Tax law is complex, no matter your occupation or investments. For real estate investors, the tax landscape can be especially challenging to manage. This is why many investors recruit the help of professionals for tax advisory and tax preparation—but these two activities are not one and the same.
Though the terms are sometimes used interchangeably, tax advisory and tax preparation are two separate activities. Understanding the key differences between them can help you make informed decisions for optimizing your tax situation.
What Is Tax Advisory?
Tax advisory (also referred to as tax planning or tax strategy) is an ongoing proactive process between an investor or business owner and a tax advisor. The advisor offers advice and strategic planning, which varies based on the investor’s unique circumstances and goals. Tax advice is situational and should always be tailored specifically to each individual.
The goal of tax advisory is to minimize the amount of taxes you’ll need to pay through strategic planning. Tax advisors are familiar with the intricacies of tax law, as well as regulatory guidelines, and can present solutions that reduce your tax burden while remaining compliant with applicable laws at the federal, state, and local level.
Tax advisory services cover a broad range of offerings that can vary between providers. For example, tax advisors who specialize in real estate might offer such services as:
- Strategy meetings
- Written tax plan
- REPS/STR material participation time log reviews
- Assistance with entity structuring
- Review and analysis of your books and records
- Tax projections
- Guidance on tax implications of acquisitions and exits
Tax advisors may also offer individual clients guidance on individual tax matters, like tax planning with children; maximizing assets., like homes and vehicles; and retirement planning.
Tax advisory is an investment, with the goal of saving you more than it costs you to retain. Savings include income tax savings and also time savings. How much is your time worth, and where is your time best spent?
What Is Tax Preparation?
Unlike tax advisory, tax preparation is a once-yearly, retroactive activity. It takes place after the year ends, during tax season, which typically runs from January through mid-April; the deadline may extend to the fall if an extension is filed. It involves the gathering of all necessary documents and filing the federal, state, and local tax returns. The overarching goal of tax preparation is to file your taxes on time and in compliance with tax law.
With tax preparation, a professional tax preparer serves as a technical and analytical expert, helping complete your tax return meticulously by going through the documents and information line by line. While these individuals can offer general guidance, such as which deductions to take, their role is limited to assisting you in filing taxes for the previous year.
How Do These Services Differ?
While both tax advisory and tax preparation share a common goal of optimizing your tax situation, they bear the following noteworthy differences.
1. Regulatory Requirements
Filing your taxes is a mandatory requirement for any U.S. citizen or permanent resident who earns income. Tax preparation is therefore a legal obligation, whereas tax advisory is an optional—though valuable—investment.
2. Timeline
A tax preparer works with clients during the tax season and focuses exclusively on the previous tax year. A tax advisor, on the other hand, offers strategies throughout the year for current and future years. As a result, tax advisors can help reduce your tax liability. Because advisors maintain ongoing communication throughout the year, they have a greater ability to look at the full picture of your tax situation instead of working on a compressed timeline to file a tax return by the deadline.
3. Scope of Work
For real estate investors, a tax advisor might offer guidance before you purchase a new property to rent or renovate, or before you sell a property. They can explain the tax implications of your investment to ensure you’re pursuing the best option for your financial goals.
Tax advisors who are well-versed in real estate tax law, in particular, can guide you through investment decisions and activities regarding growing your portfolio with the eventual goal of creating tax-friendly income that can enable you to retire early and live off your passive investments.
Conversely, tax preparers look exclusively at the transactions that have already taken place and your income and expenses from the previous period to file your taxes accordingly.
4. Professional Requirements
Tax advisory calls for a great deal of expertise and understanding of tax law; professionals who take on these services typically have more experience and credentials than a preparer who focuses only on tax returns.
Furthermore, industry-specific or niche tax advisors—like real estate—offer more targeted expertise that is highly valuable to those looking to grow in that industry.
Interestingly, there are no federal or state requirements for tax preparers, which is why it’s worth seeking out a certified public accountant (CPA) or enrolled agent (EA) who pursues additional study before taking a certification exam and ethics exam. CPAs and EAs must pass rigorous exams and acquire extensive on-the-job experience under the supervision of a more senior accountant before being eligible for a license. They are also required to attend continuing professional education (CPE) sessions to maintain their certification.
An unlicensed tax preparer, on the other hand, must only have a preparer tax identification number (PTIN), which is essentially a license that grants individuals the ability to prepare tax returns for payment. Preparers are not required to hold an advanced degree, though they may seek accreditation from a professional council or organization.
It is often beneficial to work with a firm who offers both tax advisory and tax preparation services. This provides the benefit of having everything under one roof, and the advantage of having a dedicated specialist who’s familiar with your entire tax situation.
What Are the Benefits of Tax Advisory?
While tax preparation is a legal requirement for most, tax advisory isn’t required by law. However, it should be considered an essential investment or business tool because it can decrease what you owe in taxes and help you meet both your short- and long-term financial goals.
For real estate investors, working with a specialized tax advisor can also help with decoding complex tax and accounting jargon. An experienced advisor will break down tax law into understandable terms, ensuring you have a full picture of the tax implications of future investment and business decisions. These professionals help you plan proactively, not reactively, and can offer tax-savvy strategies through each step of your investment journey.
At Aiola CPA, PLLC, we specialize in both tax advisory and tax preparation for real estate investors. Our team invests in real estate, too, and our goal is to share our expertise, knowledge, and first-hand experiences with you through effective and consistent communication. Get started by contacting us for a free intro meeting today.
This content is intended for general educational purposes only and does not establish a client relationship. Specific questions and concerns should be addressed to an accountant or advisor.
