Most agency leaders are obsessed with increasing gross billings, but that metric is irrelevant if you can’t use the money to benefit your team. The reality is that many agencies are paying more than they should when tax season rolls around. This could be due to ignorance, substandard systems and processes, bad advice from certified public accountants or tax preparers — or a combination of all three.
For this reason, I highly recommend every agency work with a tax strategist before filing. Tax preparers fill in the right boxes on tax forms in March or April after your money is spent; tax strategists assess your finances on an ongoing basis. They can help you improve business operations so that you keep more money (without breaking the law). These professionals evaluate the relationship between your income, expenses, and performance relative to the industry at large.
This year, working with a tax strategist is more important than ever. Why? Laws have changed a lot since the Tax Cuts and Jobs Act in 2018, and finances might still be tight in the wake of the COVID-19 pandemic. With that in mind, here are a few best practices you can implement to help your tax strategist maximize your money come tax season.
Keep your books up to date
As a rule of thumb, you should update your books every month. If you don’t, you have no idea how you’re performing from a financial perspective. Many agencies wait 60 to 90 days before they close their books for a given month. Regardless of the size of your company, this isn’t a good practice. If you find yourself in a similar situation, it’s time to reassess your accounting personnel and the tools they’re using.
Continually monitor your expenses
Most firms rely on billing systems to manage payments to contractors and vendors, and agency leaders will typically designate an internal employee or team to handle the payment approval process. Unfortunately, that’s a recipe for disaster. Unless you’re personally reviewing and approving payments, you’re exposing yourself to internal fraud.
Of course, you should be able to trust the people you hire. But you also need guide rails in place to ensure they’re doing things the right way. Most agency leaders are constantly slammed with work, but tools like Bill.com make it easy for you to review and approve outgoing payments with the click of the button. If that’s not feasible, hire an independent third party to audit your financials.
Ensure employee salaries align with your adjusted gross income
In the agency world, adjusted gross income is the metric you use to figure out what you have to spend. Generally, salaries should be 55% of your AGI, overhead costs should be 25%, and the last 20% should be profit. Right now, most agencies are overpaying employees: Salaries might account for roughly 65% of your AGI. If that’s the case, adjust your overhead expenses to avoid eating into your profits.
Understand how deductions work
One new rule that could be particularly helpful to agency owners is what experts are calling the Augusta Rule. Essentially, it allows you to rent out your home to your business for up to 14 days each year for tax-free income. You can take advantage of this rule to shift money from your business to your pocket by holding monthly meetings or other business-related gatherings in your home.
The amount you earn should be roughly equal to the fair market value of lodging in your area multiplied by the number of people attending each day. On the other hand, some deductions, like entertainment for clients, are no longer applicable under the new code. Your tax strategist can help you understand how to make the most of the updated rules.
Remember: It doesn’t cost you anything to explore your options when it comes to professional advice. And being proactive is always better than being reactive. You might look at a tax strategist as another expense you’d rather not pay, but having an experienced expert in your corner to save you money (not to mention protect you from fraud) will quickly change your perspective.