How much should I spend on tax planning?

Question

I own a business flipping vacant land properties so according to the irs I am a real estate dealer and my income is taxed as ordinary income which includes the full 15% self employment tax.  I recently found out about a potential tax strategy using a limited partnership to cut down on or eliminate paying the full 15% self employment tax.  I spoke with a tax planner that quoted me $4800 for the first year of tax planning and $1000 a year after.  I've only been operating this business for a year so I have not dealt much with accountants and I have no idea if this is a good price.  My income is under 50k so $4800 would be a considerable chunk of my income but if it reduces my future taxes by cutting down of the self employment tax it could be worth it.  Any more experienced folks have some advice for me on this topic?

Carl Fischer · Answer

@Joe P.

I would talk to your tax preparer/CPA and see what they have for you. Then I would discuss/ interview @Brandon Hall and @Lance Lvovsky because their answers on BP Community questions seems accurate and smart. Then stay with your current guy or hire the one you like best.

$4800 is more than half the Ss/Medicare tax- seems high. You may also want someone who can do tax planning, financial planning, estate planning, asset protection, etc     I was just quoted $3200/year and $1k each year after for all of the above.

Brandon Hall · Answer

@Joe P. In my opinion, that's too much for just tax planning based on your income level.

With tax planning, you should receive significantly more in tax savings than you spent on the service. At your earnings level, based on what you are doing, a few minor tweaks can likely save you $5-8k per year. But that wouldn't necessitate a hard core tax planning service.

When we do tax planning, we want the client to return 3-4x the cost of our service. I would feel extremely uncomfortable quoting you $4800 because I know you would not be saving $15-20k in taxes as your NOI is simply not at the level that allows for those savings.

Daniel Hyman · Answer

Sounds steep to me as well. But then again, maybe that particular tax planner has a creative, of the box strategy that none of us are familiar with and is worth all of that and more.

It might be worth your time to good to call around and see what else is out there.

Basit Siddiqi · Answer

@Joe P.It is true that there are strategies involved that can reduce the amount of self-employment taxes that you pay.

However, how much self-employment taxes can you even potentially avoid?why pay for a strategy to eliminate your self-employment tax if the cost to avoid it are more?That seems counter-intuitive.

Jose A. Ramirez · Answer

$4,800 for a tax plan itself is not expensive.  The real questions should be, do you really need one this early in the game.  A tax plan can be sold an never implemented.  Not using it would not take away its value nor the work a tax advisor puts into it.

I would suggest holding off on buying tax plan for now.  If you are flipping land or any kind of real property, self-employment would apply. To cap said self-employment, an s-corp is recommended once you get to certain income level where the expense of maintaining an s-corp would make sense. At 50K a year in net income, I would not do an s-corp yet.

Hope this helps.

Teri Feeney Styers · Answer

I paid $2000 in 2016 @Joe P.

Bill Hampton · Answer

@Joe P

That is very high. Shop around ask what are you getting for your money.

Lance Lvovsky · Answer

It depends how much to spend, but I would say that is a high quote based on your income. Also, tax planning while can be ongoing, sometimes is not a yearly ongoing engagement. I would speak to a CPA who can provide you with adequate tax planning services that ultimately add value to your bottom line.

Christopher Smith · Answer

I think you are approaching this the right way, Cost v Benefit analysis, maybe time valued. You should also attempt to assess the risks of the tax strategy that you are being presented with, in other words the likelihood of you prevailing on such a position if challenged by the Govt. Is it garden variety stuff, or is it a little more aggressive. You might also perform some due diligence on the person running this idea by you e.g., credentials, referrals, any past history of misconduct.

Finally you might also do some comparative shopping if you can. Ask other tax practitioners what they would recommend and charge relating to the same strategy. I'll assume you didn't need to sign any confidentiality agreement to discuss the strategy that you were presented with by the first tax practitioner.

Joe P. · Answer

Thank you for the input everyone!  That was very helpful and I am getting things sorted out now!

How much should I spend on tax planning?

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