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 π Also on YouTube at PlugAccountingandTax!
Freakonomics of Tax π - Unlikely Combinations
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Freakonomics is a classic read about initially uncorrelated outcomes. π One of the more memorable correlations is how diapers and beer were purchased together at grocery stores. It seems weird at first until you think about young dads at the store to buy diapers and likely not being able to go out to a bar and drink. πΊ Tax strategy works the same way. π Business owners and tax pros alike can approach each tax strategy as a standalone tool.
These strategies operate independently in most people's planning. The real value comes from recognizing that certain strategies pair together π« in ways that create more opportunity than either one creates alone. When you combine them strategically in the same tax year, you compound value that the individual tactics can't achieve on their own. Let's get into it. Bonus Depreciation + Roth ConversionsYour biggest depreciation year is also your best year for a Roth conversion. Bonus depreciation creates a massive deduction in a given year. A Roth conversion adds taxable income through the conversion amount. These pull in opposite directions for a good reason. π That bonus depreciation puts you in a lower marginal tax bracket. βοΈ That lower bracket is exactly when a Roth conversion costs the least. You're converting dollars at a reduced rate because your other income is offset by the depreciation deduction. You take income that would normally be taxed at your full marginal rate and convert it at a substantially lower rate. The bonus depreciation created the conditions to buy Roth dollars at a discount. π° Opportunity Zones + Tax Loss HarvestingWhen you invest in an Opportunity Zone, your original capital gain gets deferred. β After five years, that deferred gain is automatically taxed back into your income, albeit at a reduced rate. But it's a fixed date on your calendar. The useful part is that you can plan for it. You know exactly which year that original gain will be taxable. That advance notice lets you manage your portfolio strategically around that event - and accumulate as many capital loss carryforwards as you can. πͺ£ During year five when that deferred gain gets triggered, you can deliberately realize losses from underperforming positions in your portfolio. Those losses offset the gain recognition that's coming back in anyway. The two strategies work together because you're using the predictability of the OZ rule to rack up your loss harvesting strategically. Paying your Kids + Schedule C + Roth IRA + Trump AccountsThis strategy garners a lot of eye rolls by tax pros. π Usually because people are overpaying their babies to be models. This isn't that. If you can justify a real wage to your kids labor then there's an ideal way to do it:
That's a deduction for one child of over $20,000 once you factor in the savings of FICA through a Schedule C. Again - run it right and don't cheat. π ββοΈ Reverse Cost Segregation + Installment SalesReverse cost segregation (or 4797 Optimization) allocates more gain from a sale to land and non-ordinary income recapture assets (building). π An installment sale spreads gain recognition across multiple years. ποΈ These strategies have different purposes. But here's where they collide: ordinary recapture from depreciation isn't eligible for installment sale treatment. It gets taxed in year one regardless of the installment sale structure (whether you got any cash or not). Capital gains get deferred across the payment schedule. When you combine reverse cost seg with an installment sale, you are shifting more capital gain to be deferrable and avoiding the phantom income of recapture tax on those short-lived assets. π«Έ Worth pointing out that goodwill (if you buy a business you later sell) is also subject to recapture at ordinary rates - so any amortization you took on that over the time you had the business is taxed immediately even if sold on a seller note. The TakeawayWhat connects all four pairings is a principle: tax pros and business owners can get laser focused π¬ and optimize each tax decision independently. They minimize taxes on that one transaction, that one year, that one situation. The advantage goes to people who see tax years and strategies as interconnected systems. π€ Your biggest deduction year connects to your Roth conversion planning. Your capital gain realization connects to loss harvesting. Your business structure connects to your family's wealth building. Look for connections between strategies that seem unrelated and find opportunities that are hiding in plain sight. π«‘ π₯ Hottest Finance Posts This Week π₯β
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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 π Also on YouTube at PlugAccountingandTax!
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