Tax tips for financial advisers

Like all small business owners, financial advisers look for ways to cut taxes, maximize income, and save for retirement. Counselors who own their own businesses incur a number of expenses that are unique to their line of work, but there are also several steps that most or all self-employed taxpayers can take to reduce their reportable income.

This article examines the main avenues available for financial advisers to reduce adjusted gross income that they must report to the IRS.

Key takeaways

  • If you are a financial advisor, you should treat your practice like any other small business.
  • This means understanding the tax exemptions and deductions that are available to you when it comes to taxes.
  • While standard expenses such as overhead and marketing materials are found in all types of businesses, financial advisers can claim additional deductions that are specific to their industry.

Separate the business entity

Many financial advisers follow the same strategy as other small business owners by dividing their practices into separate business entities, such as a subchapter S corporation, C corporation, partnership, or LLC. They then pay themselves their business salaries, thus leaving the remaining income from the practice taxable for the company itself.

This prevents the professional from being personally liable for all taxes on the business and also allows him to escape the self-employment tax. It can also reduce the liability of the litigation advisor. If a client sues the advisor for any reason, the business itself may be liable, but not the advisor, depending on how the business is set up.

Standard business expenses

There are a lot of business expenses that consultants can deduct in the same way as any other small business. These include:

  • Marketing and publicity
  • Business and mobile phones
  • Rent, utilities
  • Employee wages
  • Life and health insurance and other benefits, health savings accounts
  • Standard office equipment, such as paper, copiers, and furniture.
  • Computer and software expenses, such as accounting programs that keep track of income, accounts receivable, and business expenses
  • Traditional retirement plan contributions (those that are now deductible with distributions that are taxable at retirement)

However, financial planners also have a number of expenses that are unique to their profession. Depending on your business model, most or all advisers must pay for some or all of the following:

  • Broker / dealer costs
    Most brokers charge their advisory employees annual fees of various kinds, such as maintenance and administrative fees. They also tend to keep a portion of the gross commissions earned by their brokers and advisers. (Some brokers / dealers do not charge advisor fees and simply keep more of the commissions earned.)
  • Trading platforms
    Many advisers bypass brokers / dealers so that their clients get the best possible market prices when placing orders for securities for their clients. Trading platforms connect the advisor directly to the markets and bypass the market makers used by brokers / dealers to trade for them. Most trading platforms charge a monthly fee for this service that can vary depending on the services the advisor needs.
  • Financial planning software
    Today, most advisers use sophisticated software to analyze stocks and portfolios. There are also many comprehensive financial planning programs that allow advisors to go into all aspects of a client’s financial situation and then produce detailed reports showing what could happen in various what-if scenarios that the client may choose to follow. Many of these programs cost thousands of dollars to purchase and hundreds more to maintain each year.
  • Education and certification expenses
    Continuing education and class work costs for professional certifications like CFP®, CLU or ChFC can be significant and are deductible for assessors. License costs to sell securities or insurance may or may not be deductible, depending on the assessor’s circumstances. A new advisor who has just arrived from a completely different occupation to start a new practice will not be able to deduct these expenses, because they will qualify the advisor to work in a different line of business. But advisers who are already practicing in some way can cancel this if the IRS finds that they are working in the same field.

Tax reports

Financial advisers must report your business and personal income on the same tax forms as all other small business owners. Those who function as sole proprietorships must report all business income and expenses on Schedule C, while others must file corporate or partnership tax returns. Financial advisers working as employees must report all unreimbursed work-related expenses on Form 2106 and take them to Schedule A (those who cannot itemize deductions cannot).

Major expenses, such as new furniture, can be deducted in the year purchased under Section 179 of the Internal Revenue Code on the appropriate type of tax return. Advisors should also be careful to break down their business expenses by client for record-keeping purposes, as the IRS may require this in the event of an audit. This also gives advisers an idea of ​​how much they are spending on each of their clients. Most advisers can easily meet these obligations with a standard business accounting program.

The bottom line

While many of the tax savings strategies presented here are applicable to most small business owners, there are several types of expenses that are only borne by financial professionals. Some advisers may also prepare and file their own returns, but those who are not trained tax preparers may be wise to delegate this task to someone else (and then deduct tax preparation costs on their returns).

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Mark Holland

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