25 BASIC TAX PLANNING STRATEGIES

CHOOSE THE OPTIMAL BUSINESS ENTITY
STRUCTURE

  1. Avoid the double taxation applicable to the earnings of a C-
    corporation by electing S-corporation status.
  2. Avoid a flow-through regime (such as Schedule C or K-1) that
    subjects 100% of allocable business income to payroll taxes.
  3. Take advantage of a C-corporation in order to reinvest earnings
    in the business at a lower top marginal tax rate (34%) than the
    rate applicable to individuals (39%) under a flow-through regime.
  4. Take advantage of a C-corporation's ability to provide tax
    deductible benefits to shareholders with more than a 2%
    interest, which are restricted in an S-corporation.
  5. Use a C-corporation and an S-corporation together, in order to
  1.  combine the advantages of both forms
  2.  take advantage of the separate set of graduated income
    tax brackets available in a C-corporation and
  3. improve asset protection.

TAKE ADVANTAGE OF DIFFERING TAX RATE
SCHEDULES

  1. Take advantage of a second set of graduated income tax
    brackets by allocating taxable income to a C-corporation.
    Allocating $50,000 of earnings to a corporation can produce
    $12,000 in annual income tax savings, because the 15% initial
    corporate rate represents a 24% savings from the 39% top
    individual rate ($50,000 x 24% = $12,000).
  2. Take advantage of differing fiscal years and accounting methods
    between entities (and the owner) to create income deferral
    opportunities.
  3. Lower the owner's salary to reduce payroll taxes, while making
    up the difference in the form of distributions from an S-
    corporation.
  4. Take advantage of corporate tax deductions from which
    shareholders can benefit on a tax-free basis, such as qualified
    retirement plans, health plans, group term life insurance,
    cafeteria plans, non-taxable fringe benefits, meal reimbursement
    plans and 14 day rental of personal residence.
  5. Transfer shares of an S-corporation or other flow through entity to
    children active in the business, to take advantage of a second
    set of graduated income tax brackets.
  6. Transfer shares of an S-corporation to a tax-exempt ESOP trust
    to escape all taxation of the allocable low-through earnings.
  7. Refinance existing debt through an ESOP trust (transfer a
    minority interest to the trust in exchange for the trust assuming
    the existing corporate debt), to get a deduction for both principal
    and interest on the debt.
  8. Appropriate the excess accumulated earnings of a C-corporation
    for a valid business purpose, to avoid the accumulated earnings
    tax.

SPONSOR TAX-FAVORED EMPLOYEE BENEFIT
OR RETIREMENT PLANS

  1. Implement qualified plans that provide a tax-free benefit to
    employees and a tax-deduction to the company.
  2. Maximize pre-tax retirement savings through various qualified
    retirement plans which allow greater deferrals of pre-tax income
    than traditional IRAs.
  3. Create an ESOP trust, for the benefit of the company's
    employees, and transfer a minority interest to the trust on a tax-
    favored basis. This can provide employees with a share of
    corporate earnings, without the owner necessarily having to
    sacrifice managerial control.

ADD TAX SAVINGS TO A BUSINESS SUCCESSION
PLAN

  1. Structure buy-sell agreements as cross-purchases, to allow
    surviving shareholders to receive a stepped-up basis for any
    future transfer of their interests (a stepped-up basis is only
    available in a stock redemption on the death of the shareholder
    under Section 1014).
  2. Fund buy-sell agreements with life insurance policies, to provide
    liquidity without setting aside cash that may otherwise be
    needed to operate or expand the business.
  3. Use an ESOP to create market for the owner's closely-held stock
    and diversify the owner's net worth on a tax-deferred basis by
    selling a minority interest in the closely-held corporation to the
    ESOP trust.
  4. Gift shares to children active in the business or bonus shares to
    key employees.

PLAN TO REDUCE ESTATE TAXES

  1. Each spouse should devise property directly to descendants, or
    to a credit shelter trust, rather than passing 100% of the estate to
    the surviving spouse, to avoid wasting either spouse's unified
    credit.
  2. Create an irrevocable life insurance trust to receive ownership
    and proceeds of an insurance policy, to prevent the proceeds
    from entering the spouse's estate.
  3. Take advantage of the annual $11,000 per donee gift tax
    exclusion ($22,000 with spouse), to remove property from the
    taxable estate.

FINANCE EDUCATION WITH TAX SAVINGS

  1. Pay a salary to a child attending college in order to take
    advantage of dramatic tax rate reductions attributable to their
    separate graduated tax rates, IRA deduction, personal
    exemption, standard deduction and education credits.
  2. Contribute any after-tax amount to a 529 plan, to allow the
    earnings to grow tax-free and withdrawals for qualified expenses
    to be made tax-free.
Areas of Practice