I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox 👇 Also on YouTube at PlugAccountingandTax!
What Tax Strategy Looks Like in Practice 👀
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Calls with prospective clients often turn into "show me what you got" contests. But tax strategy doesn't work like that... It's a multi-phase process of decision making. Before we name a single strategy, we have to answer three questions about you. The answers decide which moves are on the table and which are noise. And this process compounds with time - as we learn your tendencies, goals, and risk appetite. And with our selling season picking up steam, I wanted to share how we think about this. First, what kind of taxpayer are you?Every taxpayer fits a profile, and the profile decides which strategies are even worth discussing. A real estate operator, a high-income pass-through owner, a founder heading toward a sale, a high-W-2 earner, and a family doing estate planning all live in different worlds. A cost segregation study is central for the real estate operator and irrelevant to the W-2 earner. Qualified small business stock matters to the founder and means nothing to the landlord. We start here because it keeps us honest. There are more than seventy strategies on our master list. Your avatar cuts that to the handful that fit your facts, so we are not running you through moves built for someone else's balance sheet. Second, are you in a high or low income year?The same person needs opposite moves in different years. We call this your income orientation. In a high-income year, we defer income and accelerate deductions. Push income into a retirement plan, bunch several years of charitable giving into one, buy the equipment now. In a low-income year, we do the reverse and pull income forward while it is cheap. Convert a traditional IRA to a Roth at a low bracket. Harvest gains before the rate climbs back up. The strategy is fixed to the year, which is why the plan gets revisited every year instead of a set-it-and-forget-it style. Third, is this a matter of structure, elections, or timing?Every move we make sorts into one of three levers. Structure is how you are built. What entity you are, how income flows, how the pieces are owned. It is the foundation and the hardest to change later, so we look at it first. Elections are the choices you file with the IRS. An S-corporation election. Real estate professional status. The pass-through entity tax. Most cost little and can be worth six figures, and most carry a deadline. Timing is when income and deductions land. A cost segregation study, an installment sale, a retirement contribution. The dollars are often the same over a lifetime. The year they hit is the whole game. What this looks like for a high-income pass-through ownerAn LLC clears $700,000 a year, one owner, working in the business full time. He also owns the building his business runs out of, held in a separate LLC that leases it back to the company. The avatar rules the board. This is a high-income pass-through owner who owns his real estate, so entity structure, the QBI deduction, and the building's depreciation are all in play, while estate trusts are not. The orientation is high income, so we lean toward deferring income and pulling deductions forward. Then the three levers do the work. On structure, we elect S-corporation treatment and set a reasonable salary, taking the rest as distributions. Those distributions skip the 3.8% Medicare layer that wages carry. That same election drives the QBI deduction, and lower wages can shrink it, so we model the two against each other rather than chase the payroll savings blind. The other limitation is what we can do with the bonus depreciation and that drives how much QBI deduction and how much we'll need in payroll. The building becomes the big lever, and it takes timing and an election working together. We run a cost segregation study that reclassifies part of the building into short-life property, which 100% bonus depreciation lets him write off up front. On a $1.2 million building, that can free up a first-year deduction north of $300,000. Here is the catch. On its own, that write-off is a passive rental loss, trapped and useless against his business income. So we group the rental LLC and the operating business into one activity under the §469(d)(1) election. Because he materially participates in the business, the combined activity counts as non-passive, and the deduction lands against his top-bracket income. At 37%, a $300,000 deduction is about $111,000 of tax, moved off his return in a single year. The TakeawayOne profile, one orientation, three levers. That is how a vague goal of "pay less tax" turns into a short list of decisions the owner can actually make. The value is in the fit and the order, not the length of the list. Most owners do not need all 70+ strategies to read over at night - they need a guide and help focusing on how to win at the ones that matter. If you liked this, here's a visual that's included in our services deck we share with prospects: 🫡 Group Chat Worthy Posts 🔥📲
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The Plug [Newsletter]
I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox 👇 Also on YouTube at PlugAccountingandTax!
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