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6 Most Costly Tax Mistakes You Are Letting Your Clients Make

7 minute read

If you’re a tax professional, what are the biggest mistakes you could be letting your clients make? We’ve highlighted six errors that firms around the nation are commonly making. Maybe you aren’t doing all of them, but chances are you’re doing at least some of them! Without further ado, here are the six costly tax mistakes you’re letting your clients make:

Costly Mistake #1: Letting Clients Continue to Run Their Businesses with Less Than Ideal Entity Structures

Too many tax professionals are not proactively helping their clients find the most efficient entity structure for their business. Of course, every business is different and what works for one client may be less than ideal for another depending upon their situation. That said, do you know the best business structure for each of your clients? 

For example, some of your clients might be organized as a Schedule C, but it might make sense to move them to a S Corporation or even a C Corporation. In short, have you even examined your client’s business entity and whether or not it makes sense to change the business structure from a tax perspective? 

Every single year you let a client operate in a less-than-deal entity for them, you cost them significant amounts in unnecessary taxes, not to mention the other potential burdens or limitations based on their business structure.

Costly Mistake #2: Not Telling Clients About New Tax Laws

Tax laws are changing all of the time. One simple example of this is the Consolidated Appropriations Act (CAA) which overrode the Tax Cuts and Jobs Act (TCJA) by making temporary rules for the Business Meal Deduction. 

What is the CAA?

For both 2021 and 2022, the CAA revived the following Business Meal Deduction rules:

  • Some meals that have been 50% deductible are awarded a 100% deduction if the food is bought from a restaurant.
  • Most meals that were dropped to 50% deductible by the TCJA are brought back up to their original 100% allowance if the food is bought from a restaurant.

While entertainment costs remain nondeductible, many of your clients likely have no idea about tax law changes like this. You’re making a mistake if you’re not encouraging your clients to take advantage of this tax deduction with a Meal & Entertainment (M&E) account.

Segregating meals expenses will be helpful when claiming this deduction. Even though most meals expenses are fully deductible now, this won’t be the case in 2023. If you can get your clients to use more M&E accounts this year – creating an account for each category of expense – your job will be that much easier when it’s time to file their tax return.

Encourage your clients to categorize meals expenses as they happen. If they wait until the end of the year to put the meal costs into the appropriate bucket, they probably won’t remember why those expenses were incurred. 

Encourage your clients to keep itemized receipts. If they have any sort of entertainment alongside meals expenses, the food is still deductible. If  your client puts the food and entertainment expenses together, they cannot deduct any meal expenses. You can see the expense categories to suggest to them here.

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Costly Mistake #3: Not Recommending Bonus Depreciation or Section 179 Expensing

If you are looking to help clients, depreciation can be a great way to save them money — and ignoring it can be a costly mistake. Bonus depreciation and Section 179 Expensing can be used for different assets in the same tax year to maximize benefits. For a quick comparison, let’s look at both special methods of depreciation.

For your clients that own property, double check to see if they are eligible for depreciation, and if so, research which method is best for them to use. If you fail to do this, you can cost your clients significantly.

Bonus DepreciationSection 179 Expensing
– Temporary provision — begins phase-out in 2023, gone in 2027

– Applies to property with class lives ≧20 years

– Can deduct 100% of qualified property — no limits

– May be used to reduce income below zero (generate a loss)

– Can only be used for property that originates with the taxpayer
– Permanent provision for property with class lives ≧ 20 years

– Cannot reduce income below zero

– May be taken for property that has already been used

– Capped at $1.05M for 2021

– Phase-out begins at 2.62M, with no expensing allowed after $3.67M

– May be used for some property that does not qualify for bonus

Costly Mistake #4: Not Setting Up Clients to Take Advantage of the Augusta Rule

Have you helped any of your clients with what’s known as the Augusta loophole? If you have clients who are business owners, you can advise them to host business events, such as quarterly board meetings, at their home. They can exclude the income from the rental on their personal return, yet take the rental deduction on their business return. 

The Augusta rule Section 280A(g) states:

“…if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then… the income derived from such use for the taxable year shall not be included in gross income…”

That means short-term rentals of personal residences are not taxable. If your clients have the capacity to host business events at their home, why not?

Costly Mistake #5: Ignoring the Home Office Deduction

If you have clients who are employed for a company yet work from home,  they could be eligible for home tax deductions that aren’t available to employees who work at a company office. Before the TCJA, it was much easier to deduct home office expenses because salaried employees could deduct expenses that were required to perform their duties from home. That meant that items such as travel, furniture, computers were easily deductible back then. 

Now, it’s not so simple. Not all home office expenses are eligible, but there are still deductions you can claim for your clients. There are five different types of employees that may be eligible to deduct some expenses when working from home: artists, military personnel, politicians, individuals with disabilities and educators. 

If you have clients in any of those groups, you’re making a mistake if you aren’t helping them claim the home office deduction. In addition, if a home office is used regularly and exclusively for business purposes, your client may be eligible to deduct a portion of their home-related expenses if it is:

  • A condition of their employment
  • Necessary for the business to function, or
  • Needed in order for the employee to fulfill their duties

If your client qualifies, they could include portions of mortgage interest, property taxes, some utilities and homeowners insurance as home office deductions.

Costly Mistake #6: Not Advising Clients to Hire Their Children

If a client hires their children to do real work for their business, they may be able to lower their business income, their self-employment income and their effective income tax rate. They can do this all while avoiding the kiddie tax.

It works because the business owner can take a tax deduction for hiring their children because wages are tax deductible. If they pay wages to anybody — including their child — they can deduct those costs as a legitimate business expense. However, wages are only deductible if they are paid to actual employees, so make sure their child qualifies as a real employee and has the documentation to back it up.

You can advise clients to pay wages to their child and deduct those wages on the business’s tax return, so less business income will flow through to them. By shifting income from a parent to a child, the family unit will report less in taxes overall. Children who aren’t claimed as dependents can take a standard deduction of $12,950  for 2022, which means the child’s first $12,950 of income is taxed at 0%.

Additional savings are possible if you advise your client to establish an IRA for their child. The maximum limit is the lesser of the child’s annual wages or $6,000. Since this contribution is tax-deductible, they may be able to pay their child up to $18,950 at a 0% tax rate.To successfully shift business income from their own tax bracket into their child’s tax bracket, they must follow a few key requirements outlined here.

What Do All 6 of These Costly Mistakes Have in Common?

You are filing tax returns for clients, but there is a common thread among all these mistakes. You are not helping your clients do tax planning. If you aren’t helping them maximize deductions, you’re just a cost to them as you help them with compliance once a year. 

That is a mistake in and of itself. You can make a difference in your clients’ tax bill each year by looking into some of the most common tax loopholes and making sure your clients are taking advantage of them. Go beyond tax preparation and you’ll bring much more value and satisfaction into your client relationships.

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