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 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 to you come tax time.
  • While standard expenses like overhead and marketing materials are found in all sorts of businesses, financial advisors can claim additional deductions that are specific to your industry.

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.

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, most or all advisors must pay for 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. (Some broker/dealers charge no fees to the advisor and simply keep a larger portion of commissions earned.)
  • 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.
  • Education and Certification Expenses
    The costs of continuing education and class work 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.

Tax Reporting

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 the 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.

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 (and then deduct the costs of tax preparation on their returns.)

Article Sources

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  1. Internal Revenue Service. "Publication 535 (2020): Business Expenses," Pages 3-6. Accessed Oct. 13, 2021.

  2. Internal Revenue Service. "Topic No. 407 Business Income." Accessed Oct. 13, 2021.

  3. Internal Revenue Service. "Instructions for Form 2106 (2020)." Accessed Oct. 13, 2021.