I will Net over 1 million dollars from my business this year, now what do I do?

[tnt211]

Hello-

I'm not sure if this post technically belongs in this forum although I've sought advice here in the past, and the responses were both very intelligent and extremely helpful, so back to the well I will go once more    Thank you in advance for reading this post. 

I am 35 years old, married with two small children (4 and 3).  I'm in year 2 of my business (sole owner), and am projecting to NET over 1 million dollars this year, pre-tax.  My plan is to first and foremost use this positive cash flow to scale my business so I can maintain this rate of growth, or at least try too!  However, even with an aggressive growth plan in place, I'll still have appx. $500k which will appear on my tax return as income unless I come up with some forward thinking ideas now in order to minimize the tax burden which will come as a result.

Here's my initial plan.  I gratefully welcome all feedback, especially the criticism, so please do not hold back if you see holes in my plan, or my head!

PART ONE: I currently have two S-corps (Biz #1 and Biz #2).  In reality, I actually have a third biz that operates independently of the first two but last year I just tacked on the revenue of biz #3 to biz #1 & 2's tax returns which from what I understand, increased my tax burden for biz #3 (i.e. net income was taxed in a higher tax rate than it should have been).

Biz #1 = will net around 800k
Biz #2 = will net around 200k
Biz #3 = will net around 40k

With this in mind, he first part of my plan is to create a third entity for Biz #3 so come tax time; this business will be taxed at a lower rate.  In order to make this work, I will give 51% ownership of Biz #3 to someone I trust that is in a low tax bracket - I will still retain full control of the company via written agreement. 

I could do the same thing for Biz #2 but based on the corp. tax rates below, this may not be a smart move since it appears Biz #2 would actually pay more in taxes (+5%) if I completely separated it from Biz #1, and myself. 

    $        0    to $    50,000        15%
                50,000            75,000        25%
                75,000            100,000        34%
              100,000            335,000        39%
              335,000        10,000,000      34%

If my line of thinking is correct, then for Biz #3, I will save 19% in taxes or $7,600 based on a projected net income of 40k for 2016.

PART TWO:  My wife and I own one home; our current residence which we bought for $160k. We still owe $90k on the note.  One goal I have is to become a real estate investor.  If we purchased a second, more expensive home, made it our primary residence, and then begin renting out the first home.  Could I then pay off that 90k note before the end of 2016, and claim it as a deductible business expense?  Would it be wise to create a LLC for my real estate company before I do this, and make my wife the majority owner so I can get the same tax benefits as I would get with Biz #3? 

Thinking out loud now... Until I add more properties to my portfolio, I'm sure I'd be operating at a loss after all expenses so I guess keeping myself as the majority owner (or not even creating a legal entity for now) would benefit us more in the long run since those losses could lower my income for Biz #1 and Biz #2.  Does this sound like a realistic and more importantly logical plan, or I do sound as ignorant as I feel?

Thanks again for reading! 

Sincerely,

tim 

[clacy]

Giving away controlling interest in company #3, sounds like a recipe for disaster. Partnerships usually end badly, and money can easily cause someone "you trust" to pull a 180.

Are you consulting a good CPA firm that is very familiar with small and mid sized businesses? They are worth their fees in my experience.

[tnt211]

@MangoMan

Thank you for pointing that out!  In that case, I'd save 24.6 % in taxes for Biz #3 making the total savings $9,860.

It then would also make financial sense for me do the same thing with Biz #2 as I'd be saving 11.6% if filed separately from my wife which would equate to a tax savings of $23,200 based on the 200k income. 

Albeit ... I am not taking into account the huge risk of giving away 51% control of my companies, but assuming that this risk was neutralized, that's an extra $33,060 in my pocket that would otherwise go into Uncle Sams.  Is that part of the equation accurate? 

@clacy

I am meeting with a new accounting firm who is familiar with companies my size at the end of the month.

Thanks and Thanks!

[I Shrugged]

It's always very tempting to play every tax angle.  But as has been said, don't give away something just to fight taxes.    Your new CPA firm will have some good advice.

[clacy]

It's always very tempting to play every tax angle.  But as has been said, don't give away something just to fight taxes.    Your new CPA firm will have some good advice.

Yep, get a reputable CPA firm and do what they tell you. It's worth the money to sleep at night knowing you're not doing something illegal or quasi illegal.

[Libertarian666]

Are you going to file a gift tax return for giving away some of your assets? I think you are opening up a huge can of worms in doing that.

If this level of income is likely to continue in the future, I would use some of the money to arrange for a second citizenship, then move abroad to a country with lower taxes and renounce my US citizenship. That is the biggest way to save taxes, and is perfectly legal (so far).

[Mark Leavy]

If this level of income is likely to continue in the future, I would use some of the money to arrange for a second citizenship, then move abroad to a country with lower taxes and renounce my US citizenship. That is the biggest way to save taxes, and is perfectly legal (so far).

I very much appreciate this sentiment - and a second citizenship is a fine thing.
But...  as freaking expensive as it is, a US passport is the best there is.  It's worth whatever you have to pay to keep it.  A few years of traveling the world will convince you that the Danegeld is worth it.

[bedraggled]

Mark,

"Danegeld?"

Cheers!

[barrett]

Mark,

"Danegeld?"

Cheers!

Yeah, I had to look that one up. Here is is:

"A land tax levied in medieval England, originally to raise funds for protection against Danish invaders."

Agree with Mark on the US passport. Don't take it for granted!

[jafs]

Congratulations on your success!

You'll get a bunch of different opinions on here, as you can see, and you'll have to decide for yourself, of course.

Mine comes with all of the disclaimers, that I'm not any sort of expert, and also that I've never had the kind of money you're dealing with.

And it's just another possibility to consider - but you could just pay the taxes, pay off your mortgage, and invest your windfall in some reasonable way that matches your willingness and need to take risk, and keep your life relatively simple.  If you're expecting to make anywhere near this kind of money in the future with your businesses, you'll be very wealthy in little time.

[Cortopassi]

I am curious -- what are the businesses?

[jafs]

I assumed in my last post that you have enough to live on, and also a cushion of savings, before investing anything.

If you don't have a lot of debt, and aren't attached to where you live, another possibility is moving somewhere, either in the US or in another country, where you can live on your investments without having to keep running your businesses, if you can't do that where you currently live.

[Libertarian666]

If this level of income is likely to continue in the future, I would use some of the money to arrange for a second citizenship, then move abroad to a country with lower taxes and renounce my US citizenship. That is the biggest way to save taxes, and is perfectly legal (so far).

I very much appreciate this sentiment - and a second citizenship is a fine thing.
But...  as freaking expensive as it is, a US passport is the best there is.  It's worth whatever you have to pay to keep it.  A few years of traveling the world will convince you that the Danegeld is worth it.

It chains you to the IRS for your whole life, which no other "advanced country" passport does.

[jafs]

I second TPG's recommendation to talk to some reliable experts about this.

And, a lot has to do with what your goals are, and your situation - if you have kids you want to send to private schools, and you want to build an estate to leave them, that's very different from no kids, for example.

So I'd also suggest clarifying your goals, and using the experts as a way to help you achieve them, rather than just relying on their advice.

[jafs]

I love thinking about these sorts of things, and so I ran a simulation with $600K to invest.  We could probably live comfortably on about $30K/yr, so I calculated an investment in a 50/50 split of itot/tlt over the last twelve years, re-balancing every year and taking $30K out each year.

At the end of that period, the remaining balance would be around $900K, which translates to an annual yield of about 4.4% on the initial investment.

There were only a couple of small down years, and only one year in which the principal dropped below the initial $600K.

It's not as precise as it would be if I included taxes, and/or taking the money out more from one half than the other (which I would do if one side made a lot more), but it gives a good overall picture of what's likely to have happened.

[Pointedstick]

There are many reasons why one might want to continue that kind of income and amass a huge amount of money. Perhaps for the goal of giving it all away to a favored charity or creating an endowment for an organization or something. Once you have that kind of wealth, just providing for yourself and your family is already finished and starts to fade into the background into the constellation of what kind of impact you want to have on the world with that money.

Regardless, I think you've gotten great advice so far, Tim. Talk to a small business professional, pay whatever tax you owe without going overboard with the tax avoidance tricks, and keep doing what you're doing! It's clearly working. Congratulations on the business success!

[dragoncar]

Yeah, what business?  I think the advice should go in the other direction

[Gabe]

tnt211, look into the Puerto Rico option. In an effort to rouse their dismal economy, a few years they legislated a few new policies that drastically the dropped their personal income tax rate (ceiling of 4%) and capital gains/interest/corporate tax to 0% for corporations and remote workers that moved to Puerto Rico and became new residents. And because they're a commonwealth of the US, not a state, residents aren't liable for federal income tax (though they still pay medicare/SS).

A buddy and I flew out there in December 2014 and explored the island. Through an extremely unlikely series of events, we ended up at an intimate dinner at the house of the regional president of Univision for all of Latin America. He confirmed that this really was as good of a deal as it seemed, and offered to personally introduce us to the Minister of Finance if we needed any help getting set up . But neither of us were really in a position where we'd reap a massive financial benefit, and I liked other countries better.

I'm moving to SE Asia in just over a month, and between the FEIE and an Individual 401k for my LLC I can dodge income tax on up to $137,850.62. At a lower threshold than that I'd rather work less than make more, so the FEIE exemption is enough for me - but if I were in your position, I'd investigate the Puerto Rico option. It's the only place in the world where you can totally escape those federal taxes while still retaining your US citizenship. A number of entrepreneurs and hedge fund managers have relocated there (including Peter Schiff). You need to have been a resident for the entire tax year, so if you were to pursue this it'd require some maneuvering to defer the earnings a little longer and possibly re-incorporate there.

There are a number of Puerto Rican law firms that specialize in this.

If you do go, our favorite places were Old San Juan and Fajardo. I was giggling with delight for over an hour straight when we went kayaking at night through the bioluminescent bay in Fajardo. That place was absolute magic.

[MachineGhost]

tnt211, look into the Puerto Rico option. In an effort to rouse their dismal economy, a few years they legislated a few new policies that drastically the dropped their personal income tax rate (ceiling of 4%) and capital gains/interest/corporate tax to 0% for corporations and remote workers that moved to Puerto Rico and became new residents. And because they're a commonwealth of the US, not a state, residents aren't liable for federal income tax (though they still pay medicare/SS).

http://www.internationalman.com/article ... should-too

[WiseOne]

+1 to TennPa's recommendation.  Find yourself a good tax attorney and go through the options.  I assume you already have an accountant doing your taxes...start there maybe?

I'm not clear on whether your business income from #1 and #2 are one-time windfalls or ongoing income, and whether you want to keep these businesses or sell out.  Also depends on your current and projected expenses, and whether you're looking to retire.  If it's a one-time windfall, there are ways of deferring income to reduce the tax hit.

Either way, your situation sounds excellent and most likely well-earned.  Congratulations!