Financial Team’s Tax Strategies Saved Small Business Owners $40,000

As a business owner, one of the biggest challenges is keeping as much of your hard-earned money as possible in your own pocket. Last year some clients of mine wanted to find a way to do just that. So I sat down with their CPA and tax attorney to come up with tax strategies to help do just that for this couple. Let me set the stage for what we did for them.

The clients were husband/wife business owners, with their business split the typical 50-50 ratio. Essentially each spouse had 50% ownership in the company, which is also common. Now, this isn’t a big business. They make about a gross revenue out of $1.3 to $1.4 million. So it’s not really big business, but it is a good, solid business. And they’re making some great margins. They have a good life. Their income is significant, which means they were paying self-employment taxes up to the full $118,000 for last year on both of their incomes.

In July of last year, we were looking at their tax returns and trying to come up with some ways to cut their total taxes. After meeting with my team, we brought in their CPA and a tax attorney to strategize further (this is that three-legged stool that I’m often talking about— the CPA, the tax attorney, and a good CFP^® – all of these professionals must know how to work with business owners).

Each one of us was brainstorming strategies to utilize and I suggested making Spouse #2 an employee of the company and moving full ownership to Spouse #1. So instead of earning the same salary as Spouse #1, they would now be paid as an employee at a fair rate for their job. Now, I’m not going to get into all the details of a very technical situation, however, by doing this we could end up saving almost $40,000 in total taxes, with all things being equal and just moving the ownership to one spouse.

The disadvantage of this tax strategy is the spouse with the reduced ownership in the company will not be maximizing their benefits for Social Security since they will not be paying taxes on the historic $118,000 anymore. Nonetheless, Spouse #1, whenever they retire in about five to ten years, will have fully maxed out Social Security benefits for the most part. What this couple said, and I agree with them, “We don’t care. We would rather save the money now. Invest it ourselves, either into our business or into our investment account. We have the opportunity to grow our money better in the markets.”

So if you’re running to some really good margins in your business and taxes are kicking your tail, then get with your financial team, because your numbers, the solution, and results will be different than the above example! Seriously, if your tax payments are higher than many people’s annual income, which happens a lot, sit down with your CPA, your tax attorney, and your CERTIFIED FINANCIAL PLANNER™ and see what you can do to minimize the amount of money you’re paying Uncle Sam.

After all, this one meeting saved about $40,000 in taxes for these clients, which is not insignificant by any means. So there are tax strategies you keep more of your hard-earned money in your own pocket.