To kick off the new year, many investors set a resolution to take their business to the next level. A supplemental goal is to find and hire a CPA. Don’t believe me? Just check out the tax forum. It’s crawling with posts asking about CPAs.
These types of posts are great! It means investors are serious about growing their portfolio or business. They have moved from “do it yourself” to “my time is more valuable, I need to outsource,” and I love that thought process.
I intend to answer three questions today:
- Should you self prepare your tax returns using big box software or should you hire CPA?
- What should you use a CPA for and how will one help grow your business?
- How can you find and hire a CPA?
Sit back and relax because some knowledge is coming your way!
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Self-Preparing vs. Hiring a CPA to Prepare Your Tax Returns
There are pros and cons to doing it yourself versus outsourcing your tax preparation. Many new business owners and investors prepare their own returns to save on costs. Unfortunately, when they prepare their returns wrong, hiring a CPA to correct the old returns often costs more than hiring the CPA to prepare them in the first place.
Let’s cover the pros and cons to preparing your own returns.
Pros of Preparing Your Own Returns
- You are preparing your returns on your own schedule and do not have to worry about a CPA’s busy schedule.
- You have complete control over your data and security.
- You can prepare your returns for less than $100.
Cons of Preparing Your Own Returns
- You probably don’t know the technicalities of the tax code relative to your situation.
- To learn the technicalities requires investing time for research, sometimes hundred to thousands of hours.
- If you have a question, you will have to rely on your software’s customer support team, who may not be qualified.
- If you mess up, it will be costly in terms of IRS and state penalties and CPA fees to correct your tax returns.
The number one reason I feel that investors and business owners prepare their own tax returns is to save money. However, preparing your own tax returns often results in costing more money than you are saving. Why? The opportunity cost of your time.
When you prepare your own tax returns, you may save $400-$1,000. But how long is it going to take you to accurately prepare your tax returns?
The IRS publishes the average time it takes per form to compile records, learn about the law applicable to the form, prepare the form, and send it to the IRS. As an example, Schedule E takes roughly 6 hours to prepare. But that does not include the supplement forms, Forms 4562 and 8582. Form 4562 takes 38.5 hours, and Form 8582 takes just under 4 hours. So in order to really prepare an average Schedule E and the required supplemental forms, you are looking at almost 50 hours of your time!
If your tax preparation cost is $500 and you have decided to prepare your own tax returns, you are going to spend at least 50 hours on Schedule E and its supplemental forms alone. You have effectively valued your time at $10 an hour, and this doesn’t even include the rest of your return. Even the proposed minimum wage is higher than $10! Do not pay yourself below minimum wage.
Of course, financial and tax competency varies. If you have a background in either subject, you will be able to prepare your returns much more efficiently. If you have attended to training or watched webinars, you will also have a shorter preparation time (but you have still invested those hours to learn about the code). It could very well make sense to prepare your own returns if you can do it quickly and accurately.
Use a rule of thumb that anything that will pay you less than $100 per hour should be outsourced. A hundred dollars per hour results in an annual salary of roughly $208,000, which is pretty darn good. So going back to our tax prep example, if your quote is $500 and you can’t prepare your return in less than 5 hours, outsource it.
Let’s talk about the pros and cons of outsourcing your tax prep.
Pros of Outsourcing Your Tax Prep
- You are leveraging expertise and (hopefully) niche knowledge.
- Your returns will be prepared accurately and quickly.
- A professional’s set of eyes on your information increases your chances of maximizing your tax efficiency.
- Your professional will know how to navigate complex issues and will understand your federal and state filing requirements, ensuring nothing is missed.
- It’s scalable, as you are tapping into a firm’s resources and technology.
- You will save money in regard to both tax savings and the opportunity cost of your time.
- You can spend tax season doing something other than worrying about your taxes.
Cons of Outsourcing Your Tax Prep
- It costs money, and sometimes lots of it.
- You lose control of your data and security, though this concern should be mitigated when using CPAs, as we are held to high data security standards.
- You are subject to the CPA’s schedule, so if you give him/her all of your documents in late March, you may have to file an extension.
- You could pick a professional who is not qualified or does not understand what he/she is doing.
- Switching costs (if you decide to use a different professional) are usually high because the current professional maintains your documentation and already understands your situation.
So there you have it. A rather objective list from both sides of the coin.
My opinion on when you should utilize a CPA depends largely on the complexity of your tax return. If you have one or two rental properties and you are savvy in finance or tax, you can likely prepare your own returns. However, a CPA will give you much more than tax preparation, namely advice and tax strategies to implement. Once you feel you need this type of advice, I recommend biting the bullet and finding a qualified CPA who knows real estate inside and out.
Using a CPA and Their Role in Your Growth
Many business owners and investors are inadequately maximizing the professional relationship with their CPA. Of course, the CPA firms don’t help promote this relationship maximization through traditional pricing models and failing to utilize appropriate technologies.
Look at your relationship with your CPA (if you have one). How many times did you speak with them over the past twelve months outside of tax preparation? If the answer is “once” or “never,” then you need to talk with your CPA about increasing face time or you need to find a new one.
When I onboard new clients, I hear the same three common reasons as to why a client is leaving their current CPA:
- No communication or takes weeks to get a reply
- Limited or no proactive tax planning
- Doesn’t know what he/she is doing respective to real estate
Sometimes I’ll have new clients tell me their CPA checks all three of the above boxes! Does that sound like a relationship you want to be involved in?
You need a CPA who is essentially going to act as a coach or your “board of advisors.” You need a CPA who will always be there for you because, as we all know, real estate deals move fast. In order to accomplish this, you should be meeting with your CPA at least two times per year outside of tax season. If you aren’t seeing your CPA this often, you aren’t maximizing that relationship.
Admittedly, the only reason I know this is because I have failed some of my clients, and I have helped others reach massive success. You guessed it — those that I have failed I only see at tax time. When I noticed that my successful clients (those that I met with a few times throughout the year) were always running a more efficient business and realizing larger tax savings, I changed my business model and eliminated the hourly rate.
Billing by the hour didn’t make sense for my clients or myself. Billing a flat rate each month for 12 months encourages a much more proactive relationship, and the results have been stunning. The key driver behind my model is building out that proactive advisory relationship.
Hopefully by now you now understand the point I’m trying to make is that you should be meeting with your CPA multiple times throughout the year outside of tax season.
Anyone (literally anyone) can prepare a tax return. Some prepare returns better than others, but with a $50 fee paid to the IRS to receive a PTIN, you can be in the business of preparing tax returns.
What you will not get with any old tax preparer is the ongoing advice that you need in order to continue growing. That’s what your CPA relationship should look like. Consistent check-ins ensure that you are tapping into the CPA’s wealth of knowledge and maximizing the return on your dollar invested in the service.
You will use the CPA to understand how to structure a business for continuous growth and flexibility. The CPA will advise you on the latest loopholes and changing regulations (which is extremely important this year with the Trump tax plan). And, of course, as weird expenses or opportunities come up, you will need a CPA on speed dial so that you can strategize on how to best maximize your position.
As you grow, your CPA requirements may change. For instance, if the majority of your earnings are W-2 wages and you have one rental property, a generalist CPA may be perfectly fine. But once you start that development business or grow a large portfolio, the more expensive specialist makes sense. And once your net worth hits $50M (it will!) then you may need to onboard multiple CPAs, one of which works specifically with high-net-worth individuals.
They key is to always be looking to leverage advice from experts in the various field/industry or advice from people who are smarter than you. This will be key as your business scales over time.
Finding and Hiring a CPA
Now that we know we are not going to prepare our own taxes and we understand how a CPA should be interacting with us to help us grow, we need to find and hire one. This can be a rather daunting task, though, so let’s set basic criteria to aid your search:
- The CPA must have a real estate practice or be focused on real estate.
- The CPA must utilize cloud technology.
- The CPA’s fees must be reasonable and feasible per the assumed value to be provided.
- Either: (1) The CPA does not have to be local; or (2) the CPA must be local. This is a personal choice and one that you need to make prior to beginning your search.
Now that we have our basic criteria laid out, it’s time to start your search. I recommend the following (in no particular order):
- Google search for a real estate CPA.
- Jump on the BP forums and ask for referrals.
- Join a local Facebook or real estate club and ask for a referral.
- Contact other professionals in your network, like bankers, attorneys, or real estate agents, and ask for a referral.
Related: What Real Estate Investors Can Do Now to Prep for Trump’s New Tax Plan
Going through each of these steps will likely yield a solid listing of CPAs who maintain a client base of real estate investors or business owners. Your next step is to research each one of them thoroughly and give them a call. We’re looking for the following:
- Where are they based, and does that meet your location criteria?
- Have they ever been disciplined by the state CPA board or IRS (you can look this information up by navigation to the state CPA board’s website and running a search)?
- How do they bill (hourly, fixed fee, monthly), and does that align with the relationship you expect to build and maintain?
- Do they seem like they are real estate focused? Note: If you ask a CPA who wants your business if they are real estate focused, they will, of course, tell you that they are real estate focused. Key indicators of this being truthful will be participation on BP, writing real estate articles, blogs, or white papers, and having several real estate client referrals.
- What is the preferred method of communication and how quickly can you get an answer to a question?
- Can they refer you to other real estate professionals who can help your business grow?
- What is the CPA’s work experience? Did he/she come from a large firm, such as PwC, Deloitte, EY, or KPMG?
- How is the CPA staying abreast of latest tax law changes and regulations?
Notice that none of the questions above covers anything about tax strategies or technicalities. Feel free to quiz your CPA to determine competency, but I feel you are wasting precious minutes in determining how the relationship will look. You want the peace of mind that the CPA will be there for you when you have a need, so make sure you are asking the potential CPA questions regarding the structure of the relationship.
Once you make a decision, be courteous and explain to the non-chosen candidates why you are choosing the CPA that you are. I care dearly about my business, and I always ask for feedback when a client chooses another CPA over me. This feedback helps me grow and become a better service provider. So provide the CPAs you didn’t choose with good feedback that they can harness to build a better firm.
That’s all I have for today. We have learned the pros and cons of preparing your own taxes versus outsourcing. We’ve learned how a CPA will help your business grow. And we learned how to find and hire a CPA.
If you don’t already have a CPA lined up for this upcoming tax season, I recommend that you start your search immediately and lock a CPA in by mid-February. Otherwise, you will likely need to extend your returns, as they wont be able to fit you in before the deadline.
Do you use a CPA to prepare your taxes? Why or why not?
Let’s discuss below!