Does anybody else remember David Letterman’s Stupid Dog Tricks? Watching these intelligent creatures doing dumb things they learned from their clever humans was great fun. While these CPA tricks may not achieve pop culture status, you should still pay close attention. Some CPAs can be dangerous to your wealth! If you’re paying a CPA for expert advice, watch out for some of these “tips” I’ve heard in 40 years in business:
- Buy a house to get the mortgage deduction Take advantage of the mortgage deduction when you have decided a house makes sense for you. The write-off should not enter into your decision (see #5 below).
- A home office is a red flag/will cause you to be audited. If you have a legitimate home office, of course you should deduct it. I’ve not seen any evidence in my 40-year career that home offices themselves cause the IRS to target clients. Get solid advice from a CPA who is open to deducting your home office and understands how the rules work.
- Depreciating your home office will cost you taxes This is a corollary to the above. Let’s break this into parts:
- If you have a home office, you must use either “Actual Costs” (which includes depreciation) or the “Simplified Method”, which doesn’t. For most physicians with high-value homes, the “Actual Costs” method will yield the higher deduction.
- If you sell your home and have depreciated your home office, you will “recapture” that depreciation. This merely reverses any deductions you took against income and makes the IRS “whole”.
- If you don’t sell your home, you don’t repay anything, and you have saved taxes by depreciating.
- Your business should own your car Meaning you will get to “write off” your car, just by titling it to your business. Sorry, not true. You can deduct only the proportionate costs for the mileage you drive for your work not including commuting. Whether your business owns your car or you own it outright and set up an “Accountable Plan”, you are allowed the same deduction.
- You should buy a lot of equipment before year end to save taxes Not true. If you really need the equipment, go ahead and buy it. But those who win the game of finances are not the ones who save the most taxes. They are those who keep the most in their pockets.
- Your practice should own your building It’s always a good idea to separate the real estate from the business activity. First, you should never put an appreciating asset into a corporation. The reason is you will owe taxes on the appreciation should you ever remove the asset from the business. Second, your building is similar to a second business. When you retire or sell your share in your business, you can keep the building for a future passive income stream.
- Rent your home to your business You can rent out your home for up to 14 days a year and you won’t be taxed on the income. A corporation would allow you to rent your home to your business for corporate events. However, it is a headache to set up and maintain proper records and it’s doubtful you would save enough to make setting up a corporation worthwhile. Plus I would consider this a red flag.
- Every business should be an S-corp S-corps are a great choice in the right circumstances. But you must weigh the added costs for administration, payroll, and tax filing against the tax savings. If you’re making <$300k – $350k in your business, an S-corp may cost you more than you’ll save. Run the numbers before deciding.
- A Backdoor Roth is a bad idea Many CPA’s continue to express ignorance about backdoor Roth IRAs. Either they believe the step transaction doctrine is still an issue, that the future growth is negligible for high-income professionals, or they think they’re the same as nondeductible TIRA’s. If you find yourself having to teach your CPA about backdoor Roth’s, it’s an indication he does not have enough experience with HIPs (High Income Professionals).
- Backdoor Roth’s don’t need to be reported Because some CPAs aren’t familiar with the backdoor Roth, they do not realize you must file Form 8606 for both transactions: when you contribute to the nondeductible TIRA and when you convert to the Roth. If your CPA overlooked these forms, you can file them in arrears with the IRS.
- Set up a SEP for your business CPA’s commonly recommend SEP’s over solo-401k’s. The truth is that the only time a SEP makes sense is when you didn’t set up a solo-k and it’s past December 31. Then you should contribute to a SEP, roll it into a solo-k, and close the SEP. See my accompanying post on “back-door solo-k’s”. (NOTE: this advice is no longer true as of 1/1/20 – now there is no good reason to open a SEP that I can think of!)
- You cannot have multiple 401k’s Actually, you can have as many 401k’s as you have employers, as long as the employers are unrelated. If you own 2 businesses, your businesses are considered aggregated and you can have only one 401k. But if you have a side hustle from your day job at the hospital, you can also make profit-sharing contributions to your solo-k. You can make only one employEE contribution ($19k in 2019) across all plans, though.
- Form an LLC so you can write off more expenses You can deduct the same expenses whether you are a sole proprietor or an LLC or an S-corp. The business entity does not matter.
- Doctors should have LLCs to protect themselves While the purpose of forming an LLC is for asset protection, this shield doesn’t extend to professionals performing their duties. For that, you need appropriate malpractice insurance. If you are concerned about running over someone in your Tesla while driving between hospitals, get a PUP (Personal Umbrella Policy) for protection. An exception to the LLC rule is hiring employees. In that case, you should form an LLC or elect to be an S-corp to protect your assets from their mistakes.
2 thoughts on “When CPAs give Bad Advice”
Enjoyed the clarification on these common misconceptions! It seems every industry has them. In medicine, everyone knows that vaccines cause autism (wrong), marijuana is safe (wrong), and spinal taps cause paralysis (never seen it).
Interesting perspective. I hadn’t really thought about it that way, but you make a great point. Thanks for posting!