My accountant’s $35,000 mistake

The moral of the story of this post is no matter how complicated things seem and how much you don’t want to do something, like accounting and taxes, always, always verify that the “experts” you hire aren’t doing it incorrectly or ripping you off.

This true for credentialing companies (signed a unfavorable contract without the doc approving- true story), billing companies (who drop the ball by not following up) and is particularly true for financial advisors as there are tons of conflicts of interests and incorrect information out there.

Ho Sun was initially too intimidated to do his own taxes, but after several bad experiences now he does them himself. I did my personal taxes (by hand, to boot) for the years I was employed. I even did my business taxes by hand for a few years but finally switched to and Credit Karma to double check.

Here’s what Ho Sun had to say about his experiences:

“I’ve been trying my best to go everything alone, but I finally bit the bullet and decided to hire an accountant for filing my S-corporation tax return.  Originally, I had bought Turbotax Business for $95 to file my return.  However, going through it, I just wasn’t confident enough that I was doing things correctly.  Last thing I wanted to do was to mess up my return, losing thousands of  dollars in potential deductions just to save a few hundred dollars.  Although I would be filing just my expenses and no income, I didn’t want to lose out on any deductions that would be carried over in the future.  

I called around for rates, and they were all over the place.  As with every other consulting service, I could tell that some of these guys were extreme overbillers.  My return’s going to be quite simple and straightforward, but some accountants refused to budge.  One adamantly told me that it would take a minimum of 5 hours at $200 an hour, and that I should expect a 7 to 8 hour bill!! I ended up going with a local guy who will be doing both my corporate and personal returns for $500ish total.  Since my financial records are well-organized, this accountant told me that it shouldn’t take 5 hours.  Also, he offered me a “start-up” rate as well, in order to earn my future business. 

As for my Turbotax, since I didn’t file with it, it’s up for sale on eBay.  I’m expecting $60 for it. 

I also bought Quickbooks as well.  Playing with it, I feel like it will be good for month to month operations, but I still like my Excel spreadsheet for recording start-up expenses.”

Here’s an article on how to do your own bookkeeping, which you should be doing for both your personal and business expenses to keep track of how much you spend, as well to avoid embezzlement or other funny business.

Little did Ho Sun know- know he does his bookkeeping and returns himself. The first year when you’re trying to learn everything it’s painful, but once you get the hang of it, usually just putting different numbers in the same boxes. And google is your friend when it comes to stuff you can’t figure out.

Here’s what Ho Sun had to say the next year:

“So, I fired my accountant a few weeks ago because I couldn’t trust him anymore.  I used him for my personal and corporate return last year.

As an aside, although I didn’t have any revenue in 2010, I still filed my corporate return, so that I could claim my massive tax deductions in the future.  Also, I was able to deduct a bulk of my residency and miscellaneous income from the first half of 2010 with my startup expenses.  I got about a $5,000 refund, which made a decent contribution to my capital.

OK. Back to my accountant story.  Originally, I was cavalier and tried to go with Turbo Tax for my S corporation.  It didn’t take long for me to realize that I was way over my head.  I didn’t want to make some lame mistake that could potentially cost me tens to hundreds of thousands of dollars in future deductions.  

I found this guy through Yelp last year.  I looked for the best reviews and the cheapest prices.  This guy had only 4 or 5 reviews, but the comments made him sound like an honest guy, which was my biggest selection criteria outside of price.  So, I met up with this guy, and gave him my “meticulous” records.  I spoke with him for about 30 minutes, and he seemed by the book.  He prepared both my corporate and personal returns for $500 without any problems.  I had to clarify a few items, but overall, he didn’t give me any trouble.

In passing, he also tried to sell me his payroll and bookkeeping services.  I told him that I needed to conserve capital, and that I was going to go it alone.  That was the end of the conversation.  He knew I had absolutely no business experience, but he didn’t try to sell me these services any further.  This changed COMPLETELY this year.  

I don’t like Quickbooks.  Although it took a bit longer, I’ve been keeping all my books on Excel.  I like to think that I was pretty OCD with my expense and revenue records.  I separated all expenses into categories (ie. advertising, accounting, interest, payroll, etc), and I also kept a separate file for depreciable asset purchases.   I changed nothing with my bookkeeping practices from 2010.

So, when I gave my accountant all my records this time, he found a few simple mathematical errors (we’re talking about $100 discrepancies out of hundreds of thousands of dollars in expenses), and a few miscategorized expenses.  I had made similar mistakes last year as well.  However, this time, he just tore me a new one.  He started going off on how I’m not qualified to be a bookkeeper, and that I really shouldn’t be doing my own bookkeeping.  

OK.  First off, I made a few small errors.  Secondly, if you didn’t think I was qualified to do my own books, why didn’t you tell me last year before I had made such a “mess”????  He didn’t emphasize how important his bookkeeping services were last year, and now it’s absolutely essential???  

I told him how important saving a few hundred dollars a month still was for me, and how I had a lot of free time on my hands.  He responded by saying how my time is worth more than the few hundred a month!  Who are you to make such assumptions about what’s worth my time and what’s not?   That’s no way to sell your services!  

Also, I felt that bookkeeping wouldn’t really save me much time since the bookkeeper would most likely end up asking me where things go and what things are for anyway.  So, why would I pay someone to do something redundant.  Besides, I’d rather know where all my money is going at all times.  That’s how I can figure out where to cut costs.  

Another issue was with the balance sheet.  As an S corporation, you’re required to keep a balance sheet.  I didn’t know that, and I didn’t know how to make one.  My accountant told me that all I had to do was to document how much cash and debt I had as of 12/31/2011.  When I returned to him with this information, he tore me another one saying that I did everything wrong.  He told me that I had omitted certain categories like assets.  (I’ll go over balance sheets in another post in the future).   Then he essentially told me how clueless I am and that is why I need to use his bookkeeping service.  WTF??  I did exactly what you told me to do!!! 

I still wanted to believe him to be a straight shooter, and that he was looking out for my best long term interest.  In the end, I agreed to use his bookkeeping service for 2012.  Before all that, we had agreed that completing my 2011 return was priority.  He recommended that I meet with his bookkeeper to clean up my books for 2011.  He told me how much cheaper it was going to be to use his bookkeeper rather than himself for this part.  I ended up meeting the bookkeeper on another day at 8AM, but apparently she had no idea why we were meeting.   All she did was give me another sales pitch on why I should use their bookkeeping services.  WTF again?  I had already agreed to it.  I didn’t need to listen to this crap again.  She hadn’t even looked at my file.   We ultimately went over a few things, but I ended up telling her to forget all this, and that I was going to clean up everything on my own using the few tips she had given me.  

A few days later, this accountant e-mails me saying “I thought we were clear that you’re not qualified to  do your own bookkeeping.  If you don’t feel comfortable with my services, maybe I should refer you to another accountant.” 

Of course we were clear, and it was his lack of communication with his bookkeeper that infuriated me.  I immediately replied, “You know what, I actually  don’t feel comfortable with our situation.  I don’t trust you anymore and would appreciate a referral.”  

He then backed down, and tried to kiss my butt.  He wanted to start everything fresh.  Too late, I had already found another accountant.  He charged me $550 for the 2 hours we met and the extension we had to filed because of all this hoopla.”

Unfortunately later, Ho Sun fired his second accountant for “forgetting” to deduct tens of thousands of dollars of equipment! Unbelievably, this same situation has happened to not just one, or two, but at least three of my colleagues.

“My accountant’s $35,000 mistake”

A member of our google group asked me to review his tax returns to see if he should take section 179 vs traditional depreciation for new equipment.

It quickly became evident that in 2016, his accountant “forgot” to deduct a laser and OCT!!!  $97,000 pretax, regardless of whether you section 179 or depreciate over five years, is at least $30,000-$35,000 in tax savings.

Fortunately he is in the three year time period statute of limitations (three years begins from date of filing- from now on I’m asking for a extension and filing in October of the next year) and still has time to properly amend his return.

It was painful for the person that emailed me to go back through every 2016 receipt and redo his bookkeeping- why you should DIY and get it right the first time. Or make SURE whoever you hire does.

Moral of story:  trust and verify. Whether it’s a financial advisor, accountant (tips to follow, below), credentialing service, or billing service, know exactly where your money is going, what the consequences are if they get it wrong, and how much time it would take you to do it vs what you’re paying them (time value of money).

Even more incredibly, it quickly became evident that his second accountant knows nothing about tax planning. The exact same thing happened to Ho Sun- he fired two accountants. 

All of this started when he emailed me to ask, “should I section 179 or depreciate over 5 years my new OCT?”  This turns out to be up to a $20,000 tax savings question- making the total with the $35k above a whopping $55,000. It’s better to give $1000 to the surgical scope fund than $55,000 to the IRS!

Let me cut to the chase for those of you who get bored with my details. Here is what you should do/ ask your accountant:

1. For every large purchase, write down the cost. At the end of the year make sure nothing is missed. Ask him to go form 4562 (depreciation of equipment) with you. Look at lines 8 (section 179) and section B column C (value of equipment placed into service, five year or other depreciation). Add them. Make sure it is the same as what you paid and nothing astray. 

2. When equipment is depreciated over five years, a common mistake is to “forget” to carry over depreciation from previous years. Make your own chart and write down the amount depreciated per year as shown on right hand column below. Then for the next five years, check with your accountant to make sure they didn’t “forget” to include depreciation from equipment bought in last five years!  (Or look at form 4562, line 17):

For those of you who are wondering- whether or not on his 2016 return he elects section 179 or five year depreciation, he gets to deduct the total $97,000 for the OCT and laser. 

It’s just a matter of doing it all at once or over five years. If your tax rate is going to be a lot higher it makes sense to wait. Not always as intuitive as you’d think. More on this later.

3. Make sure your accountant knows the difference between your marginal tax rate (the value of your deductions) and your total tax rate. This person’s second accountant didn’t know the difference.

Total overall tax rate:  amount taxes paid divided by income. Mine was about 25% for 2018.

Marginal tax rate:  number of cents in tax you’d pay for next dollar you earn. The tax system is progressive, so it tends to go up as your income goes up. I was in the 35% bracket for 2018.

This guy’s accountant actually said:

‘My new accountant said that for my 2016 transactions, “There appears to be so much missing that at this point I think it would be worth it to just recreate the schedule-c for 2016 and 2017 from scratch.  It looks like your average tax rate for 2016 and 2017 is about 25% meaning that if you find a dollar of expenses not listed then equates to $0.25 in tax savings.”’

Totally wrong. The soloeyedoc was in the 33% marginal bracket for 2016. Every missing dollar is $0.33 in savings, not $0.25. Unless you found enough in savings that you dipped down into the 28% marginal rate, when every dollar would be $0.28 in savings. Which is still greater than $0.25.

How the hell can you pay someone to give you wrong information?!?! This is his FULL TIME JOB!  Get it right damnit! I practice ophthalmology full time and figure out this stuff on the side.

4. When buying stuff like a new OCT, and debating section 179 vs 5 year depreciation, ask your accountant “what marginal rate am I at now, what marginal rate do you expect me to be in the next few years, and how is this impacted by the section 199A pass through deduction and FICA taxes?”

If your accountant knowingly nods at you, smiles, and says “I’ve got it under control and could amend your return in a few years if your income is very different from my estimates”, that’s a completely different response than if they give a blank look at you like you have two heads.

99% of you can stop reading right now. For those of you who are interested, I’ll go over the nitty gritty of how the section 199A pass through deduction and FICA tax affect marginal rates.

For the person who emailed me, he is married and spouse works at practice.  Unless you’re in your first or second year of solo practice, most of us who are single or have a spouse that works will have incomes too high for the new business pass through deduction.  But if your spouse works for you, read on. (If your spouse is a doc or high earner skip six paragraphs to FICA taxes below.)

So he is eligible for the pass through deduction- although his practice income was nearly $455k, IRA deductions, half of self employment tax, and standard deduction brought down his taxable income to about $337,000 (about $320,000 if he amends his 2016 return with the $97,000 equipment placed in service)

The limit for the pass through deduction is $315k lesser of business profits “income” (after IRA, standard deduction etc).  

When you’re right under $315k for married, you’re at the 24% tax bracket; when you’re right over it, your rate jumps to 32%. 

Moreover, $315k is the cutoff for the pass through deduction. So you get a 20% discount bringing your rate down to 24

Times 0.8 or 19.2%; when you’re over $315k up to $415k you’re being phased out of the pass through deduction- so your rate can be as high as 39%!  Here’s a post with the explanation of why. Does your accountant understand this?

It makes NO sense for him to take his $90,000 OCT against 19.2%. I advised him to save it for the next five years, when he’s in the $315-415k phaseout, taxed at 31-39%. 

Think about it, a $90,000 OCT taken at 19.2% is a $17,280 tax savings. $90,000 taken against even 31% is a $27,900 tax savings. That’s $10 grand!

Finally, the tax code isn’t as progressive as you think. This particularly applies if your spouse is a doctor. Let’s say the spouse earns over $315k per year. The very first dollar you earn, you pay 32% federal marginal rate plus about 14% self employment taxes on- a total marginal rate of 46%!!!!  You may even be at the 35% federal marginal rate, with 14% self employment taxes- a 49% marginal rate. If you live in California and pay 13% state tax you’re only taking home 38 cents on the dollar. 

But paradoxically once your business profits are over $133k, your marginal rate drops. Why?  Because no more fica taxes- fica or social security taxes have a $132,900 limit per person. So your rate goes back down to about 39% (35% federal, 3.8% Medicare)

If your accountant isn’t trying to maximize deductions taken against 46 and 49% and minimize deductions taken against 32%, fire them and find a new accountant. For $100,000 of equipment that’s $17,000 extra back in your pocket…

8 thoughts on “My accountant’s $35,000 mistake

  1. Thank you for your post. If my husband and I are thinking of starting our practice together, what would be the best way to do this? is it best for this to be a dual ownership or one person be an associate? Is there a difference in terms of taxes? Thank you!

    • Unless you were married filing separately it wouldn’t affect your taxes at all. It wouldn’t affect retirement plans as both practices would be required to have same one, IRS rules controlled groups. I don’t see how it could affect your payroll tax (fica and Medicare for owners).

      Are both of you in the same specialty? Will you be in same physical office? And hate to ask but how stable is your marriage if something happened it’s easier to have two separate businesses.

      • Thank you so much for answering! I’m in plastic surgery and he is in facial plastic surgery. So complementary practices. Not sure if better to be just one entity or if we should be two separate entities but share the overhead/space? Marriage is stable and committed. So do you think if we are planning to share space and overhead, then should just open as a joint ownership practice?

        Also, do you know where we can find guidance on how to open a two-physician ownership practice and if it’s very different from the solo practice?

        Thank you!!

      • Tax considerations aside it’ll probably be simpler to do credentialing if you open up under the same business/ TIN

        We have a few people in our group in your situation that went into business with their sibling or spouse and are very happy with their decision. It’s probably pretty similar to opening a solo practice except initially it’ll take longer to build up with two docs. The good news is once you get busy you’ll have two docs to handle the volume!

  2. Thanks for sharing. Hopefully all will fall in place for you.
    Are the links in the webpage not working? It says “Here is a link on how to do your own accounting” but there is no link. Please modify the page and update. Looking forward to seeing what you have at those links that you refer to at a few places in the article…

  3. May I please ask a question: we bought 2 ADA compliant chairs this year and put them into service, my accountant said in order to get the $5000 ADA tax credit, she would not be able to ALSO depreciate the chairs. So by taking the tax credit, it reduced my amount depreciated, and reduced my overall deduction. Is she correct on this? thank you!

    • Your accountant is correct. But a credit is worth more than a deduction. Let’s suppose the item cost $10,250, and you take section 179, and are in the 40% federal and state combined tax bracket.

      Without the tax credit you get depreciation of 40% of $10,250, or a tax break of $4100.

      With the tax credit of $5000, you get to depreciate $5250, which is a tax break of $7100 ($5000 tax credit plus 40% of $5250). I’ll take $7100 over $4100 eight days a week.

      If you could double dip and get both the tax credit and tax deduction on the entire amount, then you’d get a $9100 tax break for buying something that costs $10,250. Sorry but the government isn’t that generous.

      Bottom line: take the entire picture into account, not one single tax credit or break. I’ve seen docs make this mistake over and over.

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