I will Net over 1 million dollars from my business this year, now what do I do?

Hello-

I am 35 years old, married with two small children (4 and 3). I’m in year 2 of my business (not real estate related), and am projecting to NET over 1 million dollars this year, pre-tax. My plan is to first and foremost use this positive cash flow to scale my business so I can maintain this rate of growth, or at least try too! However, even with an aggressive growth plan in place, I’ll still have appx. $500k which will appear on my tax return as income unless I come up with some forward thinking ideas now in order to minimize the tax burden which will come as a result.

So I’d like to accomplish 3 things here:

  1. minimize my tax burden for 2016
  2. start investing in rental properties
  3. make my wife happy with the purchase of a new home for our family

My wife and I own one home; our current residence which we bought for $160k. We still owe $90k on the note. One goal I have is to become a real estate investor. If we purchased a second, more expensive home, made it our primary residence, and then begin renting out the first home. Could I then pay off that 90k note before the end of 2016, and claim it as a deductible business expense? Would it be wise to create a LLC for my real estate company before I do this, and make my wife the majority owner so I can get the same tax benefits as I would get with Biz #3?

Thinking out loud now… Until I add more properties to my portfolio, I’m sure I’d be operating at a loss after all expenses so I guess keeping myself as the majority owner (or not even creating a legal entity for now) would benefit us more in the long run since those losses could lower my income for Biz #1 and Biz #2. Does this sound like a realistic and more importantly logical plan, or I do sound as ignorant as I feel?

Thank you for reading! I gratefully welcome all feedback, especially the criticism, so please do not hold back if you see holes in my plan, or my head!

Sincerely,

tim

Hi,

How is your business structured? Is it a C-Corporation? An S-Corporation? A Limited Liability Company (LLC)? 

Structure and how you elect to be treated for taxes is important to determine a tax shelter plan!

Also what state are you incorporated in?

Let us know and we can continue this conversation?

            GR

Good morning,

They are structured as S. Corps in IL.

Thanks!

Hi,

I am going to answer part of this posting, first you will always pay taxes on income but your structure is important. 

I don’t know what kind of business your in, if for instance you sell products online you should incorporate / S-Corp out of a state that does not require corporate tax returns like Nevada as you would save a fortune while only paying yourself a taxable income in Illinois you require to live on.

In your immediate position you need to fund your retirement fully and any college funds for your children, this has tax free potential depending on your structure. You probable need to sit down with a financial planner / accountant / tax attorney as you may be able to structure something that could move your money long term out of Illinois (High Tax State) and into a low tax / no tax state for your state tax burden.

Real estate will provide tax relief / write offs against your income but taxes are pro rated so now in April by acting today you may get 7 or 8 months of potential relief but it won’t shelter the income it only provides some relief.

MC Wagner is our resident tax expert as an accountant and CPA, he can probable offer more of an overall strategy in general but I am not sure what state he works out of or his specific knowledge of Illinois. If he does not respond to this in the next week or two then send him an REI Club in mail and get his response.

                GR

No. Borrowed money that you repay is not a deductible expense. The interest you pay on the loan, however, is deductible.

Are you interested in futhering your education on entities completely?

You make too much money to use passive income loss to make up for active income (I am in same boat).

I would refinance current house with maximum mortgage (becomes a deduction against rental income) and use that new money to but more real estate.

I would also hire a TAX ATTORNEY (not CPA) to help you find the maximum loopholes you can to lower your tax liability.

Tom

Invent a new product. Or invest in mine. I have an idea for something and I just need an investor. I don’t want to tell you what it is because you might steal it.

I’m a little late to the party, but so be it. First, this is not a “problem” to address and handle on the internet. Second, you referenced a “hole” in your plan – and the whole as I see it – is that your plan is “self-authored” – this is not a do-it-yourself type of thing.

Sit down with a specialist – a well-known (in the allied professional community), qualified, experienced specialist. You should also have a team of advisors – a wealth management advisor, a trust & estate/tax attorney, a CPA, and perhaps others, as needed, etc.

You “reside” in the top X percentage of income-earners in the US. Hopefully you will also soon be in the top X percentage of wealth, net worth, etc., in the US as well. Don’t approach and look to solve problems like the masses. Don’t be a do-it-yourself’er, armchair expert, internet maven, and so on. You’ve graduated to a new, higher, level – operate your business and your personal matters – and plan the right way. All the best.