Patrick Lonergan is the owner of Vital Wealth.
If you ask owners of businesses big or small about their most costly and complicated expense, you’re likely to get one answer: taxes. Naturally, most will hire a certified public accountant (CPA) for guidance on minimizing their tax burden.
However, there’s a definite distinction between a CPA and a tax strategist—one that can significantly impact long-term financial health. While CPAs play an essential role in tax compliance, they are not necessarily equipped to provide proactive tax strategies that maximize savings and take into consideration the business and personal cash flow.
The Difference Between CPAs And Tax Strategists
A CPA’s primary role is to ensure businesses remain compliant with IRS regulations, filing accurate tax returns and meeting deadlines. While some CPAs may offer tax-saving advice, their main focus is compliance, not optimization.
A tax strategist takes a more proactive approach, working with business owners throughout the year to implement strategies that reduce tax liability before December 31.
Effective tax planning requires an in-depth understanding of a business’s cash flow, financial goals and legal structures—something many CPAs don’t have the bandwidth or incentive to address. A true tax strategist will assess every aspect of financial health, from cash on hand, the role family plays in the business, retirement plan design to legal entity structuring, to help business owners retain more of their earnings.
Common Misconceptions About CPAs And Tax Strategists
One of the biggest misconceptions is that CPAs automatically function as tax strategists. While CPAs may save clients some money on taxes, and some are qualified to offer advice, their expertise is often limited to tax code compliance rather than holistic business and personal planning for the entrepreneur.
For example, a CPA might identify typical deductions or credits that can be utilized after the end of the year, while a tax strategist will explore everything from good administration and bookkeeping strategies that need to be executed before December 31 to advanced opportunities like rarely utilized retirement plans, and creating new legal entities that could save business owners hundreds of thousands of dollars. Tax strategists build connections with CPAs, financial planners, legal experts and insurance professionals to create a comprehensive wealth-building plan.
Also, certain tax-saving measures—like restructuring a business entity or implementing long-term investment plans—fall outside a CPA’s traditional scope. Tax strategists work with clients throughout the calendar year to understand cash flow, anticipate taxes for the year and implement preemptive measures to minimize the taxes due. They focus on long-term financial health rather than preparing tax returns.
Why Simply Switching CPAs May Not Solve The Problem
Business owners frustrated by high tax bills often believe switching CPAs will result in significant tax savings. However, the issue usually isn’t the CPA—it’s the role they’re expected to play. CPAs focus on compliance and accurate tax filing, but they may not be equipped to develop custom tax-saving strategies.
For example, a business owner earning $1 million annually might pay roughly $300,000 in taxes. A CPA will apply the typical business deductions, so the client still pays the same amount as before. Rather than finding a CPA that knows the ins and outs of your business, consider adjusting your expectations.
A comprehensive tax strategy goes beyond simple deductions. It involves three key pillars:
1. Cash flow management: A tax strategist first ensures a business’s cash flow is optimized to protect and grow wealth. Many tax strategies require financial investment. If tax strategies aren’t forecasted with the rest of the business expenses, the owner may not have enough operating capital to pay all of the bills.
2. Tax optimization: With a clear understanding of cash flow, strategists implement tax-saving measures to minimize taxes so the owner can invest more in their business or build wealth outside of the business.
3. Wealth protection: Once tax savings are realized, strategists help implement legal structures, insurance policies to secure long-term financial stability.
When you first hire your tax strategist, start by filling them in on details beyond your business: your long-term financial goals, personal goals, priorities and retirement plans, for example. This will help them advise you more comprehensively.
A Real-World Example
Let’s assume a business owner is making $1,000,000 between profit and wage from the business. They are paying about $300,000 in taxes. Their CPA helps them write off all of the business expenses they incur throughout the year.
The business owner engages a tax strategist at the beginning of the year to help them minimize their taxes. They understand the client’s business and their goals. The tax strategist helps the client with a number of small tax strategies that aren’t included below that could add up to an additional $5,000 to $25,000 in additional savings. The main drivers in this example are:
1. The business owner wants to build wealth outside of the business. One strategy to do that is to use a cash balance plan where the owner can invest up to $180,000 or more into the retirement plan depending on their age and wage from the business. This strategy is outlined by the IRS just like a 401(k) plan. The federal tax savings at the 37% bracket are over $66,000.
2. The tax strategist helped optimize the business owner’s wage to fully utilize the QBI (qualified business income) deduction for an additional $100,000 deduction. This saves the client $37,000 in federal income tax.
3. Total tax savings because of the tax strategist’s involvement: $103,000. These dollars can be allocated to building the business or other wealth-building strategies.
Tax Strategist Red Flags
Not every business owner needs a tax strategist. If tax liability is relatively low, a CPA is sufficient. If a tax strategist is pushy and has a financial incentive to push you into a strategy, that’s typically a red flag.
Not all tax strategists offer the same level of expertise. Watch out for:
• One-size-fits-all tactics: Good tax planning is highly personalized. Be cautious of advisors who offer one particular tax tactic without fully understanding your unique financial circumstances and goals.
• Aggressive or questionable tactics: Strategies that sound too good to be true may invite IRS scrutiny. These “strategies” often involve items on the IRS dirty dozen list, which are tactics that are potentially problematic and utilized to evade tax. Your CPA can help ensure you’re in compliance and aren’t going to end in trouble with the IRS.
• Lack of collaboration: A good strategist should be willing to work with your CPA and other financial professionals.
When should you hire a tax strategist?
As your wealth grows, financial complexity often increases. A good rule of thumb: If a business owner is paying over $100,000 in taxes annually, it may be time to engage a tax strategist.
CPAs and tax strategists each play an essential role in financial planning, but they are not interchangeable. Rather than expecting a CPA to handle everything, business owners with high revenue should consider adding a tax strategist to their financial team to create a tailored, long-term approach to tax efficiency and wealth protection.
If you’re sending six figures to the IRS each year, consider exploring a tax strategy that helps you keep more of your hard-earned money where it belongs—in your business and investments.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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