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Simple Tax Planning Tips for Business Owners and Individuals

Updated: Dec 5, 2020

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For most professionals, tax planning is usually done at the end of the year. However, that doesn't mean it should be the first time you've reviewed this topic with your client. For the best results, you should be scheduling three to four meetings throughout the year. In addition to being able to charge for those sessions, you'll obtain knowledge as how your client runs their business day to day, their future goals and their tax liability, so you can make any necessary adjustments.

Below, I'll discuss some tips for both business clients and individuals to make these sessions more valuable to both of you.

Business Clients

After the TCJA went into effect, it was time to reevaluate your business client’s tax situation. For example, would they benefit from electing to be taxed as a C or an S corporation? With the lowering of tax rates on C corps to 21 percent, this option is now better for some.

For example, the 20 percent deduction of QBI, complete with the temporary and final regulations, made my head spin. Licensed professionals are excluded from the 20 percent deduction. Further, if a client’s AGI exceeds a certain amount, the Section 199A deduction is pretty much useless. In short, what was once good for some business owners may not be beneficial anymore.

Most of my clients are high net worth. Outside of the so-called 50 percent deduction for wages, there isn’t much that can be deducted. And with all of the same precluded deductions for fringe benefits for 2 percent or more shareholders, partnerships and sole proprietorships, most of my clients benefit from converting to an S corporation. Then there's Revenue Ruling 2019-13, which simply states:

When an S corporation's S status terminates, it goes through a “post-termination transition period” (PTTP) under Code Sec. 1377(b)(1). During the PTTP, the former S corporation can continue to take advantage of some of the benefits associated with its S status. For example, Code Sec. 1371(e) provides that, in general, any distribution of cash by a former S corporation with respect to its stock during the PTTP is applied against and reduces the adjusted basis of the stock to the extent the distribution does not exceed the corporation's AAA.

Code Sec. 302(a) sets conditions for distributions in redemption of stock of a corporate shareholder being treated as distributions in payment in exchange for the stock. Where those conditions are not met, such distributions are treated as distributions of property to which Code Sec. 301 applies. Code Sec. 301 sets out rules for the treatment of such distributions, including treatment of the distributions as dividends and as amounts applied against basis.

As you can see, the company can benefit from the 21 percent lower tax rate, avoid double taxation and qualify for fringe benefits.

When converting to a C corporation, one major contention is the issue of the retirement account. Most clients open safe-harbor 401k plans, all of which have a Roth option. Since personal income tax isn’t a concern for C corporations, an owner can contribute $19,000 if they are under 50 and $25,000 through salary reductions to the Roth option of their 401k (I will get into why in a moment).

Further, with the safe harbor, they can contribute up to 25 percent of their salary, which is tax deductible, to the C corp, up to $54,000. If they have their employees in a safe harbor plan, their only requirement is to contribute 3 percent of their employee’s salary (of those who participate) into their plan.

Additionally, fringe benefits like health insurance, company cars and health reimbursement accounts (HRAs) are now deductible.

Note that a C corporation election is not right for every client, but meeting with them three to four times a year will allow you to decide if it is time to convert. Also, if the company’s plan is to sell, under Section 1202, they can sell their stock for $10 million or less tax free, in most situations.

Because of bonus depreciation and Section 179, a lot of tax professionals will tell a client to buy equipment, whether they need it or not, to get the expense deduction. This is horrible advice, bordering on malpractice. If the client needs the equipment, then by all means, they should buy it. However, if they don’t, there is no reason for it.


With individual clients, I take a different approach. Why? Well, I read an article about eight years ago that stuck with me. At retirement age, 65 to 75 percent of all a person's expenses will become health related. Typically, most retirees will take these funds from their retirement accounts, pay tax on the distributions and be left with a medical deduction that has to exceed 10 percent of their AGI. That is just stupid.

Fortunately, there are ways to avoid this. First of all, most people are healthy when they are younger. Why not have them elect a high deductible plan and supplement it with an HSA? For these purposes, a high deductible plan in 2019 for individuals is $1,350, and their annual out-of-pocket expenses cannot exceed $6,750. For a family in 2019, a high deductible plan has a deductible of $2,700, with out-of-pocket expenses not exceeding $13,500. The maximum HSA deduction for individuals is $3,500, while for families, it is $7,000. If this money is not used in 2019, it rolls over.

Further, in an HSA, you can invest your money, and it will grow tax free. If you use the HSA funds for medical expenses, they are tax free. You also receive an above-the-line deduction for the contributions you make.

Now, back to retirement accounts. Roth contributions are made post-tax. However, if you keep them in the qualified account for five years or more and then take them out, they are tax free. If you are under 59 ½ there is a 10 percent penalty for the distribution.

When planning for individuals, you might want to start systematically converting pre-tax contributions to a Roth, since the rates are lower. The taxpayer will have to pay tax on the conversion, but you can start a plan where the burden is barely felt.

In addition, if your AGI is too high or you contribute to an employer’s retirement plan, you will not be able to deduct your contributions to a traditional IRA. However, tons of people still make these non-deductible contributions. If you are under 50, you can make a contribution of $6,000 to an IRA, but if you are 50 or older, the maximum contribution is $7,000.

About 15 years ago, I devised a trick. Today, it’s called a backdoor Roth. Here's how it works: You can make non-deductible IRA contributions, leave them in the IRA for a week, then convert them to a Roth. The taxpayer will only have to pay tax on the earnings the IRA made from the time of contribution and the conversion. If the contribution is there a short time, how much could it earn?

All of these tricks keep an individual's future in mind, when their medical costs will exceed exponentially. They can pull out money tax free for medical expenses.

This is only Part I of my simple tax tips. Look for Part II soon.

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