It is amazing how many professionals who put a high value on their own professional services downplay the ability of another professional to help them make correct choices. Many phone calls we receive for tax consulting begin like this: "How much do you charge?" Many people do not realize that the more important question is, "How can this certified public accountant help me and my business make the correct decisions and maximize tax deductions?"
Who needs a CPA?
The answer is simple. If you are a professional and have taxable income, you need a CPA. Choosing the right person for the job is the hard part. Dentists, doctors, chiropractors, optometrists, lawyers, and many other professionals all have similar problems. Each must make the correct financial decisions to get his or her business started off right, including choosing the right kind of entity and keeping as much of their taxable income as legally possible.
How to choose a CPA
Your CPA should be proactive, not reactive. With today's software, tax forms are easy to fill out and arithmetic mistakes are nonexistent. But you need more than lots of printed forms and a bill. With your CPA, you should be discussing salaries, incentives, payroll taxes, pension plans, equipment purchases, buying vs. leasing, and mileage as opposed to actual vehicle expenses.
Meet often with your tax professional to decide if there are any decisions or purchases that should be made to minimize taxes. For example, say it is November 20 and you are having your most profitable year ever. You have thought about adding some dental equipment for some time. Should you do it now or wait until next year? Would it help your decision if you learned that with the right kind of dental equipment, you could get a tax credit of up to $5,000? If you spend $10,000 and get handicapped-access dental equipment, the IRS will give you a credit for 50 percent (up to $10,000 in purchases). That lowers your taxes by $5,000! Plus, you get to depreciate the other $5,000. You may be able to get up to $7,000 in tax savings from this $10,000 purchase alone. A proactive CPA would share this information with professional clients.
Using your CPA to start your business?
Most CPAs prefer to be involved from the beginning when a client is organizing a business. When meeting with a client for the first time, the various types of accounting entities available should be explained: sole proprietor, Limited Liability Corporation (LLC), Subchapter S-Corporation, Subchapter C-Corporation, or partnership. Each entity has its own benefits and tax ramifications. Furthermore, what is right for one business is not always right for another. The choice of entity may be the biggest tax decision you make.
For example, a sole proprietorship is the entity you will be by default if you fail to apply for another type of entity. While a sole proprietorship may be easier, it has ramifications that will probably cause you to pay the most in taxes, and it does not provide you with liability protection. Your personal assets may be at risk.
Most often, for a professional, an LLC has basically the same tax issues as a sole proprietorship. However, an LLC may give you some liability protection.
An S-Corporation also gives you some liability protection, but requires a corporate return to be filed annually. This entity has some tax advantages, which, depending upon your circumstances, could be substantial. The S-Corporation passes income or loss and some expenses and miscellaneous income directly through to the owner's personal return. It is also possible to avoid payroll taxes on some of your profits with this arrangement.
With a C-Corporation, taxable income would be taxed at a higher rate, because it would be classed as a personal service corporation. Profits are taxed at the corporate level. In effect, you personally would be taxed on dividends from the corporation, creating a double taxation. However, a C-Corporation probably offers the best write-offs when it comes to benefits. It also offers tax differences from an S-Corporation in the event you someday sell your practice. A C-Corporation would be subject to a double layer of taxation.
A partnership requires that at least two owners be involved. For a single practitioner, this choice of entity would not be an option. There are some inherent liability risks with partnerships. If this is an option you want to explore, you need more detailed professional advice.
As you can see, the advice you receive today when establishing a new business can have a significant effect on your situation 20 years from now or when you sell your company or take on a partner or associate.
Other problems and questions will arise as your practice matures. Should you buy a building? How exposed are you to liability? How do you protect your assets? Are you setting up your practice properly to pass it on or sell it? These are all important topics to discuss with your CPA over time.
A friendly relationship with your CPA or tax professional is critical. Would you feel comfortable having lunch or attending a sporting event with this person? Does he or she have a personality that does not offend you or make you feel uncomfortable? Are you at ease asking questions of this person, and are the answers you get understandable?
Your relationship needs to be one where you feel free to pick up the phone and ask a question. If the CPA is involved in the decision-making process from the beginning, benefits — both short- and long-term — will return, especially on the tax return. Of course, every situation and professional business differs. For advice pertaining to your particular situation, consult with your own CPA.
L. Lee Eggemeyer, CPA
Mr. Eggemeyer is the managing partner of Fick, Eggemeyer & Williamson, CPAs, PC, with offices located in Columbia, Ill., and St. Louis, Mo. He can be reached at (618) 281-4999.
