Let’s discover how to lower your taxes now and never pay taxes when you sell your business.
Operational tax benefits
Let’s look at a different way to operate your business than you may have in the past from a tax standpoint. This does not affect your day-to-day operations; it simply changes what you do from a tax standpoint.
Assuming you are set up as an S-corporation, if your business distributes all your money and uses the money to either spend on personal purposes for investing in real estate or other investments outside the business, it should remain a pass-through entity.
However, with C-corporations being taxed at a 21% tax rate, if you’re taking out some money for a salary and leaving most of the money to reinvest in your business, you should consider being a C-corporation.
C-corporation considerations
Now to become a C-corporation, you could form a new corporation as a subsidiary. This can be owned by anyone, and you take all your business operating assets and contribute them to the new C-corporation in exchange for stock of that C-corporation. This allows all the appreciation in that C-corporation from the day you set it up to the day you go to sell it, as long as you hold it for 5 years, to be tax-free. It’s important to sit down with your tax advisor to discuss this.
Remember, while you’re set up this way, you can deduct your state income taxes and only pay a 21% tax rate. You will still pay your regular income tax rate on the salary you take out or anything you take out for something else. If you’re still looking to invest, leave some of your business in your S-corporation and put part of the business in the C-corporation. When you go to sell, you’ll likely sell all of it, so the portion in the S-corporation will be taxable and the portion in the C-corporation will be non-taxable. You’re going to sell the whole structure to the buyer.
Find good advisors
Remember, one of our goals with tax planning is flexibility. You have flexibility with regards to the different entities used, the way you own your business, and how to set up your business. Always look for how you can get tax benefits and how to make things deductible. When you work with your tax advisor and your attorney, always ask how you can do what you want to do. Ask your advisors, “how can I do what I want to do?” This allows you to decide whether you want to make those changes or to decide what to do with your money. Sometimes, advisors tell you that you can’t do that, but that’s not true. Watch out for accountants and attorneys who are deal breakers and preventers. Good advisors can create a scenario where you can do that.
One key takeaway is to never do this on your own. You want a professional tax advisor who really understands this to help you and walk you through it. Make sure to help your tax advisor understand what changes you’re willing to make in order to lower your taxes.
Remember, the government wants you to build a business, invest in real estate, create jobs, and do research and development. All the 7 investments Tom details in his book, “The Win-Win Wealth Strategy: 7 Investments the Government Will Pay You to Make” show how the tax law tells you what the government wants you to do. You can benefit now by lowering your taxes and you can later earn the greatest tax benefit when you sell your business and pay zero tax. The tax law encourages you to build a business and be a better business owner. When we do what the government wants us to do, we make way more money and we pay way less tax.
Want help creating a strategy for making way more money and paying way less tax? Book a call with TFW Advisors® today!