Discussion:Starting from scratch

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CTP (talk|edits) said:

11 September 2013
Hi Everyone,

I'm thinking about quitting my day job in January of 2015 and starting a tax business. I'm 30, married with two young kids. I have 8 years of tax experience in various tax related positions. I'm a CPA and EA.

I prepared taxes in 2008 & 2009 under my own name but went to work for my state's revenue department so I had to give up those clients (because of the conflict of interest). My day job now is an internal auditor for my state. Since I no longer work for the revenue department, I was able to start preparing taxes again this year. This year I prepared 30 returns for 25 clients.

How long does it typically take to build a viable practice? I plan to pursue both individual and business clients. I currently make $48k and would consider $60k of income before taxes to be a viable tax practice for me. I'm estimating I would need 350 to 400 clients to make that. I live in a large mid-western city (state capital) that is doing well economically.

Would having an office attract more clients? I've always done taxes out of my home and I've wondered how much of a difference having an office would make. Does it matter if I have a one room office suite versus a ground level store front with parking?

How many returns can a preparer do in a year/season? I'm assuming I would do fairly simple returns starting off, like mostly 1040's and some small businesses.

Thank you!

OzarkCPA (talk|edits) said:

11 September 2013
I'll try to address all your points as best I can. Why the date of January, 2015? Is that the amount of time you're estimating to get to a full-time client base?

I think you can build a practice in the next 2 years, 3 months, but it will depend on your ability to market yourself. What makes your tax prep service any different from the guy down the street? "We do taxes, too" is not a very good differentiator and will usually lead to a race to the bottom in pricing. After all, if you prepare taxes the same exact way as Joe down the street, and neither of you have something unique to offer the client, why on earth would they not choose the tax preparer based on price? Wal-Mart has been winning because they are the cheapest. It is hard to be the Wal-Mart in this industry and make good margins.

Let me give a quick example: Now instead of your sales pitch being "I do taxes, too" what if you now did taxes and specialized in serving school teachers? Or what if you focused on chiropractors who owned their own practice? I'm not saying you just make up a specialty out of thin air, you might actually have to put some serious thought and effort into who you would like to serve and "why" you'd like to serve them. After deciding who you'd like to serve, figure out what is unique about that profession.

Going along with my teacher example, imagine the following. You're a teacher in the school system and are new to the area. You've just graduated from the state university and are embarking on a new career. You don't want to hassle with Tax Act and have decided to hire a professional tax advisor. Which would you choose? "CTP - Specializing in serving the tax and financial needs of teachers" or "Joe - I do taxes, too?"

Also, I would reconsider the $60K a year of gross income. I think that is low if you are wanting to replace $48K of actual salary plus benefits. And at the low end (350 clients), that is only an average fee of $171 per return. That is too low to make a good margin on in my opinion. For those same types of returns, HRB and Hewitt are probably at least $100 more per return.

I think a better goal to shoot for would be $250 average per return and 400 returns a season assuming mostly 1040 w/o a lot of complicated tax situations. Not sure where you are in the midwest, but those fees are low for my area and it isn't a "large mid-western city doing well economically."

I'm not sure on the office part. Many on here think it is necessary, but I personally don't. I think it would be much more worthwhile to invest in a professional image online. Even if you do decide to work out of your house, it would be nice to have a place to meet with clients. Some sort of office sharing arrangement...

There is a lady on here who does around 800 1040 returns per season. If the returns have any complexity, I think 400-500 for 1040s would be my limit. I personally would rather work with the fewest amount of clients possible, but that will just depend on your goals and business model.

Kevinh5 (talk|edits) said:

11 September 2013
Good advice from OzarkCPA.

Also consider your need to replace your benefits: health insurance, life insurance, disability insurance, retirement savings program.

You really need to make a lot more than $60K to replace a $48K + benefits position.

And if it takes you 3 or 4 years to reach that goal, how will you pay your living expenses in the mean-time? Depending on the age of your children, maybe your wife will need to work a 2nd job? Or maybe during non-tax season you will need to work a 2nd job? Or maybe you have $200,000 in retirement savings to live off of until your practice can pay you a salary? Or maybe you can sell your home and live in a one bedroom apartment and cut your expenses to live only on what your wife makes for the first four years?

Gazoo (talk|edits) said:

11 September 2013
$48K + benefits position.

Excellent point. You need to add on 1/3 of 48k at least to cover what you were making, and that needs to be your net. (It will actually be more than 1/3 because you will not have the bargaining power of your former company...probably).

Now, you are not going to do that anytime soon, so don't get too uptight and have a heart attack. There is no use even thinking that you will do that soon.

So, hopefully your spouse has a job with benefits (they're seems to be fewer benefits every day) and she can put all of you on her medical insurance at least.

Otherwise, you will have to go bare...and read a lot of books on homeopathy. The main thing is prevention. DO NOT walk around town with your ear plugs connected to your handheld device, and don't let your family do it either. You would not believe the number of expensive ER visits and deaths that come from this act alone. Do not plug your ears and listen to Vivaldi even if you are jogging in the park...there could be a maintenance man hit you with a golf cart.

Finally, you need to start marketing now if you hope to have any chance your first season. Get some cards printed up and hand them out, especially to affinity groups like clubs or soccer or whatever else your family may be involved with. Business cards are enough for right now, don't blow your wad on any fancy marketing.

(People don't know how to market in their first year, so this is the reason not to blow your wad on it. Don't do any expensive marketing. You'll learn how to do it correctly later on. Handing out a lot of business cards will have to do right now.)

No, you cannot have an office starting out UNLESS you can get one next to a Salvation Army thrift store OR find an office that rents billboard space directly above it, and you put your marketing on that billboard. The latter would be ideal. When I say billboard, I mean billboard.

If you are lucky enough to find an office next to a Salvation Army thrift store, then you need to offer free coffee on the sidewalk and hand out your cards to people who have just donated their clothes (which are required to be in good shape). If you are next to the Salvation Army, there might be a slight smell of moth balls in your office. This is actually good because there are several Japanese studies that show this prevents the common cold.

P.S. DO NOT spend a lot on research materials when you are staring out. Buy something like The TaxBook(TM) and memorize it. Yes, I said memorize it. I never did and since my eyes are not good I had to have clients look up things for me while they were in my office. The client's didn't mind, but it make the appointments last forever. Memorize the book. E v e r y W o r d and number. There are books that teach you how to memorize.

H.D. Freifunk (talk|edits) said:

11 September 2013
and memorize it

Ja. Ja. I concur. Studies show that CPA and EA forget a whoppering 60% of what they knew the day after they pass their tests. (This has to do with the brain letting off der steam). So you will need to memorize Quickfinder or Tax Book or someding.

Der lawyers only lose 10% of what they knew after passing the bar, which sounds real good until you realize they never knew that much to begin witz

BottomLine (talk|edits) said:

12 September 2013
I'm going to be a little different from the others regarding the office/home question. I recommend an office. An executive suite is fine and should be available on a by-the-month basis at not a horrible amount. I would not be comfortable having strangers come to my home and my neighbors wouldn't like the additional traffic (also remember zoning and homeowners associations). Do you want to convert your living room to an office or take a member of the opposite sex down the hall to a bedroom/office? From the other side, would your new customers be comfortable going to the house of someone they've never met?

CTP (talk|edits) said:

12 September 2013
Thanks for the advice everyone! I know my original post was quite lengthy so thanks for taking the time.

I'm looking at January 2015 for a couple reasons. I'm hoping to build up somewhat of a client base by then to help make the transition from my day job to self employment a little more possible and bearable. I've done 30 returns thus far this year. My goal is 100 returns in 2014. Secondly, as I said before, I have two young kids. In 1.5 years one will be in preschool and the other will be nearly in preschool which means... my personal expenses will be less (daycare is currently $20k per year for two (we're in the wrong business!)).

OzarkCPA, thanks for the advice on branding and finding a niche. I've heard this before and I agree with the concept. My question though, by defining niches are we forgoing potential clients that don't fit the mold? For example I might say, "I specialize in serving clients who are teachers, widget makers, shoe repairers, and underwater Aztec basket weavers!" And a potential client could say, "I am none of those. Let me find someone else." Is that an issue? To mitigate that, would you also say you are a "good generalist?"

Having said that, a large percentage of my clients this year had rental properties. I was thinking of defining that as my first niche.

As far as the $60k viability thing, I think I said that wrong. $60k before tax would be a minimum for me, meaning I couldn't survive on any less than that (aforementioned kids). If I were making $60k before tax year after year in this business, I would probably get out. But in the start up years I could deal with it. I figure in the off season of 2015 I would have to get another j-o-b.

And I need to raise my rates. My average this year was $125 per return. I was thinking of upping them anyway and I thought $150 to $175 would be good for the start up years. It sounds like you guys would recommend higher. Do you guys thinks it would be wise to keep rates low to build a client base and then up the rates? Or would you say start off with aiming for $175 - $200 average per return?

BottomLine: Yeah, I'm leaning toward the office for the reasons you mentioned. In my area, a one room office, not on the ground floor, is around $150 to $300 per month. I think that's manageable.

Sorry, another long one.

Fr. Mackelhenry (talk|edits) said:

12 September 2013
I think Gazoo's point (and remember, he is certified crazy) is that if you can use your office TO market, then that would be ideal.

You get an office in an executive suite by the hour or in a building, you are just a number on a door. Which is fine if you are established, but some do agree that there is value in a "big sign" on the road, even in 2013. Or a convenient location, like next to a charitable thrift store. Rich people donate their stuff (usually it is embarassingly nasty and shows signs of sexual license and gluttony beyond the imagining of the normal mind). It reminds one of the drunken parties back in the old Roman days the way they treat their clothes. (No, they do not wash their clothes before donating them. It would be beneath them to do so. Let the poor be satisfied with what they get and learn to like it.)

If you want to have the really rich clients, you need the hook-up with the charitable thrift stores.

I would be remiss not to mention that Crow has run a marketing series on the public weinie roast and he claims to have received a lot of postive feedback from people who have tried it. See the yellow box. (The problem is that even the expired hot dogs cost a pretty penny now.)

OzarkCPA (talk|edits) said:

12 September 2013

To answer your questions:

1. No, I do not personally believe you are forgoing potential clients by selecting a niche to specialize in. Here's why: Even though your potential pool of clients decreases (not everyone is a rental property owner), your chance of converting rental property owners dramatically increases. A 10% response rate to 10,000 members of your niche is more clients than .5% response rate to 100,000 potential clients. I know it is counter intuitive, but in today's world I think you need some sort of differentiator to stand out from the competition. Plus your marketing efforts can be more focused and less expensive b/c you know who you are trying to serve.

I do understand what you're saying about building a client base at the beginning, though. Regardless of if they are in your long term plan, you will probably want every potential client. To combat that, I would just craft your unique selling prop in two ways: 1.) If you are just dealing with rental property owners, obviously sell the idea that you specialize in serving their needs. 2.) If you are in a setting with those outside your niche, just say something like: "I specialize in serving the needs of rental property owners and other individuals with complex tax situations." Everyone who hires a tax preparer thinks they have a complicated tax situation, so you're being inclusive while still letting them know that rental property owners are your ideal clients.

2. I agree you need to raise your rates. If quite a few of your 30 clients are rental property owners and you are only averaging $125 per return, you are way undercharging. Most professionals wouldn't touch a 1040EZ return for that price. You have a CPA and EA and have experience in your field. Don't be afraid to charge a price that allows you to make a nice profit. After all, that is why you want to go into business, correct?

I'm of the opinion that it is hard to sell based on price in the beginning and then try to raise rates gradually. You should start out with a price that allows you to make a good living while still providing value to the client in return for fees paid. No one can tell you for sure what that price is, but I can guarantee you are charging about 1/3 of what the tax prep chains charge. Most of their preparers do not have anywhere near the education and experience that you have.

3. I also agree that a small office for a few hundred bucks a month would be a good idea. I was thinking it would be way more expensive than that based on my experiences...

Gazoo (talk|edits) said:

12 September 2013
Having said that, a large percentage of my clients this year had rental properties. I was thinking of defining that as my first niche.

I didn't see this. Heavens, heavens, heavens NO! People will flee from these rental homes when they can get a huge room with high ceilings at a former Barnes & Nobel or Best Buy or even a view from a Mall.

When the collapse of retail real estate comes, people will be able to buy for pennies on the foot.

Yes, the contractors will have to cut windows into the boxes, but this is trivial in commerical construction.

I cannot think of a worse market for the future than real estate. Now, things could change if we changed our immigration policy, but as it stands now, and unless "reglar" people start having more babies, avoid real estate.

I do agree with one thing though, do not be too generous on your pricing because if you do, you will get the worst headaches for clients you can imagine. Or you'll get at least three terrible, terrible headaches, and that is more than enough.

Kevinh5 (talk|edits) said:

12 September 2013
You're an EA and CPA and only charge $125 for a return with rental properties? WOW. You are giving away the store.

Call H&R Block, tell them you have a 1040, Sch A, Sch E with 2 rental properties, depreciation on two properties, passive activity losses, and a state return.

See what they charge. Guaranteed it will be over $400.

Are they really 320% BETTER than you?

Gazoo (talk|edits) said:

12 September 2013
If I was CTP, not only would I ask for $425.00, but I would also turn the tables on the landlord by demanding a security deposit (of $850.00) just to handle their return. The security deposit is refundable at the end of the relationship, as long as the client always cooperates. (The idea here is that you can always find a reason they did not cooperate, and keep the deposit.)

CTP (talk|edits) said:

12 September 2013
Gazoo - LOVE that security deposit idea! Consider it done.

Fr. Mackelhenry - Can you tell me more about Crow and the marketing series with the wienie roast? Where can I find that, is he a user on TaxAlmanac?

OzarkCPA - I agree. If I want to go from an average of $125 per return to $250, that's a large price increase. Clients wouldn't like that and it would take several years to do a gradual increase. I think I need to at least get up to the low end of the going rate.

Also, last year I posted my prices on my website. I know not many tax pros do that. Do you think posting my prices is a bad idea? I'm starting to realize that my prices are too low. As in, when people see that, they might be suspicious and think something is wrong. For example, if you need a new roof on your house and you get a quote from a guy for $1,500 in total, you would think, "this guy doesn't know what he's doing."

Thanks for all the replies everyone!

H.D. Freifunk (talk|edits) said:

12 September 2013
It was a wild scheme of Crow's to buy expired hot dogs in an under the table deal with a grocery store manager and have a big public "Picnic" in the parking lot of the tax business. I realize that not all businesses have their own parking lot. Crow suggested putting up streamers and the whole 9 yards, with a sign on the street you can rent with a strobe light.

There was some talk of (I won't say bribing) rewarding the local health authorities with a plate of dogs in case they came by to inspect the operation.

I'm serious, this was the scheme. He said that fragrant smoke would bring the customers in from miles around.

But as mentioned above, there has been considerable "dog" inflation over the past 5 years, and even the expired ones will set you back now. It's a low market idea, but keep in mind, no one is cheaper than old money (they prefer to call it frugality). You find me old money, and I'll find you frugality like you haven't seen the likes of before. So you could have an old money billionaire drop by for a free dog.

.*Crow also pointed out, I think, that the ancient Greeks and Jews would also make a fragrant burnt offering to the Lord or God(s) to draw their attention and please them with the fragrant smoke. The Greeks would sprinkle the meat with barley meal, and roast it up for the Gods, and then pour the first glass of wine on the ground as an offering to their Gods. The Gods enjoy a BBQ as much as we do.

As a Catholic, I'm sure Mackelhenry smokes up his own church pretty good from time to time...but it's not done with meat any more to save on costs.

CrowJD (talk|edits) said:

12 September 2013
For the record, I deny ever buying any expired dogs to give away to potential customers. I used the best buns, dogs and condiments I could find. I'm not saying that some bad product might not have slipped under the radar without me knowing it. Mistakes can happen at any large picnic. Anyway, I deny everything. Anything I have not denied, I don't recall.

OzarkCPA (talk|edits) said:

13 September 2013

Do you think posting prices is a bad idea?underline text

In short, no, I don't think it is a bad idea. I think you should be able to give a client a range or at least a minimum on your website. Like "our minimum fee for property owners is $300." You could expand further on that if you'd like, but that is up to you. I think it is a poor choice to get in the game of charging per form, so I would stay away from that completely.

See this article by Marcus Sheridan of the Sales Lion for why I think it is a good idea to list prices on your website:


And yes, your prices are way too low. I would raise at least $50/return next year. If a few leave, you'll make the same money for much less work. You can't build your buisness with cheap clients. Or at least you shouldn't...

PDXTaxman (talk|edits) said:

2 November 2013
This discussion is about 2 months old, but I'd add a little more: if you have started out with super-low prices, you can retain your existing (30) clients only by continuing to offer super-low prices. Maybe as a courtesy you can offer those 30 people a grandfathered rate, limited to say no more than a 10% increase per year (and even at that, expect to mostly lose them within a couple of years). But for new clients, you need a pretty significantly higher pricing scale, else you'll never make a living and always have bargain-shoppers as your client base. A CPA/EA shouldn't have to be in that business.

I say all this because right now you ARE giving away the store. One of our clients surprised me by showing me his receipts for TurboTax including two states and e-filing: north of $100, notwithstanding all their claims to offering free tax prep. Are you really only $25 to $50 better than a box?

Even if you run a pretty bare-bones office, there are costs you just can't avoid. Basic liability insurance is generally $500 minimum a year. E&O will run you more than that if it's worth anything (your state CPA society might have a good offering on that). What software are you using? As a pro, you need something that's indisputably robust -- doesn't make mistakes, has good support, has excellent diagnostics to point you at your own errors, etc. -- and is ergonomic, easy to use. Well, robust and ergonomic equals expensive, even on a per-use basis. Drake may be the best of the more-affordable solutions (we use Lacerte, which is getting ruinously expensive). You'll need internet service, a decent website, and telephone of course, and unless you're in a security building you DO need an alarm system (about $400 a year plus initial install). And as you grow you'll come to hate any printer or fax that isn't laser-based due to cost of consumables. Don't forget that you should set up to accept debit and credit cards: Costco offers pretty decent merchant service programs (get used to hanging up on cold calls from people selling these services).

My point is don't under-estimate over-head. Your pricing needs to allow for it. One rule of thumb: though you'll exceed it the first year or two, strive mightily to keep office rent at or under 10% of gross. That's tougher than it sounds, especially if you aim for a good neighborhood, good visibility, adequate space, and avoid shabby Class C buildings. (But a slightly shabby building in a first-class neighborhood is fine). Don't be afraid to counter-offer on the asking prices of landlords. And for heaven's sake, decorate nicely. Paint the new office a hip-but-calming color. Negotiate for some TI from the landlord for decent carpeting if, as is often the case, what's there sucks. Ikea is your friend for attractive, functional-but-cheap furniture. Don't trust their filing cabinets, however: look for used on those (we only use 2 or 4-drawer side-pulls, 40-42" wide, for which I'll pay no more than $20/drawer. A few cans of spray paint after scuff-sanding and priming can make them look new. ALWAYS add bar locks, since otherwise anyone can open them with a screw driver. The locks sometimes cost more than the cabinet itself! Even a completely "paperless" office still has to keep some paper client files).

And hit Aaron Brothers or equivalent for some mass-produced art. We've got a couple of huge abstracts they had on 75%-off sale some five years ago. People stop at our windows ALL THE TIME to admire them. Point is, too many tax offices are unforgivably squalid. Don't be "that guy."

Good luck with it.

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