Which type of CPA service for my current level of investment?

Question

Hi BP!

I'm a newbie, and after a year researching, finally jumped in! I am so very thankful for this community and all the knowledge I've gained from  all of you! Now I'm needing help deciding which type of CPA service I should be seeking, at this point in my investment career.

My story: To jump-start my real estate investing, I moved in with my parents, renovated what had been my primary residence, and turned it into a rental in June. In December, I bought a house at auction that I am currently renovating to flip. Both properties are in Tacoma, WA. I've read a beginner's amount on tax implications with rental properties, so I've heard the vocabulary, but I don't have a working knowledge of it. I know next to nothing about tax implications for flips. In the long term, the bulk of my investments will be rental properties, with the occasional flip to boost my ability to purchase more rentals. As I gain more in passive income, or if I find flipping to work well for me, I will be cutting back hours at my job.

My question: Is it more beneficial for me right now to go with a CPA who charges for individual services or one who has monthly plans?

My thoughts: I'm leaning toward a monthly plan, so that I feel free to ask questions anytime, without worrying about the cost, but currently having only one rental bringing in a monthly income, it seems a steep price in relation to my real estate investment income.

In case the question is too broad, here are the questions I know I need help with:

Flip-

-What do I need to do between now and selling to pay the lowest taxes I can? Are there things I should do differently with future flips?

-What do I need to know about tax implications of a flip that as a newbie I probably don't know? (What should I be asking that I don't know to ask?)

-How do 1099's work, when I pay someone for a service who doesn't have a company (or is there a better way to do this)?

-Actually doing the taxes, when tax year 2018 comes

Rental- I probably could figure this one out on my own, but lack confidence.

-Tax implications for expenses from the renovation (how to categorize if it was improvements or upkeep, and how each of those behave in the tax code)

-I read something about needing to qualify as a real estate professional for some of the tax benefits. Explain that to me.

-Actually doing the taxes, for 2017 and on

Thanks for your thoughts!

Shelley

Brandon Hall · Answer

I'm biased, but I vote monthly fees :)

I originally ran my CPA firm like any other: hourly rate, "see ya once a year" for tax prep, slow email response, etc. Problem was that it didn't encourage anyone to pick up the phone and call me. It certainly didn't lead to a proactive advisor-client relationship.

Ultimately, I realized that my clients were not getting the advice they otherwise could be getting if I restructured how we work with clients.

Are monthly fees better than hourly/once a year tax prep fees? Nah, I wouldn't say one is better than the other. It's comparing apples to oranges and just depends on what type of relationship are looking for.

We have a 12 month agreement where we bill clients monthly. Here are the benefits (as told by our clients):

1. Someone is always there to answer your questions
2. Fast replies to emails (we've won a ton of clients from other CPAs and EAs because we reply within 24-48 hours rather than two weeks later)
3. Pricing is known and transparent, no surprises
4. Bill aligns with rent collection, easier to budget
5. Phone calls are included in the plans, meaning we WILL talk multiple times throughout the year = proactive
6. When a letter is received from the IRS or state, simply forward to our team and we take care of it, again without any surprise fees.

Benefits from my perspective:

1. Forces our team to reach out to clients consistently (after all, we are billing monthly and want to make sure you're deriving value)
2. I can better manage my cash flows which means I can better plan for capacity which means I can hire high quality CPAs that stick with me all year rather than staffing up during tax season and then getting rid of everyone.

Jana Cain · Answer

@Shelley Greene My recommendation is to go with the tax pro that you like. :-) In doing your research, you may find the the pro you mesh best with charges hourly for all interaction. Or just a flat rate for deliverables. Or monthly for everything. Regardless of the billing method, you want a pro that you trust, find to be knowledgeable, and ultimately feel comfortable with.

Caleb Heimsoth · Answer

@Shelley Greene I’ve read several books on taxes for REI and a lot about it on BP here too.  I’m not an expert but I get enough to know what forms I’ll be receiving and what I need to file.  All my bookkeeping is done by PM and then over the year I upload receipts for stuff I’ve spent on my own to their website.

With all this combined I have a decent idea, and I’ve asked them to confirm I got everything.  From there it’s pretty straight forward of then just filing the return

Michael Plaks · Answer

@Shelley Greene

@Brandon Hall made an eloquent argument for the monthly fees, and I second it.

@Caleb Heimsoth explained why it is not always the best fit, and I agree with him, too.

Because of that, some tax firms accommodate both models. You may want to start with what I call a la carte model and then upgrade to the monthly program when ready.

Shelley Greene · Answer

@Caleb Heimsoth

Thank you for this perspective, as it was the one I worried more about. Did you do much research about how to do your bookkeeping and what you would need to provide for the CPA, or were they able to help you with that as part of the filing and preparing? With just one rental and one flip right now, I'm definitely not in the big leagues yet, but I worry that I'd somehow miss out on something I should be doing if I only have a preparer rather than an advisor. I plan to have at least 10 SFH rentals in the next 5 years.

@Brandon Hall

Probably the first thing I learned when I started digging for tax and CPA information was from one of the BP podcasts you did with Brandon and Josh (which of course was both hilarious and information-packed). Thank you for replying to little ole' me! I certainly know that I need good advice and though it would be convenient to always be able to ask questions and get quick answers, I'm not sure that it's reasonable for me at this point to go monthly. The one rental I currently have would just cover my monthly cost. I suppose that if I make good use of what I'm paying for, though, I would be likely to be able to grow my investments that much more quickly.

@Jana Cain

Sound advice! Absolutely yes to all the qualities you said. I've thus far always done my own taxes, and my only experience with CPAs is watching how my parents struggle with frustration at the hourly expense for any questions they have, difficulty of communication, and all the documents they have to gather, for their CPA who does taxes for them and my dad's single-person small business. Perhaps that's also something that has me leaning toward a monthly strategy.

Which type of CPA service for my current level of investment?

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