With many new tax laws since 2018, the complexity of the tax code has created additional opportunities for tax savings. There are many tax strategies that can generate substantial tax savings over time; many of which can be fairly easy to implement.
Tax Structure – The Qualified Business Income Deduction (“QBID”) has made this more complex for practice owners early in the ownership cycle, so a solid tax plan to maximize the 20% QBI deduction is essential. For practices earning enough income to phase out of the QBI threshold, the preferred tax structure is typically an S-Corporation. Knowing when to make the S-Corporation election can save tens of thousands of tax dollars annually. There are limited reasons why a partnership or C-Corporation structure would make sense, so it is important to understand those circumstances. Additionally, with the adoption of a new Wisconsin entity level tax option, businesses now have the tools to dramatically reduce their overall tax burden, which makes entity structure even more important.
Rent Optimization – Having the correct rent amount may help optimize tax structure but may also help maximize the valuation of the practice and building during a transition.
Accountable Plan – With the removal of the 2% itemized deduction and higher standard deduction for individuals, deducting work-related expenses as an employee is almost impossible. As a result, having an accountable plan can provide significant tax benefits for both the business owner and the employees. A relatively simple document to create, it provides tax-free reimbursement to employees while allowing the employer a full tax deduction. Reimbursable items include business mileage, business cell phone use, business meals, etc.
Easy Retirement Buckets – 401K, Spouse 401K, Roth / Roth conversion = $53,000 a year on “auto pilot.” If you invest in these buckets at $53,000/year and earn a 5% rate of return for 30 years (ages 30-60), the account would be worth approximately $3.6M.
Kids on Payroll – Whether for cleaning, admin or more advance tasks for college-aged children like marketing/advertising, this is a great strategy to shift tax dollars out of your tax bracket to a lower bracket. As a planning note, once an individual has earned income, they can contribute to an IRA. For example: a child works for the office for 20 years (ages 5-25) and makes enough to fund a Roth IRA at $6,000 per year for those 20 years and makes zero contributions thereafter. If those dollars earn a 5% rate of return the account would be worth approximately $1,000,000 by age 60 and would have no taxes due upon withdrawal.
Transition Planning – Asset allocations (Tangible assets vs. Goodwill). Understanding how taxes can affect practice valuations and transition structure is crucial to a successful transition for both buyer and seller. Straddling practice/building sales across separate tax years may reduce overall tax liability.