Tax Tips for Financial Advisors

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

This article examines the major avenues available for financial advisors to lower their annual tax bills. The following are three tips that can help financial advisors lower the adjusted gross income that they must report to the IRS.

Key Takeaways

  • If you're a financial advisor you need to treat your practice like any other small business.
  • This means understanding the tax breaks and deductions that are available at tax time.
  • While standard expenses like overhead and marketing materials are found in all sorts of businesses, financial advisors can also deduct the certification and licensing costs specific to their industry.
  • Financial advisors are also responsible for brokerage fees, software, and professional investment analyses that may be considered a business expense.
  • Many financial advisors are also certified as tax preparers, but those who are not should consider hiring a tax specialist.

1. Separate the Business Entity

Many financial advisors follow the same strategy as other small business owners by spinning their practices off into separate business entities, such as a subchapter S corporation, C corporation, partnership, or LLC. They then pay themselves salaries out of their businesses, thus leaving the remaining income from the practice taxable to the business itself.

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

2. Deduct Standard Business Expenses

There are a large number of business expenses that advisors can deduct in the same manner as any other small business. These include:

  • Marketing and advertising
  • Business and cell phones
  • Rent, utilities
  • Employee salaries
  • 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 business income, receivables, and expenditures
  • Traditional retirement plan contributions (those that are deductible now with distributions that are taxable at retirement)

However, financial planners also have a set of expenses that are unique to their profession. Depending upon their business model, advisors may be able to deduct some or all of the following:

Broker/Dealer costs

Most broker-dealers charge their advisor employees annual fees of various types, such as maintenance and administrative fees. They also typically keep a portion of the gross commissions earned by their brokers and advisors.

Trading Platforms

Many advisors bypass broker-dealers in order to get their clients the best possible market prices when placing securities orders for their customers. Trading platforms plug the advisor directly into the markets and bypass the market makers used by broker-dealers to trade for them. Most trading platforms charge a monthly fee for this service which can vary depending upon the services that are needed by the advisor.

Financial Planning Software

Most advisors today use sophisticated computer programs to analyze securities and portfolios. There are also many comprehensive financial planning programs that allow advisors to enter every aspect of a client's financial situation and then produce detailed reports showing what might happen in various hypothetical scenarios that the client may choose to follow.

Many of these programs cost thousands of dollars to buy and hundreds more to maintain each year.

Following the passage of the 2017 Tax Cuts and Jobs Act, businesses can no longer deduct the cost of tax preparation fees.

Education and Certification Expenses

The costs of continuing education and classwork for professional certifications such as the CFP, CLU, or ChFC can be significant and are deductible for advisors. The costs of licensure to sell securities or insurance may or may not be deductible, depending upon the circumstances of the advisor.

A new advisor who has just come 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 advisors who are already practicing in some capacity may be able to write this off if the IRS considers them to be working in the same field.

3. Report Income and Expenses

Financial advisors must report their business and personal incomes on the same tax forms as all other small business owners. Those who function as sole proprietors must report all business income and expenses on Schedule C, while others must file partnership or corporate tax returns.

Financial advisors who work as employees must report all unreimbursed job-related expenses on Form 2106 and carry them to Schedule A (those who are not able to itemize deductions cannot do this). Major expenditures such as new furniture may be deducted in the year purchased under Section 179 of the Internal Revenue Code on the appropriate type of tax return.

Advisors should also take care to break down their business expenses on a per-client basis for recordkeeping purposes, as the IRS may require this in the event of an audit. This also gives advisors an idea of how much they are spending on each of their clients. Most advisors can easily fulfill these obligations with a standard business accounting program.

Can I Deduct Financial Advisor Fees?

Prior to 2018, financial advisory fees could be itemized as a deduction if these expenses exceeded 2% of a taxpayer's adjusted gross income. This deduction was eliminated by the Tax Cuts and Jobs Act of 2017, for the period from 2018 to 2025.

How Do You Choose a Tax Specialist?

The Internal Revenue Service has a list of tips for finding a reputable and qualified tax preparer. The first question to ask a tax specialist is their fees and qualifications–the IRS maintains a directory of tax return preparers, so it is fairly straightforward to check their disciplinary history and license status. Finally, it is important to always review a tax return, including bank information, before signing a return. Abusive tax preparers should be reported to the IRS.

How Much Do Financial Advisors Make?

The average financial advisor makes about $70,000 per year, according to data from ZipRecruiter. Like other professions, salary distribution depends heavily on geography and experience, with the top earners bringing in over $100,000 per year.

The Bottom Line

Although many of the tax-saving strategies presented here are applicable to most small business owners, there are several types of expenses that are only borne by financial professionals. Some advisors are also able to prepare and file their own returns, but those who are not trained tax preparers may be wise to delegate this task to another.

Article Sources
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  1. Internal Revenue Service. "Publication 535 (2021): Business Expenses," Pages 3-6.

  2. Internal Revenue Service. "Topic No. 407 Business Income."

  3. Internal Revenue Service. "Instructions for Form 2106 (2021)."

  4. US News & World Report. "Tax Deductions for Financial Advisor Fees."

  5. Internal Revenue Service. "Tips to Help People Choose a Reputable Tax Preparer."

  6. ZipRecruiter. "How Much Does a Financial Advisor Make?"

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