently involved in. Occasionally this is true. However, in 2015 alone, I’ve helped amend many tax returns where the investor used TurboTax to prepare them. I only wish they’d have come to me sooner.

While there’s nothing inherently wrong with TurboTax (and I recommend it for people who have relatively basic returns), you need to understand how to appropriately navigate through the software to prepare an accurate tax return. If you answer one question “wrong,” your entire return may be non-compliant.

You Haven’t Called a CPA

If you are so confident in your tax preparation abilities that you haven’t even called a CPA, you’re only hurting yourself. Unless, of course, you are a tax accountant — then carry on!

Most respectable advisors will provide a free 30 minute consultation. Just talking to a CPA for 30 minutes may give you numerous ideas that you hadn’t previously thought of.

My favorite conversations are those where new clients call me up, and by the end of the 30 minute consultation, we’ve outlined a plan to save thousands of dollars. Not the phony “contribute more to your 401(k)” but real money in their pockets.

As I mentioned above, experts have thousands of hours of training and experience. They may not have seen it all, but they’ve seen a lot.

Often I see a sense of pride for those that prepare their own returns. And that’s great, but if you can get a CPA on the phone for free, what’s the risk to you?

You Don’t Engage in Tax Planning

While it’s true that most of your documentation like W2s and 1099s will come in February, if this is the first month you are thinking about last year’s taxes, you’re in for a world of hurt.

There is a difference between tax planning and tax preparation. Tax planning is proactive; tax preparation is reactive.

Think of tax planning as brainstorming and strategy development, and think of tax preparation as compliance. It is imperative that everyone go through some level of tax planning. Tax planning for 2015 cannot be undertaken in February 2016 because it’s too late! Well, some deductions have an April 15th deadline like Health Savings Accounts and Retirement Accounts, but that’s beside the point.

year-end-tax-strategies

Related: Bookkeeping For Investors: How to Keep Your Records Straight (& Maximize Tax Savings)

My suggestion is to engage your CPA with a tax planning service within the first few months of the year (if possible, it’s busy for us now) and outline a tax strategy for 2016. This will encompass your goals and current financial position. This is where the huge value add of having a CPA on your team comes into play.

On top of that, be sure to touch base once per quarter to update your tax plan.

While we do look for ways to save during tax preparation, for the majority of strategies, it’s just too late. Tons of “experts” can prepare tax returns — but few have the knowledge and creativity to develop a tax plan unique to you that will save you tons of money.

Summary

Taxes are a huge factor in your business and directly affect returns. Make sure you have a plan of attack going into 2016. It will save you real money, likely much more than you paid the expert for their assistance.

Investors: What steps are YOU taking to ensure an efficient tax season this year?

Leave a comment and let me know!

About Author

Brandon Hall

Brandon Hall, owner of The Real Estate CPA, is an entrepreneur at heart who happens to be good at taxes. Brandon is a real estate investor and CPA specializing in providing business advice and creative tax strategies for real estate investors. Brandon's Big 4 and personal investing experiences allow him to provide unique advice to each of his clients. Sign up for my FREE NEWSLETTER to receive tips and updates related to business and taxes.

20 Comments

  1. Jerry W.

    Thanks for taking the time to write this article Brandon. Taxes are one of the places where I do not plan far enough ahead on. While I do try to review the company books before the end of the year, I should be doing it with my accountant.

  2. As a fellow CPA, I concur with your encouragement for investors to be proactive and involve their accountant BEFORE making significant investment decisions. It seems so simple but is overlooked often and can cause missed tax savings opportunities (as I am sure you can attest). As an eventual real estate investor, I appreciate your hands-on, practical advice. Thanks!

  3. Tom Mitchell

    Like Jean, I talked to two CPA’s this year looking for PLANNING help and all I got were “stay away from real estate”, and “I can do your return for you – just do it all yourself, and I’ll charge you”. I think I’m not asking the right questions up front. Would be nice to see a post on how to avoid tax preparers and get a real CPA.

    • Brandon Hall

      Hey Tom,

      I’ll incorporate that into this week’s article as I was already headed down that path 🙂 But yes, there’s an important distinction between someone who treats you as a transaction and someone who wants to build a long lasting relationship with you.

  4. Isaac Rothermel

    Hey Brandon, thanks for writing such an useful article! I’m curious, though — do you recommend finding a CPA who invests in whatever category you invest in? For example, if I invest in industrial real estate, does it make sense to look for a CPA who invests in the same, as compared to a CPA who invests in residential real estate? Along those lines, if I invest in a niche like self storage, and find a fantastic CPA who also invests in it, but lives across the country, does it make sense to work with them?

    • Brandon Hall

      Isaac – I think it depends on the market values of the properties you are taking down and what exactly is involved. For instance, if you are taking down a $500k self-storage facility by yourself or with a partner, a real estate savvy CPA will work perfectly fine. If you are taking down a multi-million dollar facility and you are syndicating it, you probably want a real estate savvy CPA with niche expertise in self-storage facilities.

      Don’t worry about using a local CPA. Find one that has the expertise you need and engage in their services.

  5. Kevin Fox

    I think still using turbo tax, never speaking with a CPA, and failing to engage in tax planning is beyond just a red flag that you MAY not be as tax-efficient as you could.

    That’s the tax equivAlent of being caught red handed with a smoking gun.

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