Accountants will tell you that missed deductions, overlooked opportunities and outright blunders plague business clients’ taxes. Financial advisors, through familiarity with the most common mistakes and their root causes, can bring value to relationships by spotting planning and compliance gaps, and then educating clients and prospects about the right questions to ask their accountant.

Tax gaffes occur for varied reasons. Some folks rush headlong into creating a business without seeking advice. On their own, they may not choose the most tax-friendly entity for their company.

Other owners outgrow their first accountant and fail to move on. “The client may have started with an accounting firm when their business was small. Then the business got large, the accounting firm is no longer a fit, and opportunities are missed. There is a spectrum of expertise,” says tax attorney Adam Sweet, a principal in the national tax office of Eide Bailly LLP in Spokane, Wash.

In still other cases—and this illustrates the importance of helping entrepreneurs voice tax concerns—the accountant may not fully champion the client’s cause.

“Some tax preparers are great at preparing returns but not so great at taking the time to advise clients as to how they can save taxes via their small business. Clients may need to push their preparer for opportunities,” says CPA and financial planner Bruce Primeau, president of Summit Wealth Advocates LLC in Prior Lake, Minn. In these situations, financial advisors can help provide the initial impetus to make this happen.

Deductions Not Taken
The combined federal and state marginal tax rate on a successful client’s business income can approach 50%, or even exceed it in some cases. So the tax savings from deductions build rapidly, which works to the detriment of lax entrepreneurs who can’t seem to keep thorough and accurate records.

Consider mileage. At 56 cents per business mile for 2021, a few 30-mile round-trips each week would produce enough deductions to reduce a high-bracket client’s taxes for the year by $1,200. Low-cost, well-rated mileage-tracking apps such as MileIQ, QuickBooks Online, Everlance and Hurdlr capture that deduction.

“Probably the most missed deduction for self-employed individuals is the home office,” says V. Peter Traphagen, Jr., managing director and wealth advisor at Traphagen CPAs & Wealth Advisors in Oradell, N.J.. Some self-employed clients don’t realize they can deduct a portion of expenses such as rent, utilities and homeowner’s insurance based on the percentage of the residence used exclusively for business, or claim $5 per square foot on up to 300 square feet under the simplified method.

Others are not aware that the office can be a designated section of a room. “The space does not need to be marked off by a permanent partition,” reads the 2020 edition of IRS Publication 587.

Quite a few business owners shy away from the home office deduction because they fear it’s an audit trigger. “I have to convince them that is not the case,” Traphagen says.

One downside he highlights to homeowners is that when they sell their residence at some future time, tax will be due on the depreciation for the business space. This rule won’t apply if the client always uses the simplified method to claim the home-office deduction.

Renters fare particularly well because they tend to have a smaller residence, so their office is a larger portion of it—often 15% to 20%, Traphagen’s says. Deducting a chunk of rent, which is otherwise non-deductible, is a boon for these self-employed individuals.

It’s also a prime example of an entrepreneur “living their financial life through their business,” says Primeau. “As a business owner myself, I recommend doing that as much as possible.”

For instance, owners who work from home some of the time should be able to write off a modest portion of their home-internet and cell-phone bills—say, between 30% and 40%. “These are easy items to get reimbursed for through your business” and the business can deduct them as necessary expenses, Primeau says.

Or take travel. An entrepreneur’s full airfare for a business trip is deductible even if the trip is extended a day or two to sightsee, provided the travel’s primary purpose is business. “By incorporating business and personal travel together, you can write off some of the expense,” Primeau says.

Passed By
Business clients frequently squander the chance to put their children on the company payroll. An owner’s child can be paid for age- and skill-appropriate tasks such as shredding documents, tidying the office or modeling for the company website. The child actually has to do something, pay must be reasonable for the job performed, and other requirements must be met. But the child won’t owe any federal income tax on earnings up to the standard deduction, which is $12,550 this year for a single filer.

The earnings can be contributed to the child’s 529 plan or Roth IRA, both of which offer tax-free growth. “So the family gets dollars out of the business at no income tax cost and puts them in accounts that are tax free. That’s about the biggest home run there is,” Primeau says.

Entrepreneurs also overlook establishing retirement plans that let them make sizable, tax-deductible contributions for their own retirement. For instance, by establishing and contributing to a traditional defined-benefit pension plan or a cash-balance plan, a business owner may be able to sock away a six-figure, pre-tax amount annually for herself.

For a one-person (or owner and spouse) operation, a one-participant 401(k) is probably the simplest solution, says Primeau. Filing an annual IRS return for the plan isn’t necessary until the combined assets in all of the client’s one-participant plans top $250,000.

For 2021, a self-employed individual can make a deductible contribution of as much as $58,000 ($64,500 if at least age 50) to an individual 401(k). Schwab and Fidelity are among the solo 401(k) providers that don’t charge plan set-up or maintenance fees. But neither currently allows plan loans or offers a Roth option like other, pricier providers do.

Improprieties
Because federal taxes get so much attention, state and local obligations sometimes get neglected, especially when the accountant handles only the client’s federal return, observes Sweet, the Eide Bailly tax attorney. He’s seen people “just forget about the state side.” Advisors can help clients be mindful of their filing responsibilities.

Finally, business owners are notorious for inappropriately treating workers as independent contractors, rather than as employees, in order to sidestep state and federal payroll taxes.

“When you classify someone as an independent contractor or consultant for tax purposes, you’re saying you don’t control them, they set their own schedule, and they have the right to work for other businesses,” explains Traphagen, the New Jersey practitioner. From what he’s seen, most work arrangements aren’t like that. How do the authorities find out?

“You have a disgruntled worker,” Traphagen says. “You terminate the relationship and the worker goes to collect unemployment from the state and says, ‘I was actually an employee.’ Then the audit will start. So I see state audits first, and then states notify the IRS.”