Time, billing, and partner comp, reconciled.

None of these are exotic. They are the ones we find most often when we open a new set of books.

1. 01

   Assuming your firm is a specified service trade or business, or assuming it is not, without anyone reading the regulation

   Section 199A(d)(2) and Reg. 1.199A-5 list the SSTB fields, and the list surprises people in both directions. Law, accounting, consulting, health, financial services, brokerage, athletics, and performing arts are in. Architecture and engineering are expressly excluded, which is a departure from the older section 199 definition. Consulting itself is narrower than the word sounds. Reg. 1.199A-5(b)(2)(vii) defines it as the provision of professional advice and counsel, and says it does not include services other than advice and counsel, such as sales or economically similar services, or the provision of training and educational courses. The same paragraph also excludes consulting that is embedded in or ancillary to the sale of goods or the performance of services by a business that is not otherwise an SSTB, where there is no separate charge for the consulting. Many firms get a verbal answer once and never revisit it.

   Claim the deduction when you are not entitled to it and you are looking at tax, interest, and a possible accuracy-related penalty under section 6662 on examination, across every open year. Fail to claim it when you are entitled and you hand back a deduction worth up to 20 percent of your qualified business income every year nobody checked.

2. 02

   Booking a retainer as revenue the day it hits the bank

   The money arrives, the bookkeeper sees a deposit, and it gets coded to income. On the cash method that is often not wrong for tax, which is exactly why nobody catches it. For running the business it is fiction. An unearned retainer is a liability until the work is delivered, and in a law or title practice a retainer held in a client trust account is not the firm's money at all.

   Revenue spikes in the month you sign and goes flat during the months you actually do the work, so every margin number describes a business that does not exist. Owners take distributions against it. Then a client terminates early, the unearned portion has to go back, and the cash is gone. Where the funds were trust funds, spending them is a bar or licensing problem, not an accounting one.

3. 03

   Running an S corporation and paying yourself in distributions with token payroll, or no payroll at all

   Distributions are not subject to Social Security and Medicare tax, so the incentive is constant. There is no safe harbor percentage in the code. An officer who performs services is a statutory employee under section 3121(d)(1), Rev. Rul. 74-44 treats amounts paid in lieu of salary as wages, and courts have recharacterized distributions as wages where the owner performed the services and the salary was not defensible, including in David E. Watson, P.C. v. United States, decided by the Eighth Circuit in 2012.

   On examination the IRS reclassifies distributions as wages and assesses employment tax, penalties and interest across every open year. There is a second cost people miss. Your section 199A wage limitation and your retirement plan contribution limits both key off W-2 wages, so understating salary can cost more in lost deduction and lost deferral than it saved in payroll tax.

4. 04

   Treating cash-basis receipts as if they were a measure of performance

   Cash basis books recognize revenue when the client pays, so a strong collection month reads as a strong production month and a slow one reads as a slump. Engagements delivered in June show up in the August profit and loss. Unbilled work in progress does not appear anywhere on a cash-basis balance sheet, so value you have already produced and not yet invoiced is invisible.

   You make hiring and compensation decisions off a lagged signal. You look flush in a month you underperformed and you cut in a month you delivered. At year end the cash method lets you accelerate deductions and defer income, and if nobody is modeling that deliberately in the fourth quarter you take the tax result the calendar handed you instead of the one you chose.

5. 05

   Serving clients in multiple states and filing only where you sit

   Public Law 86-272 protects a business from state net income tax where its only in-state activity is soliciting orders for tangible personal property. Services are not tangible personal property, so it gives a service firm nothing. Most states now source service receipts on a market basis, to where the customer receives the benefit of the service rather than where your team performed the work. An out-of-state remote employee commonly creates income tax nexus and a payroll withholding obligation, though the specific thresholds, day counts and reciprocity agreements vary state by state and have to be checked individually.

   Filing obligations accumulate quietly in states you never registered in, and because an unfiled return generally does not start the statute of limitations running, the exposure does not age off. It usually surfaces at the worst moment, during diligence on a sale or a partner buy-in, as an unquantified liability that reduces the price or holds up the close.

Each one names the section it rests on and who is allowed to perform it.