Tax Planning Complexities

Welcome to Accountants Law Pod, where accounting professionals and law firms converge, hosted by Linda Artesani, Sarah Prevost, and Stephen Libhart.

Well, hello, my friends. How are you?

Woohoo!

We're here.

It's past the tax deadline.

Well, today's the final day for the—

But this will be past that.

Oh, this will be past that. Okay.

Woohoo!

Yeah.

What are we getting past, Linda?

March 15th deadline.

Oh, yes, yes, yes.

Yeah. So today, speaking of, I think we want to really center this around staying ahead of tax and regulatory changes. And I feel like we want— in our pre-conversation, we were discussing what does payroll taxes, salaries mean when you're an entity that is electing S or you're a corporation, you need to have your S corp corporation, I should clarify. Clarify that. And when you need to have a reasonable salary, what are your withholdings? What are your retirement saving plans options that you need to be doing? What are the things to maximize and update and change with the rise and tide of your business?

And with the things that are so in flux, because we don't really know. It's kind of hard right now to even know what's going to happen in 2025.

Yeah.

Are they going to roll things back to, to cover 2025, or is this all the stuff that's happening that change is going to be for 2026? All that's unclear. clear. I think that makes it harder. Obviously, if you're a bookkeeping firm, you should be discussing things with your tax professional because that's not where we should be advising too much. We can talk about how we see it or what we know it to be, but we have to let them know that we're not tax advisors, and nor do we want to be, and that they would need to talk to their tax person who knows the whole picture of personal side because that's where We don't really have that always, that clear picture. We don't always know what's happening in a client's life and other side of it outside the business. And I think that's important too.

Well, you know, so many law firms are, you know, start out as LLCs and there's that time when they have to cross that bridge to become an S corp. And to your point, we're not here to give— we are not qualified to give all that advice, but we are qualified to hold their hand, get them to the tax person, To, you know, recommend and say, talk to your tax preparer, your CPA, and find out when it's time. And, and, you know, Sarah, you were mentioning this before we came on air, the reasonable salary, the 401s, you know, have a TPA, a third-party administrator on your 401 plan. That's not a mystery item out there that you talk to once a year. You know, involve them in the conversation and, you know, whether you're top-heavy in your 401 program compared to what your employees may be putting into the plan and how much you can put in and all those sorts of Oh, you're talking about the, the safe harbor, the HCEs. Safe harbors and all of that. That all falls together when you make these changes from entity types.

And, but if you are a person changing from an LLC to an S corp, make sure your bookkeeping firm knows that you're doing this because—

Right.

I've had them tell us like, oh, did I mention that I did this back in June or whatever? You know, they'll be like, oh, I changed the entity altogether, or I'm just electing. And we just, it's good to know that because then they just keep doing distributions and never even set up a payroll. And it's like, um, you need to—

but then there's catch-up to do.

Yeah, well, the qualifying markers are you must have a payroll, right? You must have a reasonable payroll. You— excess distribution, extra shareholder distributions are typically treated as capital gains depending on how you've worked it, and you can't have one higher than the other. Um, you— medical, uh, how your health insurance gets covered in that. There is a full layer of things.

Sorry, describe, um, What the payroll— how do they use— what's that term? Reasonable compensation.

That's exactly what I was just going to say, Sarah. What is reasonable salary?

You're wicked smart.

Well, okay, the best way, like, Linda and I, you run your business. What is our reasonable compensation? There are benchmarks out there. There are surveys out there. There's data and tools that we could use too. Our tax professionals use it. I prefer, like, I'm like Linda and yourself, Steve. Let's lean into the tax professional because Linda's personal situation to my personal situation is different.

Yeah.

But our reasonable salary for the work that, the type of work that we do, and we're in buckets, we're owners. So owners, we're, we're doing our work and then we, we're managing the marketing and we're doing, we have a fragmented piece. Reasonable is A mix of all of these things pulled together in addition to— and it's not unlike this to happen to, to myself— is we work with a tax professional and they're like, hey, Sarah, we want the withholdings for taxes to be X because this state taxes this way and this federal taxes this way. Go in and adjust it. Well, we're 3 months into the year.

Right.

The annual withhold— you just gave me annual numbers. I'm going to do the math based on what's left for payroll, right, Linda? Like we would do. But reasonable comp comes down to not just like, I use this joke. I'm a medical doctor. I'm going to pay myself $25,000 annual salary. Okay, that's great, doctor. But yet I'm going to take shareholder distributions in excess of $300,000. Oh, no. Sorry. Now you've just created a huge problem. Everything has to be reclassed.

And why would you want to do that anyway?

Why would you want to do that?

Right. I know why the answer back would be from the client. I don't want to pay those stupid payroll taxes. Yes, you do. Yes, you do. I got news for you.

Yeah. Yeah. And then the other thing, Steve, let us know, because Lynda and I've seen this. Sometimes the entity structure makes sense on paper that you would be, say, an LLC electing S, but you're a partnership and you want to pay yourselves in this other convoluted way. That doesn't seem to make sense for you to remain in that structure.

In this niche, this legal niche, is there's a lot of— and I want to say this in total respect. I don't want to sound wonky on this, I guess is the best word. But there's, there's a lot of law firms who really focus deeply and intensely on making sure that every penny is fair to both partners, all 3 partners, however many of them are in there, and that every penny is accounted for and somebody— nobody gets more than the other. Or the billable hours ratios. And there's all these different things that go into their thought process. And so that falls into what you were just— that touches what you were just talking about. I mean, it's— It gets all convoluted and you've got to educate them on it and hold their hand on it. But again, we're not the experts on when they should do it, when they should switch over or how they should do it. But to your point, Linda, and you've said this so many times before, Include us when you make the change.

Yeah, but they don't always. I don't know why they're like, oh yeah, I guess I should have told you that.

Right.

Yeah, you should have.

Should have told you. Yeah. But we keep saying we're not the experts. We are the facilitators.

We are an expert in the sense of we do know a lot, but we just don't tax advise because that's not our place, really. I mean, you want a tax advisor for that. You want somebody that studies tax and knows everything. That's what they do. You don't want a bookkeeping or accounting firm doing that for you unless they are a tax accountant doing your taxes and they understand the whole picture. There's a lot to know. I mean, we have a lot of clients that are partnerships, and then they pay out to their, their corporation, and then the corporation is where their payroll comes out of. They have a separate file for just that. So you have that scenario in a lot of firms. That's how they handle it. They don't want to be paying self-employment tax, which you don't. So I think that some of that is part of it. But I think really the conversation should be had with your tax person. And if we're a good accounting firm, we should be part of it. But a lot of times they don't include us. And I don't know why. I don't know why, because we're all on flat fee. It doesn't cost any more to have us there to the client. So why aren't we included in the conversation?

I love this question, Linda, because what— why would you undervalue the person that has to facilitate the most and make the records be in balance for the, for the proper reporting at your end.

Well, I think it's our relationship with them. We have to, we have to continually tell them, include us in the process so we can do this right. We had a firm last week that wanted to do profit sharing by the deadline, and they were struggling with it. And so I helped them out, even though that's not our role. But I was able to get into their servicing program and get them to the right person and hold their hand and say, make sure and keep me in the loop on this because I'm going to have some bookkeeping work to do for you on these, on these profit sharing numbers, you know, so that we can include it in your KPIs and all those things and that they're on the books properly for your tax person. So to your— the best answer I have to your point, Linda, is it's a constant dialogue with the client saying, include us in any changes, include us in the process, you know.

Yeah.

Keep us—

you can bang your head against the wall and keep saying it.

Exactly.

You're still inheriting it. Yeah.

It's like when we're doing the initial call with a client and we're talking about the services we provide, we mentioned that, and they're always so relieved to know that we'll be able to talk directly with— because sometimes the client doesn't know how to answer some of the questions that are asked by the tax person, and we'll be able to help with the answers. And they're so relieved that we'd be there, but then they don't include us in it at all. Oh, didn't I tell you I filed the tax return already? No. You know, maybe you should ask because what if the records weren't complete? Maybe you have not answered this 15 questions that we have. You've ignored it, and now you went and gave it to the tax person. And why is the tax person coming back to me? What do they do with things that are in, like, ask category? No clue what they do with that.

Well, they can't do much. I mean, you have to put it somewhere, right?

They have to be putting it somewhere. Yeah.

The thing that's also, I think, To the title of our, our topic, the thing that's also really important, and, and Linda said this earlier, we're the business owners as well. So we, we may not be giving the actual tax advice. We're not filing those forms that you need to make those elected entity structure changes, nor would we. But in the same breath, we have to have a pulse on all the regulation changes that are happening, and There's a lot that goes on with establishing the proper 401 that works best for you. There's a lot that goes on with establishing movement within your staff who moves from state to state. Are you set up for that state? And we— I have quite a bit of emails right now of things that need to be addressed for to support someone who has people in multiple states, and our own experience of dealing with multiple state jurisdictional things. One state is different than the other. So there's a lot that goes into not just an entity change or regulation change. There's a lot of accounting, to your point, Steve, that needs to happen. And I guess what we're saying is we're— we've raised our hand. We want to be there with you as your friend and advocate and ensure that we're following the dollars that are being spent in these areas. And we might know something before the tax person. So it might be a best conversation for us.

We work with so many law firms between the 3 of us and our teams and all that. We work with so many law firms. We hear things. We, you know, we hear that a tax law, that their CPA, you know, law firm X said that their CPA said this or that. And, and we have this information. And, and so we can just say, you know, have you considered or have you talked to your tax person about— they don't have to know that this other firm told us this, but, you know, for confidentiality, but, but we, you know, we can sound like we are on the team and we're trying, we're interested and we care and, you know, get them directed to the right place. Because like you said, Linda, a lot of times they're afraid. They don't know. They don't know what they don't know.

I mean, we've had conversations where we've talked to some of the attorneys that have maybe a kid of age that they could pay. And I mean, this is something that kind of falls under tax advice. But, you know, you might say to them, you have a child, and maybe the kid can come in and shred papers or do something in the office where you can pay that child and put that money away for the, for the, your child. It's an idea.

You, I like that.

You ask person about, look, I'm not telling you what to do. This is just something you may not have known about. I just had a conversation this morning with a client because he had money, and he's like, I had money at the end of the year, and the tax person said to me, why didn't you spend it on something instead of giving it to the government? I'm like, Okay, let's look at it. And he's just a write-up client that I have that I just do the paperwork for, really. And, um, I saw he had some, and I was happy for him because he hasn't had anything, uh, and I was happy for him. But then on the other side, yeah, he has to pay taxes on that money. Yeah, you do. That's always interesting. And that's the one reason why I think a lot of people get out of being tax preparers, is they like, they want to do the advisory work, but they don't want to be the bad news bringer at the end of the year where we're like, yeah, you do have to pay taxes. I'd rather be told I have to pay taxes. I'd rather have my money we put away quarterly. That's another conversation that we've had to have with clients because we're like, did you pay your estimated? And they're like, estimated what?

Oh yeah.

And then, well, I'll just pay that in April. No, you don't want to do that because you made money in the first quarter or the second quarter or the third quarter. We really need you to be paying it quarterly so you stay compliant. And then you start talking about that with them, hoping that the tax person has at least had the conversation. But they get so busy, they don't have a lot of conversations with the clients. And we're with them all year long. And it's a matter of— There's a shortage.

There's a shortage in our industry in general, right? So, and, and to your point, Linda, our, you know, this year's estimates are predicated on prior year's earnings.

Yep.

So we're seeing the numbers alongside you. And if we see an up or a down, we're gonna wanna have the supportive conversation of, hey, here's your layout. We've got the First off, give us the tax return and the action items.

Sarah, talk about a big pain in the butt. Yeah. Beg for the tax return. That's what I feel like. I feel like the nagging wife begging, can I please have the tax return? What do you want it for? Have you gotten that answer back? Yep. Well, I want to tie your books to tax. Why do you want to do that? I would like the tax person to give me the adjusting entries, but they don't.

Why do you want to do that? I don't know. For my health.

Yeah, because I like to waste time. But we've had— we've both— of all 3 of us have had a conversation with a client. Yeah. And it's interesting. And educating them is really what it falls down into, educating the client. And this is not what they do. We just had that conversation with somebody last week. They were like, oh, I hate all the number stuff. This is not what I do. And we're like, that's why you hire us to do it, because we do like doing this. So there's your difference. And then they're like, oh, yeah, that's true. I'm like, I can't do what you do. So, yeah.

Why would you do it yourself?

Do you both feel— I do feel— I'm not saying personally as of right now, but in my journey, I have felt underappreciated for the lack of knowledge or the assumed lack of knowledge because I'm not a CPA, or I'm not an EA. Hey, I have, I have a business. I have to work to the same damn things you do. I have to do that. I play in the same sandbox.

You don't get the same level of respect at all. Zero. You do not.

And we've had colleagues basically fully admit they have taken their, their 2 letters or 3 letters off their last name of the title. Didn't disclose that they had this education and fully treated horribly by not just the, you know, client tax, but the tax professional to them, only to divulge, hey, look, I am actually a non-practicing CPA and I totally know what you're talking about. And we've had the reverse happen. So I feel like to what you were mentioning earlier, Steve, the appreciation for Knowing we're not sitting around and just wondering about these things to wonder. We're, we're in your file, we're in your lives on the business side. And the, the personal side, why it's so important to have these right full conversations with a tax professional is they have the full picture of your business and your personal. We can recommend, as Linda brought up, we can only recommend what we see or what our thoughts are to have a starting point of a conversation. It's in your best interest to talk to, like you would a peer, another business owner. And that's what we are. We're just talking to you as business owner to business owner.

Well, and I have such a respect for the tax preparers and CPAs. I really do. I'm— oh my gosh, I bow to their shadow. They have a very, very stressful job. And so many of them nowadays are leaving that advisory role and just preparing. You know, some firms are just cranking out tax returns based on the data they're given and not—

Yeah.

You know, and then there's the other ones that really have that passion to be in the advisory side, just like in our world. There are bookkeepers who just want to crank out numbers and go home at night and other ones who care on taking that journey with the client, you know, really making a difference. But with the tax preparers and CPAs, it's, you know, I really like to have it just as clean and spick and span as possible. And we've got to be involved and our clients have to care that we're involved. For success.

We're always learning. We're always learning something. Like, one tax preparer does it one way, another one does it differently.

Right.

It's a, it's a tailored service to what's needing to happen. And we're not saying our recommendations are 100% right. We just want to include you in the dialogue ahead of time because there's a lot of noise out there. There's a lot of people offering the most craziest— like, I just saw something about real estate and offering this and how you can get in on the ground up with $0. And I'm like, okay, the too good to be true kind of thing was all, you know. But yet at the same time, what does that do to you personally? How does it affect you? You've just started yet another venture. How many more layers of tax forms do you need plopped onto your return and complexity?

Well, TikTok says—

oh yeah.

Well, let's boil it down to one little subject, cost receivables on law firm books. Some tax preparers/CPAs like to have it on the, the profit and loss as an expense, and other ones like to have it on the balance sheet as cost receivables. I prefer cost receivables because it is a loan to your clients. It's not, it's not a revenue source for the firm. There's always that discussion that you have of when you write it off. If you have it on the P&L as an expense item, when you write it off, you don't get a tax benefit. It's, you know, you're not— you're in a service business, Mr. Lawyer. You're not selling widgets. You're not manufacturing. You don't have inventory, you know, and that's always, always a tough one. That's just one little example. And so, I like to have that discussion with a brand new client and their CPA. You know, this is what we are recommending on this side of the books, but it's up to you. You know what you want to do. But it's amazing how many attorneys don't understand that. What are your thoughts?

Well, I like to go back to the— what it says on the IRS's website about whether it should be advanced client costs or not. But we kind of take it case by case because it's really— I often wonder when I see it upside down, like I see a huge amount in the income and not in the books or the opposite? Like, what— how does the tax person account for that? Because it has to be accounted for in some manner. And sometimes you can find a journal entry where they've done a journal entry to— it's across to the next year and they put it in WIP, and then they reverse it out because it's been on the books. But it's always interesting because when we had a firm one time that they wrote everything off in the year that they paid for it, and then they took it all as income in the years that they— and I don't know how that was managed that way, but it was. And we talked to the tax person and I said, oh yeah, I think he was fully aware of that. Like, every time they win a contingency case, this is going to be a big win because they're going to have all those expenses recaptured as income. And he said, yep, we're aware of that. And I'm like, okay.

So they would write off the advanced client costs in the year that they occurred?

They expensed it as billable expense when they paid for it, and then they put it as billable expense income when they won the case.

Wow.

And it was a longstanding old firm that had been doing it that way for years. And that might have been a process back in the day too. Like, who knows if that was an old method? It seems to be like writing, making a chart of accounts in caps. But you can see the old file, and as soon as you see that, you're like, oh, this is old. Like one that says personnel on it, or there's Just trigger words that you see that you're like, oh, this is a really old file. And then it's been an existing firm for 50, 60 years or whatever, and this is the way it's been. And I don't know how you would even make that changeover other than they'd have to— they would have to, like, start in one year. And I guess that's what I would think.

I would think the same.

Yeah.

The thing that, just for the listeners to kind of understand, is when you're taking expenses that you're advancing on behalf of a client, that you have not billed for or been awarded settlement on that case, and you're putting that on the financial statement of a profit and loss, you're assuming those expenses in that year, and then that settlement happens the next year, or your bill for it in the next year. You have no offset to that. Is what we're saying, because your revenue is in there. So you've inflated the revenue, or you've inflated the expenses, is the simple way to say that. And as far as tax planning and all of these things that we started off with, That is a really hard piece to follow and understand when we're looking at, okay, you own the business. How do we plan for you with this method of accounting? And so I, I'm like in the same line of thought, but of course we work for the same team. So I would be in the same line of thought as we would have to draw a line in the sand and decide this year going forward, it's going to have to work like this. But we have found certain tax professionals that aren't as maybe experienced in this at this level that we're at. There might be a different advisory method, and we're not saying that's wrong either. It wouldn't be in our place to say it, but we'd want to bring to light all of these types of scenarios so we can help you understand it. And that's where kind of the value of it is, is basically we're in doing the heavy lifting. There's a prescription being written at the end of the year. We're just lifting it up to have that prescribed method happen. As simple as I could put it.

Yeah, like Steve said, there are many loans. I mean, you're— look, if law firm's paying for the expenses, but they— a lot of times they've got the retainer, so they, they actually are holding the money. Not always, though. If it's personal injury, it could be totally different. It could be a lot of heavy lifting in the front, the front of the file, and, and then you win it. And as we know, a lot of those cases go forward and they do win when they go against the insurance. The insurance pays out. It's interesting. It's always— that's always a hard practice area to kind of get the help with cash flow, for sure.

Exactly.

They do spend a lot of money for client expenses. So that's got to be a big conversation about cash flow. And if you're expensing it all in the year, I mean, it's going to make your— how do you plan your years?

How do you plan in that scenario? That's—

we have had some in attorneys, basically they incur the costs, but they'll bill the client. It's part of the engagement of, you know, this is on contingency, but these costs are going to be billed as incurred. And that's fine to do too. I think that's a supportive method because—

That's a good— yeah.

Yeah, it's a good way of doing the work, right? But you have to, again, on the accounting side of it, the bookkeeping side of it, where's the expense? Is it tracked correctly? When is it going to get billed? What is the cadence for which that would happen so that the cash flow is not that far out. I mean, if you're going to pay, you know, to a physician, let's say on a case, $4,000 and something, the client also has to be ready to pay that bill.

Well, and you know, with cost receivable on the balance sheet also can, can tell you some things, you know, like maybe you're sitting on top of some bills that have not been billed to the client. And as you watch that grow and you see that cost receivable grow, that can be a red flag. Also, is it posted on the bills? You know, tying it back every month.

Yeah.

You know, whereas when you expense it and you, you're writing it off and doing all of that on the P&L side, it just is a little bit too gray for me.

Yeah. But going back also to the, the whole planning session of it and how can we assist with, is this the right structure? I mean, we've seen it before where you're electing S, you're a partnership, you want to pay differently, you have to unwind the S because you need to go back to this other structure. Or, you know, if you're in that structure, what are you doing? to facilitate being compliant and all the things. And then what are the regulations that surround certain— to your point, 401, all of these things, profit share. There's so much behind this whole piece. And then of course the advanced client costs. We've just got a lot of stuff that not just us, I mean anyone in our profession participates in helping facilitate and help maintain.

Properly.

So just get a walnut cracker and crack it open.

Did I think of follow Tax Twitter on Twitter or whatever X?

Whatever the heck it's called.

Tax Twitter.

Yeah.

There's a lot of good stuff there though. Really?

Yeah. Not not on TikTok. They'll they'll counter. What's funny is though.

Oh, not TikTok on X. Yeah.

No, but I'm just saying. What's happening on TikTok with this poor advice?

TikTok is not a good, reliable one, I don't think. I'm sure there's some good advice.

Oh, it's not. But I'm saying what they do on the Tax Twitter channel is combat the bad advice that's happening on TikTok, which is actually hysterically funny.

Yeah, it's funny. Yeah. It's a—

I mean, you'd have to— sometimes you'd have to understand the humor in our profession too, a little bit deeper, because you'll read it as a layman and go, I don't— okay, whatever.

But for us, they came out with I'm an accountant and we Googled that. We're like, oh, I didn't know this was a thing. Remember on TikTok? I was like, oh, okay.

I will say what's interesting, speaking on the TikTok topic, I met somebody this weekend who their banking institution, which is a major one, has changed how long the funds are available if checks are written in the business name or in their name. Due to the problem with TikTok and the whole check writing problem.

Wow.

And it's sad. That's how bad advice can be, so far out of control that regulations have to change and go back to what they used to be. Because those people that are younger than us have no idea what it meant to putting a check in the bank and you're guaranteeing those funds for 2 weeks, essentially.

Yeah.

Or vice versa. So yeah, well, that's that's all for today. I don't. I think we got to move on.

Yeah, but you can't brew.

I like the nutcracker analogy.

That's a yeah, you like it.

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Thank you.

Bye.