How to Pay Less Tax - $100,000 Less
After supervising my children’s morning remote learning session, yesterday, we had the pleasure of delivering individual tax plans for two Seattle / Puget Sound business owners who could save over $100,000 each after implementing the strategies I included within their personal tax plans. The strategies provide for evergreen, annual savings, not just one-hit wonders.
You may be asking; how does one pay $100,000 more tax than they have to and not realize it? Believe it or not, business owners who remain active in the day to day operations seldom take the time to address tax planning opportunities. As years go by, time seems to move a little quicker and before you know it, the business activity has grown significantly, but the planning opportunities remain untouched or not fully implemented. That is exactly what happened with this Puget Sound area construction subcontractor.
So how did we demonstrate six-figure tax savings for the owners, who already have the S Corp election in place? Don’t worry, although we ended up with 89 and 95 pages within their respective tax plans, we won’t need all of them to describe the strategies and attain their objective. We identified tax-saving strategies within each of the following areas of their lives:
Family, home and employment savings – Each business owner is married, has provided financial support for family members and owns at least one additional home. IRC Section 280A(g) provides opportunities to receive payment for the use of your residence without claiming the income. That was one strategy included in our demonstration.
Business savings – The greatest number of opportunities for these two business owners were related to their commercial activity. Segmenting and income stream shifting opened up opportunities for additional tax savings beyond implementing a qualified retirement plan which allowed for significant income deferral. We especially like after-tax investments in the current rate environment and included those within the tax plans. Their company relies on significant equipment to perform their services, which also provided opportunities to reduce their income tax while providing financial support to others in lower tax brackets.
Investment savings – Both of the owners have investment real estate generating passive income. Taking a more granular view of each property and accelerating depreciation expense through cost segregation provides for a one-hit wonder to catch up missed deductions, but we did not rely on that to achieve the $100,000 tax savings. Taking a look at asset allocations within their investment portfolios provided additional opportunities for tax savings through the use of more tax efficient securities.
Cashing out and succession planning – Starting with the end in mind will help guide your decisions along the way. Whether it is corporate structures or conditions of the sale agreement, there are tax saving opportunities to consider. For these two owners, we included a few strategies to consider, but since they are not quite ready to transition the company at this point, we won’t spend too much time on the specific strategies here. Remember the character of your cash receipts will determine the tax consequences. Loan proceeds are generally not taxable and capital gain transactions typically receive more favorable tax rates than ordinary income. Using trusts or other structures can eliminate or defer the recognition of gain when transitioning appreciated assets, including business operations.
Each household maintains their own set of values, priorities and circumstances. The strategies we included in the comprehensive tax plans for the two business owners described above may not be the right fit for their neighbors or your clients.
Research the strategies you employ to ensure they are legal and substantiated with appropriate documentation before taking them as a position on your tax return. Should you have questions about strategies that help you reduce the amount of tax you pay, contact a qualified professional before making a costly mistake. There are strategies that can be implemented as a DIY project; however, there are more complex strategies that will require the use of specialized knowledge, licensing and specific documentation to achieve your intended results.
To learn more legal, tax-saving strategies for business owners, or get help with an IRS tax problem, contact me at (360) 474-5892 or e-mail me at tate@ensigncpa.com.