Nothing is more complicated than income tax. Most small business owners meet with their CPA at year end with the fantasy that this will save taxes. At best, it reduces this year’s taxes by increasing next year’s taxes.
Let’s face it; the income tax law is complex. Think of 1,000,000 pages written over 100 years by different people with different agendas. Great Depression tax laws apply to international businesses. World War II tax laws apply to small (and big) business.
Starting 50 years ago (1967), our Government began using “patches” to get the Tax Code to make social changes (this is known as socialism).
Now, don’t blame anyone party. Both sides jumped on patch bandwagon. The result is 1,000,000 of pages of conflicting laws.
Most small business owners budget an hour or so of their CPA’s time for “year-end” tax planning. Meanwhile, the news reports that firms like General Electric have 2.3% tax rate over the last decade. GE’s tax department is larger than all of the IRS’s international tax department.
Great firms invest in their tax structure. Tax planning fees are tax deductible. Here, in my lovely state of California, $10,000 in tax planning fees is only $4,700 of after-tax dollars (our marginal highest tax rate is 53%).
Conflicting laws are very complex. They also created 1,000s of tax strategies. Here are a few that your CPA may not have told you:
1. Cash advance payments can be tax-free for decades (more on this link).
2. Small business owners over age 57 have huge tax savings with private pension plans
3. Importers can use the Bush administration contract manufacturing laws to avoid taxes (more on this link) legitimately.
4. The IRS has designed a new type of trust to help you avoid state income taxes and protect your assets (more on this link).
5. President Reagan’s privately owned insurance company tax law allow you to have your insurance company. You can self-insure and pay your domestic insurance corporation up to $1.2 million a year tax-free. This is known as a captive insurance company (more on this link).
6. Defer taxes (like Disneyland) with gift cards and other private money (more on this link).
Thousands of other tax strategies. Your CPA does not have a book of these. Your CPA must spend time with you and learn the details of your business. Your tax loophole maybe your inventory method, your e-commerce website, your multi-state transactions, your business insurance (or the items that you are not insuring) and the list goes on.
For example, Bob has a successful web based business. He has a few part-time employees and independent contractors assisting him. He wants to be a tax haven. Yes, Bob, himself wants to be a tax haven. He learned about the new solo 401-K tax law. Bob can be the sole trustee, sign on the bank account, buy real estate that is financed, buy stocks, bonds, and stock funds.
He started the fund in November. By January he placed more than $100,000 tax deductible dollars into the plan. This saved him $50,000 in taxes. Of course, the investment profits will be tax-free. He hired a law firm to establish the plan and maintain the plan. The cost over two years is $10,000 deductible dollars (so after tax $5,000). $5,000 saves $50,000.
Bob also used a 1954 tax law on medical reimbursement plan. He paid $15,000 to his attorney to draft the plan. This plan does not have to file a tax return, so there is no annual cost. The plan pays for all the supplements required by his doctor, his co-pay, and therapies not covered by insurance. He saves $10,000 a year in taxes for a $5,000 one-time deductible ($2,500 after-tax) cost. $2,500 saves $10,000 year after year.
I hope you will see that to make money you must spend money. Firms like GE see taxes as a controllable expense.