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Is it time to start your own accounting firm?

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Now may be the perfect time to start an accounting firm.

With client demand growing and many baby boomer CPAs hitting retirement age, there is certainly no shortage of work, and advances in technology have lowered the cost of launching a new business. 

But experts say there is much to consider before accountants jump into the deep end, such as their personal financial bandwidth, whether they want to do the technical work in their firm or just manage it and where to find support. Perhaps the best place to start is figuring out why you want to start your own firm in the first place.

By and large, there are two kinds of firm founders, experts say: Those who are natural-born entrepreneurs, and those who become founders as a result of some professional or personal change that requires them to have greater flexibility.

The first group can look like accountants who have lots of ideas but who may not be able to implement them at their current firm. Or it could be an accountant who sees what their employer is doing but believes they could do it better.

The second group can look like accountants who are starting families or battling an illness, or accountants whose firms are undergoing a structural change like a merger.

Time management, clock, team

Kirill Makarov/kirill_makarov – stock.adobe.com

Logan Graf, founder of the Graf Tax Co. in Austin, Texas, said, “You have to want it. I would not recommend starting a firm unless you have a burning desire for doing something on your own.”

He added that firm founders must be inquisitive—they need to be willing to test things out and experiment where things can be improved. 

Miklos Ringbauer, treasurer and secretary for the California Society of CPAs and founder of MiklosCPA, recommends that firm founders work for someone else first, learning the ropes in another firm and determining what they want to do differently.

“You don’t know what you don’t know,” Ringbauer said. 

Stephen Buller, founder of Buller Accounting in Tacoma, Washington, added, “Learn the ins and outs, the rights and wrongs, while getting paid for it.” 

Will I have enough clients?

Before actually starting a business, any savvy founder should consider whether there is a market for their services. For accountants, that translates to whether there are enough clients.

The answer is “not only applicable for accountants, but for all startups – it’s an unknown,” according to Ringbauer.

That’s where professional experience and understanding comes into play, he said. Accountants should consider a couple of factors: their personal financial obligations—whether they have children, student debt or a mortgage—and their personal savings. 

If you don’t have enough runway to sustain yourself for a year or two, then you may need to plan longer or save more, Ringbauer said.

One common practice among accountants is buying a book of business to secure an established set of clients. However, Angie Wood, founder of Wood CPA in Edina, Minnesota, advises against it.

“Don’t buy a book of business,” she said. “I learned that the hard way. You don’t need to.”

Many clients will make the switch to the new firm, Wood explained, “but a lot of them choose to leave shortly after because it’s a different process. It’s a different person, it’s a different relationship. Fees change. The relationship is so personal, so it’s just not worth buying a book of business because clients can leave. There’s no guarantee.”

How do I do this legally?

The legal requirements for setting up a CPA firm vary from state to state, and the requirements are different for a CPA firm versus a firm offering bookkeeping services. Ringbauer recommends that accountants do their due diligence and research on their state’s requirements, but he offered a few tips and tricks. 

“Some states limit certain things,” he said. “For example, in the State of California a professional limited liability company, PLLC, is not allowed, domestic or foreign, to operate and offer services in the state. Versus in Texas, you can be an LLC. So understanding state rules and regulations is incredibly crucial.”

In addition, many state boards of accountancy have special language requirements that must be included in a firm’s bylaws or incorporation documents. He also reminds accountants that you can always incorporate later.

“Depending on the type of services you offer, you may not necessarily need to incorporate upfront for liability purposes,” Ringbauer explained, using his own experience as an example. “For a very long time, I was doing the self-employed Schedule C. Then when our clientele started to change — when things got more complicated, when I ended up doing offshore voluntary disclosures, very scary IRS compliance stuff with clients having hundreds of thousands of dollars of penalties because they were not right previously, filing their returns with their foreign assets — I decided that this was too much risk for me and incorporated.”

Ringbauer recommends hiring a lawyer, “so you understand what your requirements are and the pitfalls or benefits of the different entities. … A lot of people think that just because you are a CPA, you know the tax laws.”

Do I need to hire?

The next big question for firm founders to consider is if and when to hire.

Buller said it’s important for the firm owner to first decide whether they want to continue as the main service provider in their business. Do they love actually doing the technical work, or is their goal to manage a firm and its employees? 

“You should hire your first employees when you have a good process and good systems in place to deliver the service that you can charge for and that will make it easy for you to train an employee to generate revenue for your business,” Buller said.

“If you’re going to hire somebody, it basically means you’re taking a pay cut and a bunch of your time is then going to be spent training this person,” he continued.

For most accountants, the easiest and most logical first hires are usually admin and a bookkeeper.

“Affordability is a factor, and then what are the tasks I wanted to get rid of?” Wood said. “Tax was my strong suit, so I held on to that for the longest and found somebody else to do the other things that I didn’t really enjoy doing as much.”

What if I’m not ready?

Founding a firm isn’t for everyone, of course. And there are those who start their firm but realize that it isn’t the right fit for them. But most people quit because of some personal circumstance, not because they weren’t making enough money, according to Ringbauer. Thankfully, accountants have a safety net in that they can always go back to being an employee. 

“The most beautiful thing in accounting is that if you are fit to do the practice, you will always make enough money to put food on the table,” he said. “It’s a secure and very viable business.”

Throwing in the towel on a firm isn’t a mark of failure, either, Buller said.

“I think it’s a good idea to have this attitude of, ‘How could I replace myself in this business in the long run?'” He said. “And then you start thinking about all these systems and processes you need to create to make it so somebody else could do the work, and then immediately you have started to create some value that you could actually sell to somebody. That’s one exit plan.”

Do I have enough support?

There is a litany of resources available to accountants looking to start their own practice, including the American Institute of CPAs and state CPA societies, which host networking events, workshops and post reading materials. Even insurance companies have boilerplate engagement letters and guidance support.

Then there’s an accountants’ personal network, which can include friends, colleagues, partners and sole practitioners. 

Wood said she experienced overwhelming support and advice when she told her network she was starting her own firm. “If I would have known how much support I would have gotten from people, I would have done this so much earlier,” she said.

Graf said he received support from other tax experts on Twitter when he was starting out. And in October, he created his own online community of firm founders called Counter, which now has over 200 members.

At the end of the day, for most accountants, there will never be a perfect time to start a firm, according to Buller—you need to just do it.

“It’s kind of like having a kid,” Buller said. “People can tell you there’s challenges. People can tell you how hard it’s going to be or various things you’re going to have to do. And you’re going to have to be ignorant about it, no matter what, to some degree, until you do it yourself.”

“That’s one of our biggest hurdles,” Ringbauer said. “We believe that we need to know everything, and we are afraid of reaching out for help. The best thing is, most accountants now are looking at each other as support rather than competition.”

He continued, “Of course there are articles and books, but the most important thing to understand is that books give you the basic idea, but your own unique life experience and circumstances will dictate what may work from it or what doesn’t.”

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Senate unveils plan to fast-track tax cuts, debt limit hike

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Senate Republicans unveiled a budget blueprint designed to fast-track a renewal of President Donald Trump’s tax cuts and an increase to the nation’s borrowing limit, ahead of a planned vote on the resolution later this week. 

The Senate plan will allow for a $4 trillion extension of Trump’s tax cuts and an additional $1.5 trillion in further levy reductions. The House plan called for $4.5 trillion in total cuts.

Republicans say they are assuming that the cost of extending the expiring 2017 Trump tax cuts will cost zero dollars.

The draft is a sign that divisions within the Senate GOP over the size and scope of spending cuts to offset tax reductions are closer to being resolved. 

Lawmakers, however, have yet to face some of the most difficult decisions, including which spending to cut and which tax reductions to prioritize. That will be negotiated in the coming weeks after both chambers approve identical budget resolutions unlocking the process.

The Senate budget plan would also increase the debt ceiling by up to $5 trillion, compared with the $4 trillion hike in the House plan. Senate Republicans say they want to ensure that Congress does not need to vote on the debt ceiling again before the 2026 midterm elections. 

“This budget resolution unlocks the process to permanently extend proven, pro-growth tax policy,” Senate Finance Chairman Mike Crapo, an Idaho Republican, said. 

The blueprint is the latest in a multi-step legislative process for Republicans to pass a renewal of Trump’s tax cuts through Congress. The bill will renew the president’s 2017 reductions set to expire at the end of this year, which include lower rates for households and deductions for privately held businesses. 

Republicans are also hoping to include additional tax measures to the bill, including raising the state and local tax deduction cap and some of Trump’s campaign pledges to eliminate taxes on certain categories of income, including tips and overtime pay.

The plan would allow for the debt ceiling hike to be vote on separately from the rest of the tax and spending package. That gives lawmakers flexibility to move more quickly on the debt ceiling piece if a federal default looms before lawmakers can agree on the tax package.

Political realities

Senate Majority Leader John Thune told reporters on Wednesday, after meeting with Trump at the White House to discuss the tax blueprint, that he’s not sure yet if he has the votes to pass the measure.

Thune in a statement said the budget has been blessed by the top Senate ruleskeeper but Democrats said that it is still vulnerable to being challenged later.

The biggest differences in the Senate budget from the competing House plan are in the directives for spending cuts, a reflection of divisions among lawmakers over reductions to benefit programs, including Medicaid and food stamps. 

The Senate plan pares back a House measure that calls for at least $2 trillion in spending reductions over a decade, a massive reduction that would likely mean curbing popular entitlement programs.

The Senate GOP budget grants significantly more flexibility. It instructs key committees that oversee entitlement programs to come up with at least $4 billion in cuts. Republicans say they expect the final tax package to contain much larger curbs on spending.

The Senate budget would also allow $150 billion in new spending for the military and $175 billion for border and immigration enforcement.

If the minimum spending cuts are achieved along with the maximum tax cuts, the plan would add $5.8 trillion in new deficits over 10 years, according to the Committee for a Responsible Federal Budget.

The Senate is planning a vote on the plan in the coming days. Then it goes to the House for a vote as soon as next week. There, it could face opposition from spending hawks like South Carolina’s Ralph Norman, who are signaling they want more aggressive cuts. 

House Speaker Mike Johnson can likely afford just two or three defections on the budget vote given his slim majority and unified Democratic opposition.

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How asset location decides bond ladder taxes

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Financial advisors and clients worried about stock volatility and inflation can climb bond ladders to safety — but they won’t find any, if those steps lead to a place with higher taxes.

The choice of asset location for bond ladders in a client portfolio can prove so important that some wealthy customers holding them in a taxable brokerage account may wind up losing money in an inflationary period due to the payments to Uncle Sam, according to a new academic study. And those taxes, due to what the author described as the “dead loss” from the so-called original issue discount compared to the value, come with an extra sting if advisors and clients thought the bond ladder had prepared for the rise in inflation.

Bond ladders — whether they are based on Treasury inflation-protected securities like the strategy described in the study or another fixed-income security — provide small but steady returns tied to the regular cadence of maturities in the debt-based products. However, advisors and their clients need to consider where any interest payments, coupon income or principal accretion from the bond ladders could wind up as ordinary income, said Cal Spranger, a fixed income and wealth manager with Seattle-based Badgley + Phelps Wealth Managers.

“Thats going to be the No. 1 concern about, where is the optimal place to hold them,” Spranger said in an interview. “One of our primary objectives for a bond portfolio is to smooth out that volatility. … We’re trying to reduce risk with the bond portfolio, not increase risks.”

READ MORE: Why laddered bond portfolios cover all the bases

The ‘peculiarly bad location’ for a bond ladder

Risk-averse planners, then, could likely predict the conclusion of the working academic paper, which was posted in late February by Edward McQuarrie, a professor emeritus in the Leavey School of Business at Santa Clara University: Tax-deferred retirement accounts such as a 401(k) or a traditional individual retirement account are usually the best location for a Treasury inflation-protected securities ladder. The appreciation attributes available through an after-tax Roth IRA work better for equities than a bond ladder designed for decumulation, and the potential payments to Uncle Sam in brokerage accounts make them an even worse asset location.

“Few planners will be surprised to learn that locating a TIPS ladder in a taxable account leads to phantom income and excess payment of tax, with a consequent reduction in after-tax real spending power,” McQuarrie writes. “Some may be surprised to learn just how baleful that mistake in account location can be, up to and including negative payouts in the early years for high tax brackets and very high rates of inflation. In the worst cases, more is due in tax than the ladder payout provides. And many will be surprised to learn how rapidly the penalty for choosing the wrong asset location increases at higher rates of inflation — precisely the motivation for setting up a TIPS ladder in the first place. Perhaps the most surprising result of all was the discovery that excess tax payments in the early years are never made up. [Original issue discount] causes a dead loss.”

The Roth account may look like a healthy alternative, since the clients wouldn’t owe any further taxes on distributions from them in retirement. But the bond ladder would defeat the whole purpose of that vehicle, McQuarrie writes.

“Planners should recognize that a Roth account is a peculiarly bad location for a bond ladder, whether real or nominal,” he writes. “Ladders are decumulation tools designed to provide a stream of distributions, which the Roth account does not otherwise require. Locating a bond ladder in the Roth thus forfeits what some consider to be one of the most valuable features of the Roth account. If the bond ladder is the only asset in the Roth, then the Roth itself will have been liquidated as the ladder reaches its end.”

READ MORE: How to hedge risk with annuity ladders

RMD advantages

That means that the Treasury inflation-protected securities ladder will add the most value to portfolios in a tax-deferred account (TDA), which McQuarrie acknowledges is not a shocking recommendation to anyone familiar with them. On the other hand, some planners with clients who need to begin required minimum distributions from their traditional IRA may reap further benefits than expected from that location.

“More interesting is the demonstration that the after-tax real income received from a TIPS ladder located in a TDA does not vary with the rate of inflation, in contrast to what happens in a taxable account,” McQuarrie writes. “Also of note was the ability of most TIPS ladders to handle the RMDs due, and, at higher rates of inflation, to shelter other assets from the need to take RMDs.”

The present time of high yields from Treasury inflation-protected securities could represent an ample opportunity to tap into that scenario.

“If TIPS yields are attractive when the ladder is set up, distributions from the ladder will typically satisfy RMDs on the ladder balance throughout the 30 years,” McQuarrie writes. “The higher the inflation experienced, the greater the surplus coverage, allowing other assets in the account to be sheltered in part from RMDs by means of the TIPS ladder payout. However, if TIPS yields are borderline unattractive at ladder set up, and if the ladder proved unnecessary because inflation fell to historically low levels, then there may be a shortfall in RMD coverage in the middle years, requiring either that TIPS bonds be sold prematurely, or that other assets in the TDA be tapped to cover the RMD.”

READ MORE: A primer on the IRA ‘bridge’ to bigger Social Security benefits

The key takeaways on bond ladders

Other caveats to the strategies revolve around any possible state taxes on withdrawals or any number of client circumstances ruling out a universal recommendation. The main message of McQuarrie’s study serves as a warning against putting the ladder in a taxable brokerage account.

“Unsurprisingly, the higher the client’s tax rate, the worse the outcomes from locating a TIPS ladder in taxable when inflation rages,” he writes. “High-bracket taxpayers who accurately foresee a surge in future inflation, and take steps to defend against it, but who make the mistake of locating their TIPS ladder in taxable, can end up paying more in tax to the government than is received from the TIPS ladder during the first year or two.”

For municipal or other types of tax-exempt bonds, though, a taxable account is “the optimal place,” Spranger said. Convertible Treasury or corporate bonds show more similarity with the Treasury inflation-protected securities in that their ideal location is in a tax-deferred account, he noted.

Regardless, bonds act as a crucial core to a client’s portfolio, tamping down on the risk of volatility and sensitivity to interest rates. And the right ladder strategies yield more reliable future rates of returns for clients than a bond ETF or mutual fund, Spranger said.

“We’re strong proponents of using individual bonds, No. 1 so that we can create bond ladders, but, most importantly, for the certainty that individual bonds provide,” he said.

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Why IRS cuts may spare a unit that facilitates mortgages

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Loan applicants and mortgage companies often rely on an Internal Revenue Service that’s dramatically downsizing to help facilitate the lending process, but they may be in luck.

That’s because the division responsible for the main form used to allow consumers to authorize the release of income-tax information to lenders is tied to essential IRS operations.

The Income Verification Express Service could be insulated from what NMN affiliate Accounting Today has described of a series of fluctuating IRS cuts because it’s part of the submission processing unit within wage and investment, a division central to the tax bureau’s purpose.

“It’s unlikely that IVES will be impacted due to association within submission processing,” said Curtis Knuth, president and CEO of NCS, a consumer reporting agency. “Processing tax returns and collecting revenue is the core function and purpose of the IRS.”

Knuth is a member of the IVES participant working group, which is comprised of representatives from companies that facilitate processing of 4506-C forms used to request tax transcripts for mortgages. Those involved represent a range of company sizes and business models.

The IRS has planned to slash thousands of jobs and make billions of dollars of cuts that are still in process, some of which have been successfully challenged in court.

While the current cuts might not be a concern for processing the main form of tax transcript requests this time around, there have been past issues with it in other situations like 2019’s lengthy government shutdown.

President Trump recently signed a continuing funding resolution to avert a shutdown. But it will run out later this year, so the issue could re-emerge if there’s an impasse in Congress at that time. Republicans largely dominate Congress but their lead is thinner in the Senate.

The mortgage industry will likely have an additional option it didn’t have in 2019 if another extended deadlock on the budget emerges and impedes processing of the central tax transcript form.

“It absolutely affected closings, because you couldn’t get the transcripts. You couldn’t get anybody on the phone,” said Phil Crescenzo Jr., vice president of National One Mortgage Corp.’s Southeast division.

There is an automated, free way for consumers to release their transcripts that may still operate when there are issues with the 4506-C process, which has a $4 surcharge. However, the alternative to the 4506-C form is less straightforward and objective as it’s done outside of the mortgage process, requiring a separate logon and actions.

Some of the most recent IRS cuts have targeted technology jobs and could have an impact on systems, so it’s also worth noting that another option lenders have sometimes elected to use is to allow loans temporarily move forward when transcript access is interrupted and verified later. 

There is a risk to waiting for verification or not getting it directly from the IRS, however, as government-related agencies hold mortgage lenders responsible for the accuracy of borrower income information. That risk could increase if loan performance issues become more prevalent.

Currently, tax transcripts primarily come into play for government-related loans made to contract workers, said Crescenzo.

“That’s the only receipt that you have for a self-employed client’s income to know it’s valid,” he said.

The home affordability crunch and rise of gig work like Uber driving has increased interest in these types of mortgages, he said. 

Contract workers can alternatively seek financing from the private non-qualified mortgage market where bank statements could be used to verify self-employment income, but Crescenzo said that has disadvantages related to government-related loans.

“Non QM requires higher downpayments and interest rates than traditional financing,” he said.

In the next couple years, regional demand for loans based on self-employment income could rise given the federal job cuts planned broadly at public agencies, depending on the extent to which court challenges to them go through.

Those potential borrowers will find it difficult to get new mortgages until they can establish more of a track record with their new sources of income, in most cases two years from a tax filing perspective. 

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