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Investing My Hard Earned $$

GeorgeP

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Sep 6, 2018
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My business partner and I have built a very successful online coaching business that is almost entirely automated. We have both followed many of the principles you lay out in your book, The Millionaire Fastlane.

After 4 years of hard work, this time last year our business was making a mere $500 a month, 3-400 of which were expenses. Countless time invested with no return. December 2017 we finally hit. It has been exponential since and last month we grossed $85,000. 80% being profit.

This is all new to us and we have not come up with a good plan for actually KEEPING everything we are now saving.

I've looked into moving the business off shore, moving it to states without income tax, changing the LLC to a C-Corp, purchasing realestate under a different entity, etc.

My accountant advises to put it into a retirement fund but obviously no.

My question is what would you advise to do so that the government doesn't tax us 42% and take almost half of all of our hard earned money.

Thank you again for all that you bring.
 

MJ DeMarco

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Maybe @CareCPA can chime in...

December 2017 we finally hit. It has been exponential since and last month we grossed $85,000. 80% being profit.
Congrats.

My question is what would you advise to do so that the government doesn't tax us 42%
I'm assuming you are in the US?

What kind of existing structure?

LOL, there's nothing you can really do to avoid getting taxed other than different business structures. I'm not a tax accountant so I won't even go there.

It is what it is. Get ready to write a check for pain. The question is, how much pain?

As for setting up in different states, that works. But you need to have a nexus there, addresses, etc. From what I understand, you can't just have some PO Box and say you operate from Nevada.

My accountant advises to put it into a retirement fund but obviously no.
That WILL save you money on taxes, but the money won't be accessible for years.

Is your accountant a business accountant that focuses on entrepreneurs? Or a Slowlaner accountant? Might be time to look for a new accountant.
 

CareCPA

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This is pretty vague, so my answer will have to be as well.

I always start with: what is your long-term goal? Is it to cash out in a year? Build an empire to last generations? Work short term or long term? The tax structure can then be created around your goals. Don't let a tax strategy dictate your business/life strategy.

If you don't want to off-shore, the C Corp just became a lot more attractive (with a flat tax rate of 21%). You can leave the money in there to grow this business or invest in other businesses.
 

biophase

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@CareCPA

Could you explain if it is possible to use C-corps to pay yourself less to lower your taxable income so that you can qualify for that 20% pass through reduction?

I’m not sure if I’m asking the question properly.
 

CareCPA

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@biophase absolutely.

Some background:
The 20% passthrough deduction is only applicable to entities taxed as a passthrough (Sole Proprietorship, Partnerships in all their variations, and S Corporations). The new deduction is 20% of Qualified Business Income, with certain limitations based on the taxpayers total taxable income, W-2 wages paid from the business (in the case of an S Corp), and even occupation.
A C Corp is not a passthrough entity, so earnings from a C Corp are not eligible for the 20% passthrough deduction.

With that said, based on your business and personal goals, you can strike a balance between paying the 21% C Corp rate, and having other business income flow through a passhtrough entity onto your 1040 (which could then be eligible for the 20% deduction). This would be especially helpful if you have contractors do a lot of your work, since your W-2 wages from the S Corp would be low, and could potentially limit the 20% deduction. This threshold starts to phase in at taxable income of $157,500 if single and $315,000 if married filing joint.

One example of where this could be helpful: say I'm an accountant but I have multiple business segments under one company. Since I'm a specified service business (limitation based on occupation), I no longer get the 20% deduction if I am over those thresholds. If, however, I can segment other parts of my business into a C Corp, I may find my taxable income from the theoretical S Corp is lower than the threshold, and I once again am eligible for the 20% deduction.
 

biophase

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@biophase absolutely.

Some background:
The 20% passthrough deduction is only applicable to entities taxed as a passthrough (Sole Proprietorship, Partnerships in all their variations, and S Corporations). The new deduction is 20% of Qualified Business Income, with certain limitations based on the taxpayers total taxable income, W-2 wages paid from the business (in the case of an S Corp), and even occupation.
A C Corp is not a passthrough entity, so earnings from a C Corp are not eligible for the 20% passthrough deduction.

With that said, based on your business and personal goals, you can strike a balance between paying the 21% C Corp rate, and having other business income flow through a passhtrough entity onto your 1040 (which could then be eligible for the 20% deduction). This would be especially helpful if you have contractors do a lot of your work, since your W-2 wages from the S Corp would be low, and could potentially limit the 20% deduction. This threshold starts to phase in at taxable income of $157,500 if single and $315,000 if married filing joint.

One example of where this could be helpful: say I'm an accountant but I have multiple business segments under one company. Since I'm a specified service business (limitation based on occupation), I no longer get the 20% deduction if I am over those thresholds. If, however, I can segment other parts of my business into a C Corp, I may find my taxable income from the theoretical S Corp is lower than the threshold, and I once again am eligible for the 20% deduction.
It's still confusing to me. I've been reading about it in a couple places and still don't full grasp if what I'm interpreting is the what can be done. Let me give you an example.

Let's say that I run 3 businesses that make $500k a year total. Each business is an S-corp that makes $100k, $200k, $200k. My W-2 income is $80k, so my income is $80k W2 and $420k pass through. In this case, I don't qualify for anything.

My taxable threshold is $157k.

What if each business is now a C-corp. W2 is still $80k. But each C-corp only distributes $20k ($60k total). Does this make my taxable income $140k? Do I now qualify for the 20% pass through. If so, is this 20% of the $60k distributed?

Or I keep the $100k biz a S-Corp. Make the 2 $200k businesses C-corps. Lower my salary to $50k. The C-corps don't distribute anything I guess? My taxable is now $150k, and I get the 20% on the $100k S-Corp business deduction?
 

CareCPA

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Let's say that I run 3 businesses that make $500k a year total. Each business is an S-corp that makes $100k, $200k, $200k. My W-2 income is $80k, so my income is $80k W2 and $420k pass through. In this case, I don't qualify for anything.

My taxable threshold is $157k.
You would still qualify. The threshold of $157.5k is just where the additional qualifications must be met.
If your passthrough income is $420k, your potential deduction is $84k. This will be limited by the W-2 wages paid by each business. So if you take the $80k salary from the business making $100k, you would be able to take a $20k deduction from that business (the lesser of 20% Qualified Business Income or 50% W-2 wages paid from the business), and $0 from each of the other two businesses if no W-2 wages are paid.

If your salary is spread out, and you take $20k, $30k and $30k from each business, your QBI deduction would potentially be $40k (the lesser of 20% of QBI or 50% of W-2 wages from each business - $10k, $15k, $15k). If you paid other employees from those businesses, your thresholds would be higher.

What if each business is now a C-corp. W2 is still $80k. But each C-corp only distributes $20k ($60k total). Does this make my taxable income $140k? Do I now qualify for the 20% pass through. If so, is this 20% of the $60k distributed?
Your Gross income (assuming no other sources) would be $140k: $80k in wages and $60k in dividends (taxable income would be lower due to itemized/standard deductions).
However, if all companies are C Corps, you no longer have a passthrough, so the passthrough deduction does not apply to you.

Or I keep the $100k biz a S-Corp. Make the 2 $200k businesses C-corps. Lower my salary to $50k. The C-corps don't distribute anything I guess? My taxable is now $150k, and I get the 20% on the $100k S-Corp business deduction?
Essentially, yes. This is where you can start to run different scenarios for C Corps and S Corps to figure out how to maximize your passthrough deduction and minimize taxes. If the only items showing up on your taxes are $100k of S Corp earnings and $50k of salary, you no longer have to worry about the $157.5k threshold.

For clarification, the 20% passthrough deduction does not disappear at the higher income levels, it just has additional restrictions placed on it. Above the threshold, your deduction is generally limited to the lesser of:
1. 20% of Qualified Business Income from each passthrough; or
2. 50% of the W-2 wages paid from each passthrough
This is why you can see in the first example, just changing the entities your salary is paid out of can make a difference in your deduction.

Also note: the way the current law is written, the C Corp tax benefits are permanent, the passthrough benefits are only through 2025.
 

mom

Contributor
May 9, 2016
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My business partner and I have built a very successful online coaching business that is almost entirely automated. We have both followed many of the principles you lay out in your book, The Millionaire Fastlane.

After 4 years of hard work, this time last year our business was making a mere $500 a month, 3-400 of which were expenses. Countless time invested with no return. December 2017 we finally hit. It has been exponential since and last month we grossed $85,000. 80% being profit.

This is all new to us and we have not come up with a good plan for actually KEEPING everything we are now saving.

I've looked into moving the business off shore, moving it to states without income tax, changing the LLC to a C-Corp, purchasing realestate under a different entity, etc.

My accountant advises to put it into a retirement fund but obviously no.

My question is what would you advise to do so that the government doesn't tax us 42% and take almost half of all of our hard earned money.

Thank you again for all that you bring.
Gold and gold coins are tax and VAT free in the USA right?
 

Rawseed

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I'm no expert, but you may want to look into real estate investing to decrease your tax burden.

I understand that you don't want to max out a 401k because you want access to your money. But, it wouldn't hurt that bad to max out a Traditional IRA.

Your business is profiting $68k a month. $5.5k a year if you're single or $11k a year if you're married isn't that much.
 

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