Tax strategy belongs in the room: Why RIAs should treat tax as a firm-level growth issue

Tax planning is getting a lot of attention in the RIA industry, but most of the conversation focuses on how advisors can deliver more tax value to clients.

The irony is that RIAs rarely apply that same thinking to their own firms. They encourage clients to plan before major decisions are made yet often wait until tax time to address the consequences of their own. By then, the CPA can only report what happened. The opportunity to shape the outcome may already be gone.

Ongoing tax advisory generally costs more than engaging a CPA solely to prepare returns. But to compare the two misses the point. A tax return is a required deliverable. Tax strategy enables firm leadership to understand the tax impact of a decision before they commit to it.

Compensation changes can have unintended consequences

Compensation is a good example of this.

An RIA taxed as an S corporation may decide to lower an owner’s salary and take more income through distributions. While that may look like a straightforward way to reduce payroll taxes, the IRS requires shareholder-employees to receive reasonable compensation for the work they perform. Push the salary too low, and some distributions could be reclassified as wages—bringing additional payroll taxes, interest, and penalties.

But compliance is only part of the equation. W-2 compensation also affects how much an owner can contribute to the firm’s retirement plan. Lowering salary may reduce the 401(k) and profit-sharing capacity of owners who are trying to save aggressively.

Investment advisory is also considered a specified service trade or business for purposes of the qualified business income deduction, which phases out as an owner’s taxable income rises above the applicable thresholds. Salary, retirement contributions, taxable income, and the QBI deduction are all connected. Change one, and the others may move with it.

Despite all this, the strategy may still make sense. It simply needs to be modeled before the change takes effect—not discovered after payroll has been running that way for most of the year. Seeing the full impact in advance is the difference between a strategy and a surprise.

Making someone a partner is a tax event

Promotions can create another common issue. When an employee becomes a partner in an LLC taxed as a partnership, that person generally should no longer be treated as a W-2 employee. Sounds simple, right? In fact, the shift is more disruptive than it sounds: payroll withholding stops, self-employment tax may apply to the partner’s share of income, quarterly estimated payments become the partner’s responsibility, and health insurance is handled differently on the individual return. Guaranteed payments and tax distributions may also need to be designed from scratch.

Without planning, the firm may be left correcting payroll midyear while the new partner faces a tax bill no one anticipated.

The firm’s entity structure can narrow its options as well. Many RIAs are still operating under structures chosen when the business was a fraction of its current size. An S corporation, for example, cannot issue the profits interests partnerships commonly use to bring in next-generation owners, and its single-class-of-stock requirement limits how flexibly the firm can divide economic rights. A structure that worked years ago may now restrict the firm’s ownership strategy. This is something best discovered before a partnership offer is extended, not after.

Tax needs a seat at the acquisition table

Tax considerations are often brought into an acquisition too late.

Firm leadership naturally starts with valuation, financing, client retention, and deal terms. Tax structure can feel like something to address after a letter of intent is signed. But by then, some of the most valuable tax options may have narrowed or be off the table altogether.

For example, in an asset acquisition, part of the purchase price may be allocated to acquired client relationships, customer-based intangibles, and goodwill. These qualifying intangible assets are usually amortized over 15 years.

Assume an RIA acquires another practice for $6 million with $4.5 million of the purchase price allocated to qualifying intangible assets. That allocation could create approximately $300,000 in annual federal tax deductions over 15 years. And while that $300k isn't an annual tax savings (and the actual benefit depends on the buyer's tax position and transaction structure), it's still a big enough deal to include in the deal model before agreeing on a price.

Purchase-price allocation also matters because buyers and sellers often want different outcomes. Payment timing, earnout provisions and how the price is allocated can affect both when the seller recognizes income and whether it’s taxed as ordinary income or capital gain.

And here’s the part worth remembering: Even if you never plan to buy a practice, most RIA owners eventually become sellers. The structure a buyer pushes for today is the same one you’ll fight against as a seller tomorrow, so understanding both sides before signing a letter of intent creates leverage—whichever side of the table you are on.

By no means should a tax strategist drive the acquisition. But your CPA should be in the room early enough to show leadership what each structure means after taxes—not just at closing, but in the years that follow.

The election that expires before tax season starts

Pass-through entity tax elections may be the clearest example of why timing matters. More than 30 states now allow partnerships and S corporations to pay state income tax at the entity level, turning what might otherwise be a limited personal deduction into a deductible business expense.

For RIA owners, the benefit can be more significant than it first appears. The expanded $40,000 SALT deduction cap phases down quickly once income exceeds $500,000, meaning owners of successful firms may still end up close to the old $10,000 limit.

Here is the catch: in many states, the election must be made (and sometimes the tax paid) during the year, often before anyone begins preparing the return. If the CPA first reviews the year in February is not simply ‘late’ to the planning conversation. In fact, there was no conversation. The benefit expired before anyone stopped to evaluate it.

Tax strategy should inform the decision

To be clear, I'm not advocating taxes should dictate every move an RIA makes. A decision can be tax-efficient and still be wrong for the business. But tax strategy does belong in the room because it can inform the decision while there's still one to make.

Before changing compensation, the firm should understand the effects on payroll taxes, retirement contributions, the QBI deduction, and owner cash flow.

Before admitting a partner, it should plan the employee's transition to owner—and confirm the entity structure can support the offer.

Before signing an acquisition agreement, it should model the structure and allocation from both sides of the table.

Before year-end, it should know which elections expire with the calendar.

Before distributing excess cash, it should confirm what the firm and its owners will owe.

These kinds of business events don't require a tax meeting every week. But they do require an ongoing relationship in which the CPA understands the firm's direction and leadership knows when to bring the advisor into a conversation. With that relationship in place, year-end planning becomes a chance to make final adjustments—not the first time anyone looks ahead.

RIAs build their practices on the promise that planning beats reacting. The firms best at delivering tax value to clients shouldn't be the ones leaving it on the table for themselves.

Mohsena Wahed is Tax Partner at PriceKubecka, a Texas-based CPA firm with 30 years of experience providing tax, accounting, auditing, and advisory services to RIAs and wealth management firms.