Client conversations = advisory opportunities

Every tax accountant has been asked some version of the same two questions: 1) Should I make an estimated payment, and 2) How do I improve my cash flow? They sound like compliance questions—and most firms answer them that way. However, those everyday conversations are also where advisory engagements are born … if the practitioner is willing to look past the question and into the facts behind it.

That was the premise of a recent presentation built around a real client case study. The client, a new addition to my firm after leaving a previous accountant, asked two simple questions at the start of the year:

1. Should the firm make a second-quarter estimated payment, and if so, how much?
2. How could cash flow be improved throughout the year?

Both of these are the kind of questions any competent preparer can answer with a calculation, but the more interesting question is whether a calculation is the best the client deserves.

Start with the facts, not the question

Before answering the questions, it helps to lay out the full picture:

• The client operated a single-member LLC reported on Schedule C, projected to earn about $50,000 in net income for the year.
• The client also owned commercial real estate through a partnership with a spouse, and that partnership leased space to the operating business.
• The partnership was projected to show an $85,000 loss.
• The prior year’s return showed a federal tax liability of just over $7,000, and no first-quarter estimated payment had been made.

On the surface, those facts point to a quick calculation of what the second-quarter payment should be. Yet, one number stands out: an $85,000 partnership loss sitting next to a profitable operating business. Rental real estate losses are typically passive, which means they’re often suspended, rather than usable against other income. If that loss could be unlocked, it might change the entire estimated-payment answer or eliminate the need for a payment altogether. That single observation is what turns a compliance question into a planning exercise.

Unlocking the loss

The usual paths to freeing up a passive loss are real estate professional status or the short-term rental exception, but both of these did not fit this client. The business demanded too much of the owner’s time to support the real estate professional status, and the property involved long-term commercial tenants rather than short-term rentals. Instead, the opening came from a grouping election. Because the operating business and the real estate were economically connected, the two could be treated as a single activity, allowing the loss to offset the operating income. The client’s previous accounting firm had already identified this possibility, and confirming and carrying it forward became the foundation for everything that followed.

The building may matter more than the business

With the grouping election established, the next area worth examining was the building. More than half of the $1.7 million purchase price had been allocated to land, which isn’t depreciable. That allocation may well have been correct, but it also may have been overly conservative or simply an oversight, and either way, it needed verification. If the allocation could be supported and improved, the firm could consider filing Form 3115, Application for Change in Accounting Method, to correct the accounting method, potentially producing a catch-up depreciation adjustment. A cost segregation study was also worth evaluating to see whether it would add meaningful value, and the timing of any change mattered as much as the change itself.

The building’s financing was part of the same conversation. With a loan of that size, refinancing became a natural question. In this case, falling interest rates made it a real option. A lower payment translated directly into better cash flow, answering the client’s second question in a way no estimated-tax calculation ever could.

Follow the tax, not just the income

One of the more instructive parts of the analysis came from looking at how the tax liability was composed, not just its total. Comparing three years of returns showed the client’s total federal liability held steady near $13,000, but its character shifted dramatically. In 2023, before the building purchase, $10,000 of that was self-employment tax and only $3,000 was income tax. In 2024, after the building was acquired and the grouping election made, the total was similar, but made up of almost entirely self-employment tax, since the loss had eliminated the income tax piece. By 2025, the pattern held: Self-employment tax was now the entire problem.

That distinction matters because it points to a different solution. Eliminating income tax through a grouping election does nothing for the self-employment tax. Addressing that requires a different tool, which in this case meant evaluating an S corporation election.

Does the S election actually make sense?

An S corporation election is not simply a tax checkbox; it’s a business decision with implications well beyond the current year’s return. Before recommending an entity, several questions needed answers:

• Is the business consistently profitable, and is that profitability expected to hold or grow?
• Are there plans to bring on additional shareholders, particularly foreign investors, which would rule out S corporation status entirely and point toward a C corporation instead?
• Are the projected tax savings large enough to justify the added payroll and administrative costs?
• Does the client have the cash flow to support running payroll, since reasonable compensation and payroll taxes come with the territory?

Even after those questions are answered favorably, an S election introduces new variables. These include reasonable compensation levels, the timing and amount of pass-through distributions, effects on retirement plan contributions if the client has a defined benefit or cash balance plan, and shareholder basis. That last point, shareholder basis, deserves particular attention. Distributions that exceed basis can create an unexpected capital gain, trading one problem for another.

Good advisory work doesn’t just solve the problem in front of it; good advisory checks for new ones it might create along the way.

An answer nobody expected

All of this analysis led to a recommendation that surprised the client: Make no estimated tax payment at all. The plan combined an S corporation election effective at the start of the year with an end-of-year payroll run. That payroll addressed the basis issue created by distributions already taken, and the associated withholding carried a valuable feature: The IRS treats withholding as paid evenly throughout the year, regardless of when it’s actually withheld. Structured correctly, a December payroll could cover the client’s liability, eliminate underpayment penalties, and free up cash all year that would otherwise have gone toward quarterly payments.

The recommendation addressed the missed first-quarter payment, eliminated the need for a second-quarter payment, reduced or removed underpayment penalties, and materially improved cash flow, directly answering both of the client’s original questions.

Getting there required exploring roughly a dozen planning opportunities, not all of which were ultimately used, but each of which had to be considered.

Advisory work starts with a question

The larger lesson here isn’t really about grouping elections or S corporations; it’s about habit. Advisory engagements rarely begin with a client asking for a tax plan. Engagements begin with an ordinary compliance question that a practitioner chooses to look at more closely. The best firms go a step further, and get proactive enough that clients stop having to ask at all. Their advisor is already surfacing the next opportunity.

None of this happens for free—and it shouldn’t. Firms that build this kind of analysis into their practice still need to decide how to price it by the hour, as a fixed fee, bundled into tax preparation, or priced on the value it delivers. That’s a conversation worth having separately.

The starting point is simpler than it looks. The next time a client asks a routine question, treat it as an invitation to look one layer deeper.