Years ago, I saw an interview with Bill Gates that changed my entire perspective on building wealth. When asked what the key to his financial success was he responded, “A working knowledge of the tax code.” You may be surprised that the answer was not “hard work” or “innovative technology.” I was originally shocked at his answer. However, this underscores the most important point in how the rich are getting richer: It is not about how much you make but how much of it you keep with tax deductions and other wealth saving strategies.
I grew up with a family business frame of mind. My father took over the business of my grandfather, and I was heavily involved in it growing up. After graduating law school, I knew I wanted to go into business myself. I originally owned my own law practice. However, I am not saying that the only way to success is owning your own business. It takes more than that. You must know how to structure your business so that you are protecting yourself and paying less in taxes. For instance, did you know that you can actually get an instant pay raise from the government without working any harder than you already are? It’s all about not grossly overpaying your taxes. So, let’s learn how!
First, it’s important that you know the following: the effectiveness of “The Tax Loopholes of the Rich” does not depend on your experience in business. You can be a seasoned business person or even just starting out. This information can change your life.
The two biggest wealth thieves a person will encounter are taxes and lawsuits. Taxes work against you by chipping away at your wealth. These include federal income taxes (deducting up to 39% of your income), state taxes (deducting up to 9.6%), and self employment or social security (over 15.5 %.). Throughout the year, the average American is losing 42-55% of their income in taxes. Ironically, the wealthiest people in the U.S. are only paying single digits taxes. Rest assured that there is something you can do about this, and it won’t cost you the $500/hr that the wealthy are paying for their tax specialists.
The other destroyer of wealth is lawsuits. This is not the slow reduction of your wealth as with taxes. It is the sudden confiscation of the money you worked so hard to earn. You can literally fall from the top of the totem pole to the bottom of the barrel overnight. I believe there are no winners in lawsuits because even “winning” a lawsuit takes up a tremendous amount of time and money. Once again, you can protect yourself by learning how to structure yourself properly. You can “bullet-proof” your assets and even avoid lawsuits all together.
Entity structuring is the use of limited partnerships, limited liabilities, and types of corporations. These can help you accomplish three things:
Let me explain how this works with the following example:
A Case Study: My friend Patrick grew up with the family business. His family sold expensive boats. His business grew. He was a financially intelligent man so he wanted to add a stream of income by opening a Marina, a land storage facility, a parts shop and a show room. Watching his business grow, I wanted to make sure he was properly protected and that he had bullet-proofed his assets. However, he was too busy making money to focus protecting himself at that time. This was his fatal flaw. One day, I got that dreaded call from Patrick. The sheriff deputy was there to shut down his businesses: the Marina, the parts shop, the storage facility, and the show room. His entire business was locked down completely in a matter of hours. Within six months, he had lost all of his personal assets and filed both personal and corporate bankruptcy. The tragedy here is beyond his losses, but the fact that this situation was completely avoidable. You can prevent this from happening to your business by using two very powerful tools:
These two power tools include a built-in charging order that is not found in your typical “S” or “C” corporations. A charging order basically states that the “bad guys” can not go after your assets. They will be able to go after income but not after you employ the following strategy. We can set up a separate management company for you. Then, you can shift your money from your LLC or LP into your separate management company. The last step in your protection is called imputing income, and it finalizes the prevention of lawsuits. The IRS can step in and tax these bad guys for the money they are suing for (even when they are unable to collect this money!) This ensures the that suing you will not be worth the effort.
In summary: They can not touch your assets because you have protected them. They can not receive the income because you have shifted it out. They are left with heavy taxes imposed by the IRS. Therefore, the likelihood of you being sued is next to nothing.
The next step is the reduction of your taxes. This can save you thousands of dollars a year no matter how long you have had your business or whether you are incorporated or unincorporated. These strategies are based on two U.S. Supreme Court decisions. First, the Supreme Court ruled that it is your constitutional right to arrange your affairs as to minimize your taxes. Second, the Supreme Court said that there are two tax systems in this country: the uneducated tax system and the educated tax system.
The line under your income on your pay stub is where these two systems differ. With the uneducated tax system, you deduct the three lines under your income and the remainder is what you receive. With the educated tax system, the first line is your reported income as with the uneducated tax system. However, the second line is the money you spent on the business, and you pay taxes on what is left. This is because when a business spends money it is called a business expense or tax deduction. Therefore, having your own business and being in the educated tax system, you can reduce your taxes by 40-70%. To break this down even further: If you are making $35,000 a year this could save you up to $10,000. That means it does not matter if you are making millions of dollars or a few thousand dollars. These strategies apply to you! A marginally profitable business can become a thriving business by applying these strategies.
A case study: One of my students, Stephanie, was making $50,000 a year. She took these strategies to her CPA who had been working with her families for years and always had her best interest in mind. He replied that although this program sounded interesting, he was already utilizing every deduction available able to her. Stephanie’s CPA agreed to participate in a conference call with me at Stephanie’s request. Stephanie’s CPA explained that she was paying $12,000 in taxes. While this was much less than the average person, she could have been paying even less. I introduced three strategies: helping her to reduce her FICA, deducting her healthcare, deducting education (both her and her daughter’s). We were able to reduce her total taxes paid to just $800. In only 15 minutes and with three simple strategies, we were able to save her over $11,200!
I have had students save well over $100,000. Just think what you could do with that money!
We can start by converting your largest expenses into business expenses. We can teach you lesser known deductions (e.g. travel and entertainment, medical, seminars, books, etc.) and shift them over to business expenses. You pay them with pre-tax dollars and not after-tax dollars, reducing your taxable income.
So why hasn’t your accountant or CPA told you about this? CPAs and accountants are inherently conservative and are not taught to apply these tax reduction strategies. They primarily use the W2 tax system. Finally, many are not proactive. They are so bogged down during tax season that they usually do not have the time to investigate these strategies and how they may apply to you. After following these strategies, you can provide the best numbers possible to your CPA.
To summarize: The average person is giving up 50% in income taxes. You can reduce your taxes by 40-70% through tax deductions no matter how much you make. It is important to incorporate your business and utilize an asset protection strategy. Entity structuring can bullet-proof your assets against law suits. This is just scratching the surface of all the benefits available to you. Sign up for your free CD and a no cost, no obligation session below. I look forward to helping you reach your financial goals!
To learn more about developing business tax strategies, please see our Small Business Tax page.