Practice Management Thoughts

Part One: Starting a Tax Practice

James Southward, EA and Elizabeth Huff, EA

Deciding to start your own tax practice takes some soul-searching. Do you have the entrepreneurial spirit? Can you put in the time?  Can you sustain yourself if you don’t turn a profit for a few years?  Running your own business, while it sounds great in the abstract, can be a real test of your professional strength.

When I started my practice, a friend told me that I would really enjoy being self-employed. I could work half days whenever I wanted – the trick would be choosing which twelve hours I would work each day! I laughed at her joke but later realized that there was more than a little truth to what she had said. After a long day of doing the actual tax work, I still had to manage the practice, with all the tasks that that entailed. If you haven’t been deterred by the thought of the time you’ll need to commit to your new tax practice, read on.

You may choose to start your own practice or you may wish to purchase a practice. Let’s look first at starting a practice from scratch. It might make sense to begin at home, creating an office out of your existing space.  If you choose this route, don’t neglect to factor in the cost of rent in your overall budget. Presumably you will outgrow your home office eventually, so you should incorporate those costs now, and set your fees accordingly. Otherwise you’ll need to increase your fees later and you will have lost revenue in the meantime. This may cause you to lose the goodwill of your clients and possibly even some clients themselves. Set a reasonable expectation right from the start so there are no unpleasant surprises for your clients later on.

By my third year in business I was able to cover all my business and living expenses. I didn’t think it would take that long, but now I know I should have anticipated a few more seasons to really get going. When I first started out, my new business was not robust enough to sustain us, so I worked for other firms to supplement our income. That made for some very long days and nights in those early days.

Another issue sole proprietors face is setting their fee structure. Here are some quick steps to follow as you begin to consider your budget. First, calculate your fixed costs. Divide your fixed costs by the number of clients you anticipate. Calculate your variable costs. Add these to your fixed cost per client. The result is your bare-bones cost. Now add your living expenses, a reasonable profit and a cushion to cover those things you didn’t think about. Use the unspent cushion to build an emergency fund of one year personal and business expenses. Hang out your shingle and hope for the best.

There is an advantage to purchasing a tax business over starting from scratch. You have the tax shelter of depreciating or amortizing the cost of the business. Furthermore, you already have an idea of the profit in an acquired tax business. In either case there is no timing risk in the tax profession, therefore there is no good or bad time to buy or start (although I don’t recommend taking over a tax practice in March, but that’s just me). Do look closely at the purported profit to make sure there are no surprises when you take over. The previous owner may have kept the books in such a way that there appears to be more income than you’ll realize once you take it on.

If you decide to buy an existing practice, be aware that not all the clients will transition over to you.  There will also be some further decline in the number of clients from that practice over the next few years. Be aware of this possibility – it will be on you to find new clients while you work with the ones you have acquired. Keep in mind that you and your new clientele may not be compatible, and be prepared to make some adjustments to accommodate them.  Or not. In my case, I chose the latter.

Early in my career I had two appointments in one day. The first potential client showed up with no documents. As we talked, he gave me all the information about his business income and expenses from memory. I told him I couldn’t work that way. If he would bring me all the data he had, I would write it up in an organized format. He refused. He said that all his past preparers had done it his way. Upon hearing that, I ended the appointment.

The second potential client I met with that day was a self-employed woman who was very well organized. She happily supplied the documentation I required, and was delightful to work with.  She became a long-time client who referred many clients to my firm whom I happily accepted.

I didn’t regret losing that first client. I knew I didn’t want to work with him, nor would I welcome the clients he would no doubt send me, all expecting me to cut corners for them. “You did it for Mr. X – why won’t you do it for me?” I could already hear them in my mind.  With two appointments, I had set the future of my practice. Keep this in mind as you plan the kind of practice you want to run.

In any case, now that you’ve made the decision to go forward, it’s time to get organized. Here are some tasks you’ll want to address:

  • Office set-up – create your client file system, define your office practices and procedures. How will you manage and monitor your time?
  • Billing – set fees as discussed above, design your invoices, set your terms. Will clients need to pay before the work is delivered? Make sure your expectations are clearly stated in advance.
  • Create your marketing and advertising program. Perhaps you’ll have brochures and business cards. Will you have a logo to personalize your business and make it memorable?
  • Design – format for cover letters, engagement letters, email correspondence and the like. What will these items say about you and your business?
  • Procure your research sources. Procure Errors and Omissions insurance. Procure your tax software. Think carefully about this, and make sure the program can grow to fit your future needs. It is time consuming to make the switch to a new program, so select carefully now.

One thing I find absolutely crucial is membership in your local, state and national Enrolled Agent societies. These organizations provide a wealth of assistance, information and guidance. They are your only representative before all tax lawmaking agencies. They are also a great source of networking opportunities.  There are many times I will talk over a tax situation with a fellow EA, and end up getting a referral. In turn, I have referred clients to my fellow EAs when I felt that there wasn’t a good fit with my own skill set.  I’ve found that networking with my fellow Enrolled Agents teaches me something new at every meeting. In return, I give back my time, talent, and knowledge to my colleagues. We network and help each other to be the best tax experts.

Proudly feature your Enrolled Agent status in all your promotions, advertisements, business cards and letterheads. We want the Enrolled Agent designation be well known and esteemed. We want all EAs to bring quality and honor to our profession. I wish you the very best as you begin your new venture as an Enrolled Agent.

James Southward, EA has over 37 years of tax experience and is the owner of Southward and Associates in San Carlos, CA.  He is a Past President of the California Society of Enrolled Agents and is currently serving on the CSEA Board of Directors from the Golden Gate Society of Enrolled Agents.  

Elizabeth Huff, EA has over 12 years of tax experience and holds the position of Senior Tax at Norman M. Golden, EA in San Mateo, CA.  She is currently serving on the Golden Gate Society of Enrolled Agents Board of Directors.