Now that tax season is officially over (any extensions you have to file aside), now is the perfect time to shift into tax planning mode for your SMB (small-to-medium business) clients. Why tax planning? To me, it’s the ultimate, easy way to engage clients into a deeper advisory relationship. Plus, it’s a fundamental strategy to support the future viability of your firm and your clients!
However, I like to keep things simple and streamlined, and in my mind having a process that I can follow with each of my Schedule C and S-Corp clients makes everything easier and less taxing (pun intended)! That’s where the following simplified SMB tax planning checklist comes in. I use it with my own clients at Powerful Accounting, and I am sharing it here so you can use it, too.
1. Identify your Schedule C clients who based on estimated tax payments should consider moving to an S-Corp. These are the clients where you can have a conversation about changing entity type to save them payroll taxes.
2. Entity selection planning comes next. This refers to choosing the appropriate entity type for your clients’ business based on their ownership structure, performance, and goals. If you are not doing this already, you are missing out on a lucrative new revenue stream as well as immediate value that you can add. This also starts a natural conversation about the overall health of your clients’ business which is a great segue into other areas of assistance you can provide including reasonable compensation.
3. Once you have the entity planning conversation, you can leverage reasonable compensation analysis as an entry point to create enhanced revenue opportunities while keeping your clients in full tax compliance as well. I love RCReports for this purpose.
Special note here: You do not want to use spreadsheets to calculate reasonable compensation or skip this! If you have not been doing reasonable compensation analysis, then you definitely need to check out RCReports because it’s the law and you and your client could be the subject of an investigation by the IRS if it isn’t done or done improperly.
4. Next, you can start looking at the tax return for some additional opportunities to help your clients. This could be with estimated taxes for business owners as well as payroll tax planning for S-corps and self-employment tax strategies for Schedule-C clients. When you have a truly accurate reasonable compensation number (see previous point) you will then have real numbers to work with!
5. Once you have the fundamentals above completed, you can use a tax planning tool to look more closely at your client’s return. This could open up opportunities for more advanced tax strategies depending on your clients sophistication and the complexity of their situation.
6. Retirement tax planning is also important to consider for SMBs and something to look at with every client. Not only will it set the stage for reducing their current tax bill, but it can also lead to other advisory service conversations if you also offer investments, insurance or retirement benefits (or partner with someone else who does).
Now that you have these six simple and easy-to-follow steps for SMB tax planning, it’s time to think back to all of your tax season clients and identify which Schedule C clients and S-corp clients you can serve, starting with the critical entity selection and reasonable compensation calculations. By starting with a solid foundation like this, you’ll have the confidence and clarity that will ensure you have all your bases covered from a compliance standpoint which is the cornerstone for effective tax planning for your clients.
Want to learn more about RC Reports? Check out the recent podcast we did together!
Thank you to Starting Lineup member RCReports for this key update as we head into tax season!
In light of recent events surrounding the IRA22 funding, I wanted to provide some additional detail on why it is absolutely crucial that you are working with each of your S-Corp owners to determine their reasonable compensation in an accurate and defensible manner.
In a Forbes article, dated January 10, 2023, it reads:
Hiring more [IRS Revenue Agents] may allow the IRS to increase audits (which are at an all-time low) but those audits would likely be focused on higher-income pass-through entities (or PTEs). Many PTEs have been skirting tax regulations concerning deductibility of losses (partnerships and S-corporations) and reasonable compensation for officers (S-corporations) for years and many in the tax industry think that additional scrutiny is long overdue.
This echoes the letter from U.S. Secretary of the Treasury Janet L. Yellen sent to the Commissioner of the IRS in August 2022:
“Enforcement resources will focus on high-end noncompliance. There, sustained, multi-year funding is so critical to the agency’s ability to make the investments needed to pursue a robust attack on the tax gap by targeting crucial challenges, like large corporations, high-net-worth individuals and complex pass-throughs, where today the IRS has resources to initiate just 7,500 audits annually out of more than 4 million returns received.”
The takeaway is clear – the IRS intends to audit S-corporations at a much higher rate in the near future, specifically focusing on reasonable compensation.
To protect your clients and yourself, take the following actions when determining reasonable compensation for your S-Corp owners:
The penalties for taking low, or no, reasonable compensation are steep for both the S-Corp owner and the practitioner. You can’t afford to skimp when it comes to calculating reasonable compensation, so take steps now to ensure you’re getting it right this tax season.
RCReports was built using the IRS approved methods, IRS job aids, court rulings, geographic data, and a proprietary database of independent wage data to accurately and objectively determine Reasonable Compensation in minutes that provides a defensible position in audit or litigation.
If you work with S-Corps, this is one piece of tech you can’t live without this tax season.
If you’d like to learn more you can: