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 ๐ Also on YouTube at PlugAccountingandTax!
Growth-based Tax Planning ๐
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Every year I talk to dozens of business owners who want to change CPAs. Their current guy isn't future-oriented enough for them - doesn't bring them ideas or strategies. I share our strategies page on our website and then ask them about their 3 year forecast for their business. Guess how many have one. I can't think about your business future more than you do. ๐ฎ I can't bring you strategies that don't belong in your tax plan. So the right place to start in strategic tax planning is getting into the details of the future. A handful of targeted questions makes strategy easy to see. So here are three questions you can use to start that process and bring to your tax guy. Let's jam โคต๏ธ 1. How will you generate growth?The usual options: raising prices, spending on marketing, hiring, opening a second location, entering a new territory, adding a product line, buying a team (acqui-hire). None of these changes the entity by itself. Every one of them moves your bracket, your state footprint ๐ฃ, the character of what people get paid, or the credits you qualify for, and any tax plan has to know which. Prices and margin are the cleanest case. Profit goes up with no new deduction attached, so we bake in high-income strategies: retirement plan contributions, bunching charitable gifts, the PTET election mattering more, and the S-corp layered into the org chart. Marketing and reinvestment years run the other way. ๐ข Heavy spend means low profit, and low-profit years are when you convert to Roth, harvest gains at 0% or 15%, and hold any CAPEX bonus deduction for the year it's worth more. Hiring and new markets change the wage and state math. W-2 wages are what let a high earner keep the QBI deduction, so swapping staff for contractors to save payroll tax can cost more in QBI than it saves. A new state means nexus, apportionment, whether that state conforms to bonus depreciation, whether it offers PTET, and usually its own entity so the segment stays clean. 2. How will you fund it?There are three traditional sources: you borrow to buy assets, you raise equity, or you reinvest profits. The funding source helps decide the entity. Borrowing. ๐ฆ A partner's share of the partnership's loan counts as basis, so debt-funded losses flow through to their return. An S-corp shareholder gets basis only from money they put in or lent themselves. An S-corp that finances $300,000 of equipment and takes bonus depreciation on all of it produces a $300,000 loss that stops at the shareholder's stock basis; a shareholder with $50,000 of basis deducts $50,000 and the rest gets held up. The same purchase in a partnership? No limits - the full loss lands. That is the whole reason real estate and leverage live in a partnership and never in an S-corp. Outside equity. ๐๏ธ An S-corp can't offer a preferred return and can't take a fund or another entity as a shareholder, so outside money usually means a partnership or a C-corp. An underrated item here is that in partnerships the operating agreement needs tailored allocation language, a waterfall that matches the term sheet, tax distributions so no partner writes a personal check for tax on profit the company kept, and a few other bits I write about regularly. Reinvesting profits. ๐ Self-funded growth carries the ugliest surprise of the three: you pay tax on money you never took home. A pass-through owner with $400,000 of profit who reinvests $250,000 in inventory, hires, and equipment still reports $400,000 (if not all done in the same year), and at 37% that's $148,000 of federal tax on cash sitting in the warehouse. A good strategy plan treats that tax as a working-capital line and pushes deductions into the high years: retirement plan, bonus on the growth capex, PTET, an accountable plan. If the earnings are going to stay in the business for years, the 21% corporate rate deserves a real look, with the 5+5 optionality (convert back to S-corp, wait out the built-in gains period). 3. How will you monetize it, and when?The big one. A sale to a strategic buyer, to private equity, to the employees, to the kids, or never. The way a buyer will want to buy you decides what you build now, and the sale year is the year deferrals comes back. โป๏ธ Sell to a buyer. An asset buyer wants a clean single-segment entity and a price they can depreciate. A stock or QSBS buyer wants a C-corp that has existed for the full holding period. If you're an S-corp and the buyer wants asset treatment, the F-reorg gives it to them without a taxable liquidation. On the seller's side: an installment sale spreads the gain across years and rates, a personal goodwill allocation pulls value out of a C-corp at one level of tax, and gain on an S-corp you actively ran is outside the 3.8% net investment income tax. Sell to the kids or the team. ๐ธ Installment structure, a family partnership that lets you move value without moving control, and a buy-sell agreement written into the operating agreement. The tax cost is spread over the years the payments arrive, which is also when the rates are known. Hold forever. For the real estate half of this list, this is the answer, and it changes deferral strategies. Property that passes at death gets a stepped-up basis, which means the cost seg deductions, the depreciation, and every 1031 gain in the portfolio are never paid back. A deferral held to death is a permanent saving. The same cost seg on a property you'll sell in three years in the same bracket is a loan from the IRS with a recapture bill attached. Not so with the "never sell" group. When. The sale year is the reversal year, so it sets the spread every deferral is priced on. A sale in a year you're at 20% capital gains against deductions you took at 37% ordinary is the whole play. Sell the property instead of the business and the menu changes to 1031 or a tenancy-in-common structure, the poor man's 1031 (buy the replacement in the gain year and bonus it), an opportunity zone deferral, and reverse cost seg to minimize recapture. The Plan needs that order in reverseHow you'll monetize decides which entity a buyer will want to see. That entity decides how efficiently growth can be funded and whether the deductions reach you. And the funding path decides what each growth move in question one is worth once it hits the return. The TakeawayThe tax bill of a growing business is an output of three questions: how the business grows, how you pay for it, and how and when you cash out. Strategies in our library slide in off those answers. If you can answer all three, the plan mostly writes itself. If you can't yet, that's the first thing worth working on before talking to a new tax guy. Caveats of course - I'm a CPA, but I'm (probably) not your CPA. Run any of this past your own advisor before you change anything on a return. ๐ซก Group Chat Worthy Posts ๐ฅ๐ฒ
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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 ๐ Also on YouTube at PlugAccountingandTax!
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