7 Critical Tax Planning Mistakes CPA Firms Make

Why Tax Planning Mistakes CPA Firms Make Are So Common

Tax planning mistakes CPA firms make for their own business are more widespread than most owners want to admit. At BusAcTa Advisors, we work alongside accounting practices of every size, and the pattern shows up consistently: the firm that spends 2,000 hours a year guiding clients through deductions, retirement elections, and entity choices often neglects those same moves for its own practice.

It's a real problem, not a hypothetical one. A sole-practitioner CPA generating $300,000 in net income can pay $20,000 or more in avoidable taxes each year by missing just two or three of the mistakes below. This guide covers the seven we see most often, what each one costs, and what to do about it before your next filing deadline.

This is general information, not tax advice. Consult a qualified tax professional about your firm's specific situation.

Mistake 1: Staying in the Wrong Entity Structure

The wrong entity structure costs money every single year. Many small CPA firms start as sole proprietorships or single-member LLCs. Both are taxed identically: every dollar of net profit is subject to self-employment tax at 15.3%, on top of income tax.

Once your firm's net profit consistently exceeds $60,000 to $80,000 a year, an S-corporation election typically pays for itself. The mechanics are straightforward. You pay yourself a reasonable salary, which is subject to payroll taxes. Profit above that salary passes through as a distribution, which avoids the 15.3% self-employment tax rate. On $200,000 of net profit with a $100,000 salary, that's roughly $15,300 saved annually.

What stops most CPA firm owners from making the switch? The administrative work. An S-corp requires payroll filings, a separate corporate return, and documented salary decisions. But at this income level, the tax savings almost always outweigh those costs. Our LLC and Partnership Tax page covers entity election considerations in more detail.

Mistake 2: Getting the S-Corp Salary Wrong

If you've already elected S-corp status, there's a second trap: setting the salary at the wrong number.

Setting it too low draws IRS attention. The IRS requires S-corp shareholders who perform services for the corporation to receive reasonable compensation before taking distributions. Paying yourself $40,000 while pulling $260,000 in distributions is a documented audit trigger. The IRS will reclassify those distributions as wages, add back payroll taxes, and assess interest and penalties on the difference.

Setting it too high wastes the advantage. If your salary is $200,000 on a $210,000 profit, you've given up most of the S-corp benefit and overpaid payroll taxes in the process.

The standard approach is to benchmark your compensation against what the firm would pay an external hire with equivalent skills and experience. Document that methodology, keep it in your records, and revisit it every year as revenue grows. IRS guidance on officer compensation is covered in IRS Publication 15-A.

Mistake 3: Under-Using Retirement Plan Deductions

CPA firms have access to some of the most powerful retirement deductions in the tax code. Most owners don't come close to using them fully. Here are the three main options, in order of potential deduction size.

SEP-IRA

Contributions are limited to 25% of compensation, up to $70,000 for tax year 2025. Setup is simple and you can fund it up to the extended due date of your return. It's the easiest plan to establish, but it's not always the most efficient.

Solo 401(k)

If you have no full-time employees other than a spouse, this plan lets you contribute as both employee and employer, up to $70,000 total for 2025 ($77,500 if you're 50 or older). The employee portion can be pre-tax or Roth, which gives you flexibility that a SEP-IRA doesn't.

Defined Benefit Plan

For high earners who want to shelter significantly more, a defined benefit plan can allow contributions well above $100,000 annually, depending on your age and target benefit. Actuarial fees apply, but the deduction can be substantial.

What would an extra $40,000 deduction do for your firm's tax bill this year? A firm owner generating $400,000 in net income who makes only a modest SEP-IRA contribution is leaving tens of thousands of dollars in tax-deferred savings untouched each year. The IRS updates contribution limits annually. Confirm the current figures at the IRS retirement plan contribution limits page.

Mistake 4: Missing the Section 199A Deduction

Section 199A of the tax code allows eligible pass-through business owners to deduct up to 20% of qualified business income (QBI). For a CPA firm generating $300,000 in QBI, that's a potential $60,000 deduction before income limits apply. That's not a rounding error.

Here's the complication: CPA firms are classified as specified service trades or businesses (SSTBs). That means the QBI deduction phases out above certain taxable income thresholds. For tax year 2025, the phase-out begins at $197,300 for single filers and $394,600 for married filing jointly. Above those thresholds, the deduction shrinks gradually toward zero.

How much of this deduction is your firm actually eligible to take? If your income sits inside or near the phase-out range, there's planning to do. Increasing retirement plan contributions reduces taxable income, which can preserve part of the deduction. Timing discretionary income between years may also help. Don't skip this analysis just because you've seen clients lose the deduction at higher income levels. Your numbers may tell a different story. The IRS explains the deduction on the Section 199A FAQ page.

Mistake 5: Underpaying Quarterly Estimates

You know this rule better than any of your clients. Yet CPA firm owners underestimate quarterly payments every year when a strong season runs ahead of projections.

The federal safe harbor is clear: pay at least 100% of last year's tax liability (110% if your prior-year adjusted gross income exceeded $150,000), or 90% of this year's actual liability, whichever is smaller. Miss those thresholds and you'll owe an underpayment penalty, calculated at the federal short-term interest rate plus 3 percentage points.

The problem usually starts in Q1 and Q2. If March is your best month ever, your April 15 estimated payment needs to account for it. Most owners base projections on last year's income and catch up in Q4. That late catch-up doesn't eliminate the penalty for the earlier quarters, though.

If your income is genuinely uneven, IRS Form 2210 and the annualized income installment method let you calculate each quarter's payment based on actual income earned in that period. It can reduce or eliminate penalties when the shortfall was in a slow quarter, not a profitable one. The full rules are in IRS Publication 505.

Mistake 6: Skipping Depreciation Planning

Your firm buys computers, monitors, software, furniture, and possibly a vehicle. Those are depreciable assets, and the timing of those deductions matters more than most small firm owners realize.

Section 179 lets you deduct the full cost of qualifying property in the year it's placed in service, up to the current annual limit. Bonus depreciation provides an additional first-year deduction on qualifying property. For assets placed in service in calendar year 2025, the bonus depreciation rate is 40%, down from 60% in 2024 as the post-2017 phase-down continues. Confirm current limits on the IRS Publication 946 page.

Here's what most owners miss: sometimes you don't want the entire deduction this year. If you expect a higher-income year ahead, it can be worth capitalizing an asset and spreading depreciation over its useful life, or simply waiting until January of the higher-income year to make the purchase. The reflex to expense everything immediately isn't always optimal tax planning.

Home office deduction is another one many CPA firm owners skip, often out of misplaced concern. The deduction requires exclusive and regular use of a defined space for business, and it's well-established. Calculate it correctly, document the square footage, and take it.

Mistake 7: Waiting Too Long on Exit and Succession Planning

This is the most expensive mistake per dollar left behind, and it's the hardest to fix once a sale is in motion.

When a CPA firm is sold or transitioned, the allocation of the purchase price across tangible assets, client list, and goodwill determines how much of the proceeds are taxed as ordinary income versus long-term capital gains. Personal goodwill, the value tied to you as an individual practitioner rather than the corporate entity, may be sold separately and taxed at capital gains rates if the structure supports it. That distinction alone can shift tens of thousands of dollars from a 37% ordinary rate to a 20% capital gains rate on a mid-size firm sale.

None of this planning works retroactively. If you're 45 or older and expect to sell or transition within 10 to 15 years, the tax structure of that exit should be influencing decisions you're making today: entity form, how compensation is structured, and whether you're building transferable practice goodwill or personal goodwill. A $2 million practice sale structured well versus structured poorly can differ by $200,000 in after-tax proceeds.

Our Tax Planning and Advisory page explains how we support strategic planning for accounting practices. If you'd like to talk through your firm's situation, reach out to BusAcTa Advisors and we'll start with a scoping call.

Fix One Mistake This Year

How many of the seven mistakes above apply to your firm right now? Small CPA firms can't afford to be their own worst clients. The seven mistakes above, wrong entity structure, salary miscalibration, underused retirement deductions, missed QBI analysis, underpaid estimates, skipped depreciation planning, and delayed exit planning, cost practices real money every year.

Fix one of them and you save a few thousand dollars. Fix all of them and the cumulative number gets serious. Start with whichever mistake is most obviously relevant to your firm's current income level, then work through the rest over the next 12 months.

This is general information, not tax advice for your specific firm. Consult a qualified tax professional or CPA about your practice's situation before making changes to your tax structure.