Saving small business and real estate owners on tax is one the best ways I fulfill my personal mission - which is lowering the cost of capital for decision makers. Today, we're going back to school 🎒 with the 5 biggest tools SMB and RE owners should be using to do just that 👇

1. An S-Corp Somewhere
2. §469 Aggregation
3. Cost Segregation
4. 199A QBI Optimization
5. Operating Agreement Planning

But first...

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Well, back to it then.

An S-Corp Somewhere

S-Corps have their place in a tax structure. They may not be the main business if you have appreciating assets, outside investors, or debt - but they should still play a role somewhere. 📊

Here's their value:

1. Without a S-Corp, you will be paying self-employment taxes on all your business profits (which includes Social Security and Medicare taxes totaling 15.3%), 😨 you only pay those taxes on the salary you pay yourself as an employee of your S-Corp. The remaining profits flow through to you without those extra taxes.
2. Without a S-Corp, you could lose Qualified Business Income deductions (see below) with no way to increase them. 🙅 An S-Corp allows you, the owner, to pay yourself a salary an get an extra 20% deduction.

Again - don't go and put all your assets in a S-Corp. But you also shouldn't just resign yourself to not having one.

Section 469 Aggregation

This one sounds technical, but it's actually pretty straightforward. If you own multiple businesses, real estate properties, or both, the IRS normally treats each one separately for tax purposes. 🫂 Section 469 aggregation lets you group them together as one big activity.

Why does this matter? When "activities" (or income / loss from business and real estate properties) are grouped together, losses from one can offset gains from another more easily. Plus, it can help you qualify for certain tax benefits that require you to "materially participate" in your rental business. 🏡 🏢 💰

To qualify, your "activities" need to make up an "appropriate economic unit," which usually means they're in similar locations, control, etc. But the point is that while many owners believe this is how it works, without this election it won't.

Cost Segregation

This is like getting a detailed appraisal of your property, but instead of determining its value, you're identifying how quickly you can write off different parts for tax purposes. 🏎️

Normally, when you buy a rental property, you depreciate the building over 27.5 years (39 years for commercial). But cost segregation studies identify components that can be depreciated much faster. Things like carpeting, light fixtures, landscaping, and certain electrical work might qualify for 5, 7, or 15-year depreciation instead.

And those same types of assets can be eligible for Bonus Depreciation - or a special 1 year deduction. This accelerates a post-tax return on investment for many investors and owners. 🤑

Imagine buying a $500,000 business office. Without cost segregation, you might depreciate $400,000 of improvements over 39 years. With cost segregation, you might find $150,000 worth of items that can be depreciated instead the first year - offsetting that much business income immediately.

199A QBI Optimization

The 199A deduction, also called the Qualified Business Income deduction, is like getting a 20% discount on your business taxes. If you're eligible, you can deduct up to 20% of your qualified business income from certain pass-through entities like LLCs, S-Corps, and sole proprietorships.

However, there are income limits and restrictions. 🚧 High earners in service businesses (like consulting, law, or medicine) might not qualify, while those in real estate or manufacturing typically do.

The key is structuring your businesses and income to maximize this deduction. This might involve separating different activities into different entities, managing your total income source (W2 versus K1), or ensuring your real estate activities qualify as businesses rather than investments.

For someone with $1,000,000 in qualified business income, this deduction could save over $50,000 in federal taxes ANNUALLY. 🤯

Operating Agreement Planning

Your operating agreement isn't just legal paperwork - it's a powerful tax planning tool. 🏋️‍♂️ A well-crafted operating agreement can help you allocate profits, losses, and tax benefits among owners in ways that minimize everyone's overall tax burden.

But most owners disregard it as a "check-the-box" item that gets put in the safe.

A few important areas that owners must get right in business operating agreements:

• Allocation language agrees to investor expectations (avoiding surprise K1s) 🫴
• Profit interest legalese (to protect tax-free profits interests and capital gains at sale) 🔀
• Tax distribution language (to protect minority partners from getting squeezed) 🔞

Unfortunately, not all attorneys are up to par on tax impacts. 👉 (Shameless plug that I do this for a fee - review your operating agreement and tax returns to make sure they're buttoned up.) 👈

The Bottom Line

These tools work best when used together and when implemented properly. Tax law is complex, and what works for one business might not work for another. Always work with a tax professional who understands these strategies and can help you determine which ones make sense for your specific situation.

Remember, the goal isn't just to pay less tax this year, but to build a sustainable, tax-efficient structure for your business and real estate portfolio over time.

Play the long game but play to win. 🥅

If you made it this far - I'd love to hear from you. Reply to this email on what you'd like to read more about. And check out the channel on YouTube as I build that from scratch. Thanks!

And if you prefer to watch this edition, check out the below episode:

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