Steven Pullara describes the client-accountant relationship dynamic as a staircase, with different steps of complexity ranging from basic bare-bones vendors to sophisticated business advisors. With each new growth step comes another layer of complexity that should make entrepreneurs pose the following question: Am I with the right accountant?

Pullara, a CPA and partner with Smith & Gesteland, has plenty of company among accounting colleagues who have seen businesses grow in sophistication and require a corresponding level of sophistication in their accountant, or their accounting firm. In this look at the accounting industry, IB examines how business owners know they are with the right accountant, a business advisor whose importance ranks with bankers and attorneys. We also present some key tax law changes for 2014, including new considerations for same-sex couples.

According to Pullara, most small businesses seek an accountant to help address the “necessary evils,” a reference to commodity services, such as tax preparation, required by small businesses that are more proprietary, have few employees, and have comparatively little equipment.

As the company grows, the need for an accountant goes beyond basic compliance to a more service-oriented relationship that also includes proactively responding to new laws, new technology tools, and growth opportunities.

If the business grows large enough, the company may require an accountant who is an industry expert and a trusted advisor — somebody who has enough resources, experience, and industry knowledge to help with business decision-making.

Says Pullara: “It’s probably somebody you would check in with before you would make any major decision to say, ‘Hey, I’m thinking about hiring this person, or I’m thinking about acquiring this building, or I’m thinking about expanding my manufacturing facility. What do you think about it? What are some of the pitfalls of doing that? Can you help me with the cost-benefit analysis?’

“That’s really the highest level, and if you want and need that level of service, you have to be prepared to pay a lot more for it. This level of service requires a much higher skill set, resulting in the higher price, but you should also get a return on that investment in higher profits or tax savings.”

Local attorney Susan Hutton, who provides business accounting services, believes the telltale signs you’ve outgrown your accountant are: (1) if the accountant can’t give you an audit when you need to borrow money to expand your business, (2) if the accountant can’t help you with your business plan or provide advice about an expansion or key decisions like taking on a partner, and (3) if you receive an audit notice from the government that something was not properly filed because it was too complex for your accountant.

The opposite also is true, so if you run a small company served by a large accounting firm, it might be time to swim downstream because this is problematic from a cost standpoint. As Hutton puts it, accounting firms come in all sizes and levels of complexity, kind of like cars. “You don’t want to drive a Ferrari when all you need is a Ford,” she says. “You want to pick the accounting firm that fits your needs and not pay too much, or too little.”

Sometimes, Hutton says, this situation sneaks up on people. “I often see, when somebody is running a business and they have a really good accountant and they are doing fine and then they retire, not only is the accountant doing their tax return, he is doing the kids’ tax returns, and the kids don’t need this big accounting firm. They don’t need to be paying through the nose for somebody who is not helping them, and neither does the retired executive because the situation has become much simpler and he’s better off not paying the money.”

In Hutton’s view, accountants should work with attorneys on behalf of clients. One example of this is when it’s time to modify outdated estate plans. Hutton noted that many estate plans were made when the unified credit only sheltered $600,000, but the increase to a $5 million unified shelter should prompt them to modify their estate plans. Having the right accountant can save surviving spouses and children thousands of dollars and considerable hassle.

As Hutton explained, there are a lot of people who are worth between $600,000 and $5 million, and they have estate plans that put everything into a credit shelter. “They put everything into this trust upon the death of their first spouse to avoid paying estate taxes on the death of the second spouse, so people end up with these fancy estate plans they don’t need because it was set up when the credit was only $600,000 and they needed to use the first spouse’s credit to avoid paying taxes.”

Now that the credit is $5 million, Hutton says they don’t need to use the credit shelter trust. If they don’t change their estate plan when the first spouse dies, they put the money into the credit shelter trust and they end up filing trust tax returns for years, until the second spouse dies, and they didn’t need to do that because their combined estates aren’t worth anywhere near the $5 million.

When there is a significant change in the law, your accountants should direct you to an attorney to get the estate plan changed and “not charge you $400 a year to file a trust tax that you don’t need,” says Hutton.

“People think that once they have that will, or once they have that game plan, it’s set, but it’s not,” Hutton added. “Anytime you have a significant change in your circumstances or a significant change in the law, you need to review that estate plan.”

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Another relationship factor is personality. If it feels like your accountant hasn’t got time for you, and demonstrates that by not returning your phone calls or emails, you are in the wrong place. “This guy should be a business partner,” Hutton said. “He should be somebody who you are working with to achieve success, and if he hasn’t got the time to return your phone calls, or if you feel like he’s talking down to you or won’t take the time to explain something, you need to find somebody else.”

Surveys indicate that entrepreneurs want an accountant with integrity, and one who will listen, provide advice, and add a personal touch. Pullara says that once a business determines which characteristics are most important, it must think about the services it wants, compare that to what it can realistically afford, and find a firm that can deliver. When business owners interview prospective accountants, they should seek answers about experience, education and training, industry expertise, firm size and resources, professional and community involvement, and pricing.

They should also come prepared to answer many of the same questions about themselves, and determine how much accounting work can be done in-house. “They must be prepared to be specific about whether their business is pretty simple or whether it’s complicated,” Pullara says. “What is your niche or focus? What are your goals? What are you trying to accomplish? Because if you have high aspirations and you want to accomplish a lot of growth, you’re going to need more resources.”

When it comes to choosing a new accountant, industry-specific services can provide a leg up because accountants who specialize in particular industries, like telecommunications, are more familiar with applicable regulations. “It saves people lots of money when you go to people who know all the regulations, who know that industry,” Hutton says. “Quite often, you can find somebody who has knowledge in a given industry by talking to the business association for that industry.”

With larger companies, selecting an accountant with specific industry expertise can be trickier. Even though accounting firms must be mindful that corporate financial information is confidential and must never be shared, some clients don’t want their firm to serve a direct competitor. “For smaller companies, that’s not much of a consideration, but for larger companies, that’s a consideration because there are fewer players in that space, and they might have a really key competitor that they don’t want you working with,” Pullara said.

Know New Taxes

The one-year delay, to Jan. 1, 2015, of the Affordable Care Act’s employer mandate carries no income tax implications, but there are several 2013 tax-law changes associated with the ACA and the legislative deal that was reached to avoid the fiscal cliff. Steve Grimm, a partner with Smith & Gesteland, says many businesspeople are unaware of the changes because they haven’t filed their tax returns, but they should become familiar with them for planning purposes.

In the fiscal cliff deal, high-income earners such as married couples with more than $450,000 in annual income, or individuals with more than $400,000 in annual income, will now have a federal income tax rate of 39.6%, up from 35%.

Also for wealthier Americans, an additional 0.9% Medicare tax goes into effect for married couples who file jointly and earn $250,000, married couples who file separately and earn $125,000, and individuals who earn $200,000.

Investment income will also be taxed at a higher rate. A new 3.8% Medicare contribution went into effect for 2013, and it will apply to individuals with adjusted gross incomes above $200,000 and joint filers with AGIs above $250,000.

Wealthier people also face higher long-term tax rates on capital gains, which will rise from 15% to 20% for individuals with incomes of $400,000 or more, or married couples who file jointly with incomes of $450,000 or more.

Grimm believes these changes will only hit home when people file their income taxes in the winter of 2014. He noted there are legal ways to minimize these different taxes, but it varies by company, and the key is to begin planning now. For example, the imposition of the new 3.8% Medicare net investment income tax generally applies to a business owner’s non-salary, pass-through income, unless the owner “materially participates” in the business. In addition, the 3.8% tax will generally apply to income from rental real estate, unless the owner qualifies as a real estate professional.

According to Grimm, an important planning technique for small business owners is to take appropriate steps to ensure they meet the tax law’s requirements for material participation. Similarly, owners of rental real estate will want to take steps to qualify as a real estate professional, if possible.

Under certain circumstances, it might also be possible to make certain tax elections to group together various business and real estate interests that, when viewed separately, would be subject to the 3.8% tax because the owner does not materially participate in each separate business. In some cases, when viewed as a group, these interests would not be subject to the tax because the owner’s overall business activity does meet the material participation requirements.

The full impact of the U.S. Supreme Court’s recent ruling on same-sex marriage is not yet known, but some effects are emerging. The U.S. Treasury Department subsequently announced that same-sex couples will be treated just like heterosexual married couples for federal tax purposes, meaning same-sex couples no longer have to declare themselves as unmarried on federal income-tax returns.

The largest impact could be on estate taxes, where spouses have a tax exemption. “We have this strange situation where states like Iowa treat a couple as married, but the federal government had not,” Hutton noted. “Now, it appears that the federal government also is going to treat them as married, so how does that impact estate planning? Is a same-sex couple going to be entitled to that spousal exemption?”

The state of Wisconsin, controlled by Republicans, has taken the opposite approach on tax policy. In the 2013-15 biennial budget, lawmakers not only reduced the number of state income tax brackets from five to four, they also reduced the rate slightly (two-tenths of percentage point) in each bracket, and they made the decrease retroactive to Jan. 1, 2013. State tax rates now range from 4.4% on incomes up to about $14,000 to 7.65% on incomes over $300,000.

“It’s not a huge tax cut by any stretch of the imagination, but the marginal rate in Wisconsin roughly varies from 4% to 7%,” Grimm noted. “I don’t want to say it’s just for show, but it’s not going to be a huge amount of dollars that is going to change anyone’s life. It’s just kind of a political statement.”

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