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  • Can an Active Limited Partner Avoid Self-Employment Tax?

    Self-emploiyment taxes are an additional tax over and above any income tax that may be due. The amount can be significant—these Social Security and Medicare taxes can add up to 15.3% on top of ordinary income tax rates. For smaller businesses, it is often a very large part of the overall tax due. How this… Continue reading Can an Active Limited Partner Avoid Self-Employment Tax?

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  • From Heroics to Process: Documenting Work Before You Automate It

    There is a moment in the life of every small firm when the founder realizes that the firm cannot grow past her. The signs are subtle for a long time and then suddenly obvious. The work that depends on her judgment keeps showing up faster than she can train others to handle it. The senior people get frustrated because she will not let go. The clients are loyal to her, not to the firm. Whenever she takes a vacation, the work piles up in a way that takes two weeks to dig out of. The firm is, in effect, a personality projected onto a payroll. It is a wonderful personality and a fragile firm, and the founder is too busy being the personality to notice that the firm under her has stopped scaling.

    This is the moment process design becomes the most important investment the firm can make. It is also, in our experience, the moment the firm is least equipped to make it. The same things that made the founder good at running the firm by heroics — her judgment, her speed, her unwillingness to delegate the parts she cares about — make her bad at writing down how the firm works. The founder has to learn a new skill, late in her career, to do the thing that will determine whether the firm outlives her. Most founders never get there. The firms that do are the ones that, in retrospect, were able to compound.

    You cannot automate a process that does not exist. This sounds obvious until you walk into a small professional services firm and try to figure out how it actually does its work. The work gets done — the documents go out, the clients get served, the bills get paid — but if you ask three people in the firm how the work happens, you will get three different answers, each only partly true. The firm does not have a process. The firm has heroics.

    Most small firms are run on heroics. A senior person knows how to do something. She does it. When she is busy, she trains a junior person by doing it together a few times. Eventually the junior person can do it on her own, mostly. When something unusual happens, the senior person handles it. When the senior person leaves, the institutional knowledge leaves with her. This is fine until the firm needs to scale, at which point it becomes a wall.

    From Heroics to Process

    Process design in a professional services firm is not about turning the work into a factory. It is about making the work repeatable enough that it does not depend on any one person knowing the answer. The senior person’s job changes from “do the work” to “design the work so that other people can do it correctly without me.” This is a different job. It uses different muscles. It requires the senior practitioner to translate twenty years of tacit knowledge into explicit instructions, and then to accept that the explicit instructions, executed by a less experienced person, will produce work that is ninety percent as good as her own — which is the right trade, because the firm can run ten parallel instances of ninety percent and only one instance of one hundred percent, and ten times ninety is nine hundred percent.

    The smallest unit of process design is the checklist. A real checklist, not a wishlist — a sequence of steps that, when followed, produces a reliable outcome. For probate intake, the checklist might have forty items. For drafting a particular kind of trust, eighty. For an offer in compromise, two hundred. The checklist is not a substitute for judgment. It is a way to free up the practitioner’s judgment for the parts of the work that actually require it.

    The genius of the checklist, which Atul Gawande wrote a whole book about and which professional services firms have mostly failed to learn from, is that it does not lower the ceiling of performance — it raises the floor. The best practitioner with a checklist is at least as good as the best practitioner without one, because she can simply ignore the items she already has internalized. The mediocre practitioner with a checklist is substantially better than the mediocre practitioner without one, because the checklist catches the items she would otherwise have forgotten. The variance of the firm’s output narrows. The narrow variance is what clients are actually buying when they hire a “good firm.” They are not buying the peak performance. They are buying the predictability.

    Document Before You Automate

    The first rule of automation is that you cannot automate what you have not first documented. The temptation to skip the documentation step and go straight to the software is enormous, because documentation is boring and software is exciting. The teams that skip the documentation step end up with software that automates the wrong thing, or that requires more manual work than the process it replaced.

    We document everything before we automate anything. The process documentation lives in plain text, edited by the practitioners who actually do the work, reviewed by the firm leader, and updated whenever the process changes. It is not glamorous. It is the most valuable artifact in the firm. The documentation, taken together, is the firm’s operating system — and a firm with a written operating system is qualitatively different from a firm without one. The first kind of firm can be taught to a new partner. The second kind of firm can only be lived through, which means it cannot be replicated, transferred, or sold.

    The order matters: document first, then automate. Most firms that get this order wrong end up with a tangle of automations that nobody fully understands, each one solving a small problem in a way that creates a larger one. The right sequence is to write down the process as it is currently being executed, in enough detail that a thoughtful new hire could follow it. Then improve the process on paper — most processes have at least one or two obvious improvements that surface only when they are written down. Then, and only then, look at what parts of the improved process are mechanical enough to automate. The mechanical parts get automated. The judgment parts stay with humans. The result is a firm that uses software as a force multiplier, not as a substitute for understanding its own work.

    Process Owners

    A process without an owner decays. Every process in the firm has an owner — a specific person whose job includes keeping that process current, identifying where it is breaking, and fixing it. The owner is not necessarily the senior practitioner. Often the best process owner is the senior paralegal or the office manager, because she is the one who watches the process get executed every day and notices when it is not working.

    Process owners are paid for the role. It is not extra duties on top of a full-time job. We carve out real time and real authority for the people who own processes, because the alternative is processes that look great on paper and that nobody actually follows.

    The pathology of process ownership without authority is one of the most common patterns in professional services firms. Someone is named “process owner” but has no power to change the process, no time to maintain it, and no audience for raising the alarm when it is failing. The process stays on paper. The work happens however the practitioners decide it happens. Six months later, the documented process and the actual process have diverged so far that the documentation is worse than useless — it is misleading. New hires are trained on the documentation and then quietly learn from senior peers that the real way to do things is different. The firm now has two operating systems, one written and one oral, and the oral one wins. The cure is not better documentation. The cure is process owners with authority commensurate with the responsibility.

    When to Break the Process

    Process discipline is a tool, not a religion. Every process should have an explicit exception path. The exception path is what the practitioner does when the fact pattern is novel, the client is unusual, the deadline is unusual, or something else is unusual. The exception path requires more judgment than the standard path. That is the entire point.

    A firm that follows its processes ninety-five percent of the time and uses good judgment for the other five percent is much better off than a firm that has perfect adherence to a process that does not actually fit reality. Process exists to make the routine work routine, so that the unusual work can get the attention it deserves.

    The cultural failure mode in mature-process firms is process worship — the belief that the process is the work, rather than a scaffolding for the work. Process worship produces firms that follow the documented steps even when the steps are clearly wrong for the situation in front of them. The signs of process worship are easy to spot once you know what to look for: practitioners who escalate trivial decisions to managers because “the process does not cover this,” documentation that has not changed in three years even though the firm has, and a steady erosion of judgment among the people who used to have it. The cure is to make the exception path as legitimate, as documented, and as celebrated as the standard path. The exception path is not a failure of the process. It is part of the process, and the practitioners who use it well are doing the highest-value work in the firm.

    The Documentation Discipline

    Documentation rots if it is not maintained. The discipline of keeping it current is harder than the discipline of writing it in the first place, because the urgency that drove the original effort fades, and the maintenance work is invisible until the documentation is wrong. The firms that maintain their documentation well do so because they have built maintenance into the regular operating rhythm — not as a quarterly project but as a continuous practice. Every time a process is executed in a way that differs from the documentation, the documentation gets updated. Every time a new edge case is encountered, the documentation absorbs it. The documentation is a living artifact, not a published one.

    The format matters less than the discipline. We have seen firms run perfectly good documentation systems in plain text files, in Notion, in Google Docs, in dedicated process-management software, and in old-fashioned binders. We have also seen firms with expensive process-management platforms whose documentation is stale and useless. The platform does not create the discipline. The discipline is what makes the platform worth anything. A firm with a discipline and no platform will have better documentation than a firm with a platform and no discipline, every time.

    What Good Process Design Feels Like

    In a firm with mature processes, a new hire can be doing real client work in weeks instead of months. A long-term associate can leave for two weeks of vacation and the firm does not freeze. The firm leader can sleep on Sunday night without lying awake wondering which deadline is going to be missed on Monday. The work product is consistent. The clients notice that the firm feels organized.

    The reason most small firms do not invest in process design is that the payoff is invisible. You cannot point at a particular client win and credit the process for it. You can only point at the absence of failures, which is the hardest thing in the world to point at. We do this work anyway, because the absence of failures is what compounds into a durable firm.

    There is also a more subtle, and ultimately more important, effect of mature processes. The firm starts to be able to think about itself. Not in the vague, retrospective way that all firms can — “I think we are getting better at X” — but in the specific, prospective way that only systematized firms can. The leadership can look at a documented process, see that it produces a particular kind of result, and ask whether a different version of the process would produce a better result. The firm becomes capable of experimentation, because there is a baseline to experiment against. Pre-process firms cannot really experiment, because they cannot measure the difference between the experiment and the control. The maturity of the process is the prerequisite for the maturity of the firm’s self-understanding, and the self-understanding is the prerequisite for everything that compounds beyond it.

    What to Do Monday Morning

    Pick the three processes that the firm runs most often and write them down. Not in a slide. In plain text. Start with the most ordinary, most repeatable processes — intake, billing, file opening — because these are the ones where the gap between “documented” and “actually executed” is widest and where the wins from closing the gap are largest. Resist the urge to start with the glamorous, complicated processes. Start with the ones that should be boring and have somehow become hard.

    Assign an owner to each process. Give the owner real time and real authority. If you cannot give the owner real time, the process is not important enough to have an owner. If you cannot give the owner real authority, the documentation will diverge from the practice within a quarter. The owner-with-power is what makes process work compound rather than decay.

    And finally, write down the exception path for each process. Not in the abstract. With examples. The exception path is the proof that the process respects judgment, and the explicit acknowledgment of the exception path is what keeps the standard path from becoming a religion. A firm that has both — a clean standard path and a legitimate exception path — has built the operating system that will let it scale beyond the senior people who currently hold it together. The rest is execution, and execution is easier than building the operating system in the first place.

  • When Providing Information to the IRS Discloses Additional Tax Due

    The IRS consumes information about taxpayers. By and large, that is what the IRS is–a vacuum for information. It then processes the information and applies statutorily mandated processes to evaluate the information. The processes are geared toward evaluating whether additional tax is owed and then recording that balance on the IRS’s books, so that the… Continue reading When Providing Information to the IRS Discloses Additional Tax Due

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  • Missed Opportunity When a Partner Dies: the Section 754 Election

    There are tax opportunities that come up when someone dies. Many of these relate to those who own real estate in LLCs or partnerships. One such a opportunity the Section 754 election for partnerships. This is a valuable election–one of the most commonly missed–thatallows the partnership to adjust its inside basis in assets to match… Continue reading Missed Opportunity When a Partner Dies: the Section 754 Election

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  • The 80/20 of Back-Office Infrastructure for a Professional Services Firm

    The first time you walk through a small professional services firm with an eye for the systems underneath, the dominant feeling is archaeology. Layer on layer of software accreted over decades. A practice management tool the partner picked when she went solo in 2009. A billing system the office manager added when the firm hit a million in revenue. A document repository that came in because a paralegal liked it. A bookkeeping platform an accountant recommended once. None of them are wrong, exactly. Each one solved a problem that was real at the moment it was installed. The problem is that no one ever zoomed out and asked whether the collection, taken as a whole, was a coherent operating system or a museum of past emergencies. Almost always, it is the museum.

    Small professional services firms run on systems. The reason most of them do not run well is that the systems are accidental — assembled over fifteen years from whatever the partner happened to be using when she went solo, plus whatever the office manager added when something broke, plus whatever the IT person who came in once recommended before he disappeared. The firm runs on these systems the same way an old house runs on its plumbing: it works until it doesn’t, and when it stops working, nobody knows where the shutoff is.

    When we acquire a firm, the systems audit is one of the first things we do. It is also one of the longest. The point is not to replace everything — replacing everything in a firm is how you destroy a firm. The point is to figure out what is actually load-bearing, what is decorative, and what is actively making things worse. The audit produces a map. The map is the foundation of every operational improvement that follows, because without the map, every improvement is a guess. Most firms operate without a map. We refuse to.

    The 80/20 of Back-Office Infrastructure

    There is a relatively short list of systems that every small professional services firm needs to run well. A practice management system that actually models the work. A document management system that the team trusts. A billing system that ties back to the work product. A client portal that clients will use. A financial system that produces real management reporting. A secure way to handle email, files, and credentials. And the integration layer that holds it all together.

    Most small firms have rough versions of each of these. The problem is rarely that any one of them is missing. The problem is that they do not talk to each other. The billing system has one version of the client list. The practice management system has a different one. The email system has a third. The bookkeeping software has a fourth. Reconciling these takes hours every week and introduces errors that nobody catches until a client calls.

    The deeper problem with un-integrated systems is not the time they consume. It is the cognitive tax they impose on the people doing the work. Every disconnection requires a human to hold two facts in her head and verify they match. Multiply that by twenty disconnections, across a team of fifteen people, across a workday — and a meaningful fraction of the firm’s collective brain is spent on reconciliation that adds no client value. The disconnections also create the silent failure mode that small firms are most vulnerable to: the small inconsistency that does not get noticed for six weeks and produces a bill that is wrong, a deadline that is missed, or a document that does not match the file. Integration is not a luxury. It is a precondition for the firm being able to think about anything else.

    Integration Is the Product

    What we actually deliver to the firms in our family is integration. We do not pick the fanciest practice management software and roll it out everywhere. We pick the system that fits the firm’s practice area and we make sure it is integrated with the rest of the stack so that data flows automatically, billing reconciles automatically, client communications log automatically, and the firm leader can see what is going on without asking three different people for three different reports.

    The cost savings from this are real but they are not the point. The point is that integration removes the cognitive overhead of the firm. The firm leader stops thinking about which system has the truth. The intake coordinator stops re-typing the client’s information into four different places. The bookkeeper stops chasing down what happened to a payment because the system shows it. Every minute that the firm spends on this kind of internal reconciliation is a minute it is not spending on clients.

    Integration also produces a second-order effect that most firms underestimate: it changes what kinds of questions the firm can ask itself. A firm with integrated systems can ask, “which practice area has the longest cycle time from intake to first deliverable?” and get an answer in five minutes. A firm with disconnected systems cannot ask the question at all, because answering it would require a paralegal to spend two days pulling data from four places, and nobody is going to spend two days answering a question that the firm has never asked before. The integrated firm gets to be curious about itself. The disconnected firm gets to be opinionated about itself. The first kind of firm improves over time. The second kind of firm just gets older.

    What We Will Not Do

    We will not build custom software when commercial software exists. We have watched too many firms get into the software-building business by accident and ruin themselves. The right answer is to pick the best commercial product, configure it carefully, and pay the subscription. The wrong answer is to hire developers and start writing code.

    We also will not chase trends. The list of systems above is boring. It has been boring for fifteen years and it will be boring for the next fifteen. Boring systems that the team trusts beat exciting systems that the team has to learn every time. Stability has a value that does not show up in software demos.

    The temptation to build custom software is one of the most reliable failure modes in professional services operations. It usually begins innocently. A senior partner identifies a workflow that no commercial tool quite handles. A developer in the firm’s family offers to build a quick solution. Six months later, the firm has a piece of software that mostly works, that depends on the developer to maintain, and that has become a load-bearing part of the firm’s daily operations. Twelve months later, the developer is busy with something else, the software has bugs nobody can fix, and the firm is back to manual workarounds — only now the manual workarounds are stacked on top of a custom system that nobody fully understands. The right discipline is to write the workflow down, look for the commercial tool that comes closest, accept the seventy or eighty percent fit, and configure around the gap. The seventy percent solution that is maintainable is dramatically better than the hundred percent solution that is fragile.

    Where AI Fits

    AI fits inside the existing systems, not on top of them. A bookkeeping system that has AI helping with categorization is more useful than a separate AI tool that you have to copy data into. A document management system that surfaces relevant prior work using embeddings is more useful than a chatbot that you have to prompt manually. The integrations that mattered five years ago still matter; AI just makes some of the steps inside those integrations faster and more accurate.

    We are deploying AI inside the firms we own, but quietly. The firms do not advertise it to clients. The associates do not introduce it as “AI-powered.” It is just that the work happens faster, the responses come quicker, the documents have fewer mistakes, and the firm has more capacity. The technology recedes into the background of the work, which is where it belongs.

    The reason we deploy AI quietly is not modesty. It is durability. Tools that announce themselves to clients become part of the firm’s brand promise, and brand promises tied to specific tools age badly. Five years from now, the specific AI tool that the firm advertised will be obsolete, replaced by something better, and the firm will either have to update its brand promise constantly or have to defend an obsolete tool against newer competitors. Tools that work silently behind the firm’s existing brand do not have this problem. The firm’s promise is to deliver quality work efficiently. The tool helps the firm keep that promise. If the tool changes, the promise does not. This is a small distinction with large consequences, and it is the one that separates firms that use AI well from firms that performatively use AI badly.

    The Hidden Cost of Software Sprawl

    One of the patterns we see in firm after firm is what we call software sprawl. A firm of twelve people will have forty-three software subscriptions, each one renewed automatically, each one used by one or two people, each one creating a small data island that has to be reconciled with everything else. The total annual spend is meaningful — often six figures — and the productivity drag is larger still. The sprawl happens because every individual subscription decision was rational at the time it was made. The aggregate is irrational, but no one is responsible for the aggregate.

    The cure for software sprawl is the systems audit, repeated annually. Walk through every subscription. Ask who uses it. Ask what would happen if it disappeared. Most firms discover, on the first audit, that they can eliminate twenty to thirty percent of their subscriptions without losing any capability the firm actually relies on. The savings are real, and the simplification is even more valuable. A firm that runs on seven well-chosen systems is faster, clearer-thinking, and more resilient than a firm running on forty-three. The discipline of choosing what not to run is, paradoxically, what gives the firm its actual operating capacity. The maximalist firm thinks it has more capability because it has more tools. The minimalist firm thinks it has more capability because it has fewer distractions. The minimalist firm is correct.

    Why This Matters

    A small firm cannot afford the systems work we are describing here. The math does not work for a four-person practice. The math starts to work at a platform of firms, because the same controller, the same systems architect, the same integration work serves multiple firms at once. This is the whole rationale for the holding company structure. The systems are the asset. The firms are the customers. The clients are the beneficiaries.

    This is also the part of the platform thesis that is genuinely defensible against larger competitors. Big firms have enormous systems teams but very little ability to deliver bespoke configurations to small practice areas. Small firms have intimate knowledge of their practice areas but no ability to invest in proper systems. A platform that combines the practice-area intimacy of the small firm with the systems-investment capacity of the larger one occupies a real and durable position in the market. The systems work, in other words, is not back-office plumbing. It is the strategic differentiator dressed up as plumbing — which is the most reliable way to build a durable advantage, because nobody copies the things that look boring.

    What to Do Monday Morning

    List every system the firm uses. Every one. Subscriptions, internal tools, spreadsheets that are load-bearing, the email aliases that route to the wrong place. Get them on one page. The act of listing them is, by itself, a small revelation, because no firm leader has ever counted before, and the count is always larger than expected.

    Identify the disconnections. Where does the same client appear in two different systems with two different attributes? Where does a deadline get tracked in three places? Where does a payment have to be entered twice? The disconnections are the work. Closing them is what produces the integration that compounds.

    And finally, do not buy anything new until you have eliminated something old. The discipline of one-in-one-out is what keeps software sprawl from accreting back. Every new tool has to displace an old one, or the firm has to make an affirmative decision to expand the surface area. Most of the time, the firm decides not to expand. That decision is the one that, year after year, keeps the operating system clean enough to actually be an operating system rather than an archaeology site.

  • Can a Tax Attorney Recover Attorney’s Fees from the IRS for their Own Case?

    The IRS administrative process is intended to catch incorrect tax returns and make adjustments to fix the returns. This includes false and fraudulent tax returns as well as those with honest errors. This includes an IRS audit function, and IRS appeals function, and IRS counsel function. And each step has a management oversight function and… Continue reading Can a Tax Attorney Recover Attorney’s Fees from the IRS for their Own Case?

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  • When Can the IRS Pursue a Deceased Spouse’s Estate Without Probate?

    Our income tax laws can be complex when applied to unique or varying fact patterns. This can result in tax liabilities. Tax liabilities can also arise when someone legitimately owest tax and simply does not pay it. There are various collection remedies available for tax liabilities. These remedies often have the best outcome when there… Continue reading When Can the IRS Pursue a Deceased Spouse’s Estate Without Probate?

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  • Short-Term Vacation Rentals and Material Participation

    Real estate can offer significant tax benefits. This is largely due to depreciation deductions which allow taxpayers to deduct their cost of investment in the property. Given the tax benefits, Congress has put in place some nuanced rules that allow some real estate owners to get immediate benefits and that deny or defer benefits to… Continue reading Short-Term Vacation Rentals and Material Participation

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  • Settling Debts in an Asset Purchase: Immediate Deduction or Capitalized Cost?

    You own two businesses. They work in similar spaces, but are distinct businesses. One of them has financial troubles and gets behind on its bills. You decide to have the other business acquire the assets of the failing business. You start thinking about taxes. You think ahead when you go to do the tax returns… Continue reading Settling Debts in an Asset Purchase: Immediate Deduction or Capitalized Cost?

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