Issue 3: Is Tax Planning Important?

What is Tax Planning for Business Owners?

Before we discuss tax planning for business owners, let’s first talk about the first step of money.?That first step is “Your Relationship with Money”, what do I mean by this, I mean how well do you and your money get along, who is in control??This question is one of the hardest questions that any of us can honestly answer.?I bring this up because if you cannot understand your relationship with money, whether you are a business owner or not, any amount of planning will simply be null and void, because you will not truly give yourself to the plan that you create.

No worries, this article isn’t addressing that issue, just need to get your brain thinking.?So…What is Tax Planning?

Tax planning is the process of figuring out what you have done in the past, what you currently are doing and what we can project your future (within 18 months) to do.?That is the process in it’s simplest of forms.?Now I will take you through our process with Business Owners, with some real life examples as well, as a reminder you have to be willing to give a professional (CPA, CFP?) your entire financial picture, if you cannot do this there will be no point in moving forward.

To begin a business owner must provide at least their last two business returns, profit & loss statement, etc.?This allows us to have an honest look into what you are doing, the reason behind doing a deep dive immediately, is simple, there are things that maybe simple to change it reduce your tax burden by 20-50%, depending on your situation.?We have a current client that we did this exact process and made a tweak to how her business was structure, found she was not writing off business (in home), as well as her children were working in the business, and we immediately reduced her tax burden by $35k.?Simple write offs, cellphones, offices, marketing, advertising, vehicles, employee benefits, your OWN retirement, etc. will allow your tax burden to reduce drastically and that is not even getting into the complex concepts.

The second step is implementation of everything, now again you have to trust the professional and give up control and/or the job of doing your payroll, bookkeeping, tax planning otherwise it will be very costly to have a firm review your work and attempt to correct them.?Once you have done this there are two major times in the year that you will meet with your tax planning team, once will be in the summer June-July, this meeting will allow for your annual projections to be half over and have true data on where your tax planning needs to be focused on.?The second will be November-December, this meeting is just to finalize numbers, review all that has been implemented and make last minute minor tweaks, at this stage you know your tax refund or bill and would have saved/planned accordingly throughout the year.

Last step is to file your return get it signed and prepare for the next year’s June-July tax planning meeting.

Now that you understand the process in its simplest forms, what are some common techniques that you can deploy??Here are 5 of them; (some of these will be change depending on if you have employees or not)

1.??????Fully utilizing your employee benefits (even if you are a sole-prop)

2.??????Understanding what is for business purposes

3.??????Hiring a financial planner, who is an expert with business owners (services are deductible if they charge you a monthly retainer outside of assets you may have invested)

4.??????Structuring your business

5.??????Defining your role

Fully utilizing your employee benefits

This topic we could spend 10 pages on, but we won’t.?Business owners have a plethora of options when it comes to reducing their tax burden by adding benefits to their business (regardless if they have employees or not).?Some of these benefits are; Self- Directed Accounts, SIMPLE IRA, 401k, Solo k, HSA, HRA, Life Insurance, Disability Insurance, Student Loan plans, Bonuses.?Now they seem simple on the outside but within them, there are concepts to gain more tax deductions.?For example, we have a client who owns a firm and makes about $600k a year (gross), we got him in the premium finance concept, which is an supplement retirement plan utilizing leverage from a bank to fund an IUL.?This loan from the bank, those interest payments are deductible (this case $75k a year) for 10 years.?At the end of those 10 years and once the note was paid off in year 13, this client will receive $290k in tax free income from this plan!?

Huge deduction for a huge benefit, we also can do that same plan for the spouse, children or key employees.?Now wouldn’t that be an amazing perk as an employee, more reason to be loyal and work hard.

Another example is utilizing a Self-Directed Solo K (401k for self-employed), this client maxed out a solo k and added his wife, for a combined $110k into their plan.?Now that it is inside the self-directed option, we were able to purchase commercial real estate or another business with this solo k money.?He invested in a building that initially sold for $1.5 million and is now worth $4.5 million, in just little over 5 years. Now that is growth within someone’s retirement that we LOVE TO SEE!

Last example and we will move on, HSA.?We have a client who added a health plan to his business and maxes out his HSA as well as his employee’s HSA.?For a family that is $7k, huge benefit to the employee and another deduction for the business.?He coupled that with an impressive plan that has a family deductible of $4k, so that means in any year the family can max out their deductible and still be ahead $3k, in which we can invest this money every year until they retire and have another account for retirement!?Assuming a 7% growth rate over 30 years, net the deductible, this account could be about $283,382.35 of tax-free money (if used properly in retirement).?Count me in!

Understanding what is for business purposes

What is utilized for business and what is not??Here is a list of 10 missed business expenses, (some may apply to in home businesses)

1.??????Utilities (internet, water, gas, electricity, etc.)

2.??????Cell Phone

3.??????Vehicle

4.??????Portion of your Mortgage

5.??????Advertising (simple sponsorships)

6.??????Donations

7.??????Education

8.??????Meals (modified for new tax code)

9.??????Travel

10.??Professional Fees (CPA, Financial Planner (CFP?), Attorney, etc)

Hiring a Financial Planner (CFP?), focused on Business Owners

Selfishly, having a planner on your team will ensure accountability to the tax planning process as well as your financial plan personally and of your business.?Our firm will go as far as being your personal CFO and your business CFO, that way you can grow your business like a true business and not just someone who is working in and on the business but a true business where you can leave and s*** won’t hit the fan.

A planner who focuses on business owners will know the techniques I mentioned above and will be able to separate you from your personal and your business finances.?Most of the time business owners believe they are one in the same, but they are not.?You are an employee of your business (with added perks) and therefore you need to run your life as if you are an employee and deal with the business as a separate issue as much as possible.

Your planner will be the quarterback of your ENTIRE financial picture as well as the coach, what do I mean by coach??Well someone has to keep you accountable to the plans as well as help you emotionally through the highs and lows during execution of the plan.

Added bonus, our services are deductible!?As long as they are not directly tied to your investments, find a planner who is paid on a retainer of some kind that the business directly pays for, then it is a business expense!

Structuring of your Business

There are WAY too many variables that go into play with this discussion however to keep it simple, should you be a S Corp, C Corp, or just LLC (sole prop)?

That is thee question!

If you make an income of at least $25k, it often is the trigger to becoming a S Corp.??As a S Corp, you have greater abilities to do employee benefits, more deductions and a little more protection than just a schedule c/1099 business owner.

So as majority of us will fall under the S Corp status, a C Corp may come into play for those international focused businesses, businesses that need/want to raise capital more easily.?

Yes I know this was very vague and simple but there is way more that goes into this topic, just know you need to seek professional help from a CPA, CFP? an attorney, with all of them on the same page to ensure your setup is correct!

Defining your role

This might be the hardest point to accomplish, as business owners we inherently want to be in control or know everything that is going on in and around our business.?To a point this is okay, however the most successful businesses have different roles, i.e. CEO, CFO, COO, etc. You need to determine what you are, it is okay to be the owner and be the sales person or the frontline employee. Do what you’re good at that can produce more revenue for your business and delegate/hire for the roles that will allow your business to run, now and 30 years from now, regardless if you are around or not.

Let’s be honest we all became business owners because we felt a need to be independent and saw a need to help others, which I love about being an owner.?However, our downfall comes when we lose or focus on our initial mission/vision. Every business goes through the infancy stage to a transitional stage, this transitional stage is on the Business Owner, this is when you hire partners, staff, or outside businesses to help take you from a hobby business to a fully operational business that operates without the owner needing to touch it.

If you can define your role, quickly and precisely, it will cost you less money and allow you to be successful quicker.

Cannot wait until next week or just want more, check out our podcast?@nobswealth ?and catch us on?youtube . You can always follow me on?Instagram ?and?Twitter ?as well! Or just email me, [email protected].

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Oh, yeah and have to put this in here...Compliance and all

“The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.”