Starting a Tax Practice: Are You Ready to Hang a Shingle?

Co-Editors: Michael W. Crisler, CPA, and Steven F. Holub, CPA, MBA

Another busy season has just come to an end, and most tax practitioners will confess to putting in excruciatingly long hours at the office. Family and friends frequently reach out soon after April 15 (or April 18 this year) to make sure the CPA in their life is not a figment of their imagination. And when CPAs open their now-vacant calendar to schedule some much needed catch-up time with these important people, they may pause and think, “Wow, there must be more than this.”

The good news for tax professionals is that the opportunity does exist to make the public practice experience exactly what they desire. They should not be misled; what this column discusses requires a commitment to long hours and consistent, hard work, but the rewards can be tremendous—the opportunity to venture out and start their own tax practice.

When deciding whether this is a route worth exploring further, CPAs must consider a number of factors. This column provides two experienced CPAs’ overview of some of these key factors, as both of the authors have been down this road—a road filled with joy and some pain, but culminating in an overall sense of satisfaction and accomplishment.

Find the Motivation Factor

It is no secret that most tax practitioners suffer from exhaustion on the heels of tax season. As the adrenaline rush present in the early weeks wanes, tax practice becomes more about getting through the remaining days. The decision to start a tax practice should not be entered into lightly and not merely be a response to current working conditions.

Take a break, catch up with friends and family, and think deeply about why this might be the right career move. Is the motivation to run away from something that feels bad now, or toward something that is strongly desired for the future? If the answer is not clear, ask these questions to help gain clarity:

• Is this a reaction to current circumstances?
• What is the primary reason for wanting to move forward?
• Is this feasible, based on existing financial means?
• Is a support system in place to help with the transition?
• Are the necessary skills to run a business present?

These questions are not intended to discourage the idea, but all of these important questions have to be answered before moving forward with a plan to start a tax practice. If the answer to one or more of the questions indicates a lack of readiness, it just means those issues must be addressed in a plan. Now may not be the right time to move forward. Perhaps sometime in the future may be more favorable.

Creating a Plan

Many more questions must be addressed. How will the practice be established? How much seed capital is needed? Where will the office be located? Is an office even required? What hardware and software tools will be necessary?

Regardless of the “why” for venturing out, creating a solid plan is a must. The form and content of the plan may vary greatly—from an exhaustive formal business plan to a bulleted list of key points scribbled on a napkin. Theories abound on which approach is more successful, so start by reading up on the topic and choosing a strategy that resonates the most.

Once a method is chosen, consistent implementation of the strategy is key. However, it is also necessary to be flexible because things do not go according to plan and modifications will be needed along the way.

In developing a business plan, it is not enough to decide to provide “tax services.” Successful tax practices specifically identify their purpose and are not trying to be all things to all clients. What type of clients will be served? What kind of tax services will be provided—i.e., individual, small business, fiduciary, etc.? Is write-up work going to serve as an “annuity” line of business in the off-season? Will the practice serve specific industries and develop a niche? Are there skills that are not being used currently and need to be sharpened? Perhaps the acquisition of a specific certification or credential (such as the Chartered Global Management Accountant (CGMA) designation, or credentials including Accredited in Business Valuation (ABV), Certified Information Technology Professional (CITP), Certified in Financial Forensics (CFF), Personal Financial Specialist (PFS), etc.) will be necessary to compete in the chosen area. Speak with colleagues and mentors for help answering these questions.

Understand the Market

It is important to have a grasp of the market the practice will enter. If the practice will have a physical office, where will it be located? Are other CPAs close to the location, and will that make it more difficult to acquire new clients? What are the demographics of potential clients? If the plan is to start a tax practice with a manufacturing niche, are there enough of these businesses nearby to serve?

If the barriers to entry in the market of choice are substantial, it may be more feasible to seek alternative options. Consider that there may be practitioners already providing these services in this market who are looking to retire and/or sell their practices. These situations may present opportunities.

Joining the local chamber of commerce or other community-based organizations offers a fine opportunity to get to know the workings of the community and, in turn, learn more about its economics, market, and community leaders.

Licensing Requirements

A CPA who is considering entering a new state or jurisdiction must determine the location’s licensing and regulatory requirements. It is imperative to research these in advance and begin obtaining or transferring any licenses. Each state has specific rules on using the CPA credential, and getting a reciprocal license (if required) can take some time.

Further, consider what regulations are in effect for the jurisdiction (state or local) where the practice will be located. Perhaps a local business tax, registration, or permit requirement must be complied with to operate in a certain jurisdiction. It is not good to be on the receiving end of a notice—with a related penalty—for failure to comply at the outset.

Financial Considerations

The financial wherewithal to start a business of any kind is surely one of the most important considerations, as it affects just about everything else. A currently employed tax practitioner may receive a decent salary and be considered creditworthy by lenders; however, the minute the practitioner stops receiving that wage income, the situation changes drastically. So what alternatives are available to fund this new business endeavor?

Commercial banks and lenders are an option, but they prefer to have collateral they can put liens against to minimize their risk of nonpayment. CPA tax practitioners are service providers, and the biggest assets of the practice are the people who provide the services. Knowledge cannot be pledged in a loan.

Private lenders or venture capitalists are another possibility, but they often seek higher-than-usual returns on their investment in exchange for funding, and venture capitalists rarely fund small startups. In addition to standard interest, they often charge management fees to the company during the loan period to oversee operations and may get deeply involved in daily operations. In addition, some venture capital companies are more interested in an ownership stake than an interest payment or management fee. These investors are looking for businesses with a high potential for rapid growth with the intention of selling the business at a profit. Before considering this type of arrangement, find out the state’s specific requirements on who can legally be an owner of a CPA firm and how such a change in ownership might affect you.

The most common option is to self-finance a new tax practice. This can be done by dipping into savings, taking loans from retirement accounts, using existing lines of credit or credit cards, obtaining mortgages on a home, or seeking loans from friends and family.

Once the business is funded, the owner must consider the anticipated cash outflow. It is a dramatic change to go from receiving a paycheck every other week to calling clients and begging for a few thousand dollars to cover the rent or payroll. Consideration should be given to whether the existing lifestyle will still be reasonable and what contingencies are in place if billings and collections fall short.

Set up a business bank account and secure a business credit card for all business transactions. Once these separate accounts are established, monitor them and keep them separate from any personal activity—doing so will make reporting at tax time much easier.

Building a Team

Having the right team in place from the outset will make a significant difference. When hiring new staff or retraining existing staff, it is key to set the example, lead the way, and be specific about the desired work environment at the outset. This is important for enabling the staff to see what is expected, both in their presence and in their ultimate work product. Also consider developing an employee handbook with expectations stated so that the requirements for employment are clearly delineated from inception.

Before hiring staff, one must understand the related employment laws at the federal, state, and local levels. Employers must follow many complex rules and regulations, and it is advisable to seek guidance on what is involved with hiring a workforce. One option may be to connect with a trusted and experienced payroll company representative. National payroll firms also often offer webinars and/or in-person events on employment-related topics that would be beneficial, touching on matters such as payroll tax compliance and health care regulations. A good payroll company may offer benefits (retirement plans, health care insurance, etc.) that might not otherwise be available to a small employer. Payroll companies may also be better prepared to comply with wage and other reporting requirements.

A good team also includes many people who do not work inside the practice. These include family and friends who provide support outside work hours. It may include peers and prior associates who are willing to stay connected and “talk shop” when it gets lonely. It may also include other professionals whose services the firm’s new clients may need. It is important to start building relationships with attorneys, bankers, insurers, and others so that referrals can be made in both directions to serve clients’ needs and best interests.

Growth

In the blink of an eye, a new practice that gains traction could suddenly be booming. Before this happens, some thought should be given to the following: Will the tax practice grow through client acquisition? Will the practice be heavily promoted via social media or word of mouth?

In large part, how the practice grows will depend on the personality traits of the owner. Be honest about these traits: The owners must know their strengths and weaknesses, accept them, and work on any that need improvement. For example, many accountants acknowledge that they are not good (or, at least, natural) salespeople. If that is the case, they should not expect to grow the practice by “pounding the pavement.” It may make more sense to acquire an existing practice, “get your feet wet,” and grow the business from that base. In other words, do not go into building a business with a plan that is not consistent with the skill set of the person who must carry out that plan.

Protection

To sleep well at night, a practice owner must have insurance. Many kinds of insurance should be considered. Malpractice insurance provides protection for both the owner and the firm from certain claims made for negligence, errors, and omissions while performing tax services. General liability insurance protects from slip-and-fall complaints, whether the firm rents or owns the property where the office will be located. The contents of the space should also be insured. Other insurance coverage to consider, if applicable, will be disability, health insurance, workers’ compensation, etc. The specific insurance policies will be determined by the type of practice established and the needs of those who will be working in the practice.

Prioritize Time Management

Very often—especially during busy season—tax practitioners find themselves at the end of a day, saying, “Where did the time go?” or “There are so many tasks to get to and not enough time in the day!”Do not fall into this trap. From the beginning, develop a workable strategy that makes sense for the owners, their families, and the firm’s clients.

Numerous books are available about time management. Some basic practices to consider implementing include making a list of what needs to get done during the week and diligently sticking to it; blocking out time (e.g., three times a day) for responding to email and returning phone calls; and leaving time to tend to administrative tasks (e.g., business development, billing, etc.).

Don’t Be Shy: Ask for Help

Countless resources are available to support CPAs who decide to embark on the journey of forming their own tax practice. Reach out to the AICPA and your state CPA society, which offer various educational resources and networking opportunities. Networking groups and strategic alliances are some of the best ways to expand a knowledge base, develop new friendships, and help others in the process.

Another valuable resource is the U.S. Small Business Administration (SBA). Its website (sba.gov) provides numerous tools and tips. The SBA also provides guidance on navigating federal, state, and local matters.

Anyone planning to open a new practice should also visit the AICPA website to download the recent ­”Starting Your CPA Practice Planning Checklist” (available at www.aicpa.org), which can serve as a ­practical road map for the journey.