3 Often Overlooked Tax Game Changers for Entrepreneurs

Apr 3, 2024 | Blog

By: Dan Darchuck, CFP, CPWA – Co-founder Topturn Capital

Featuring: Jeff Hamilton, CPA – Principal, Sierra View Tax & Consulting

Let me tell you how it will be. There’s one for you nineteen for me, ‘cause I’m the Taxman

Talk about irony. I had just enjoyed a brief parking lot conversation with a business owner friend, who mentioned that his tax numbers were in, and that he was “getting killed”.

Our chat ended, and a minute later, I stepped into a restaurant to grab lunch. Music was playing, and I heard the lyrics, “Let me tell you how this will be. There’s one for you, nineteen for me.” I immediately recognized the song, and you may have too, as the Beatles’ Taxman. 

Curious as to the origin of the lyrics, I did a bit of mealtime research and learned that in 1966, the same year the song Taxman was released, Great Britain’s highest earners were subject to a “supertax” of 95% against the uppermost portion of their income.

Safe to say that whether your top income tax rate is 95%, like it apparently was for the Beatles in the sixties, or nearly 50% for my high-income California friend…

Getting killed is getting killed. Confiscatory is confiscatory.

What I didn’t mention to my friend (thinking maybe the parking lot was not the best setting) is that I have come to believe that many high income entrepreneurs pay too much tax, simply because they don’t know how not to.

With that in mind, I had already invited Jeff Hamilton, CPA, a principal of Sierra View Tax & Consulting, to help me brainstorm a short list of some of the most effective tax saving strategies virtually any business owner has access to.

We came up with about a dozen, and for the sake of brevity, I’ve included just a few of the most overlooked AND effective tactics here.

For those who would like to see the entire list, we’re putting together a planning tool with all of the strategies included. We’ll announce it within the next few weeks, as soon as we have it ready.

Jeff and I began our discussion, with absolute agreement on one concept… “tax savings are the most effective, high return investment anyone can make”. Putting solid tax strategies to work in your business or professional practice is the fastest way to get momentum moving in your favor.

In other words, the dollars saved – not sent to the Taxman – are “found” dollars. Money you have already earned and now get to keep to further enhance your wealth. 

With that in mind, let’s take a look at 3 of these game changing strategies:

Strategy #1: Real Estate Cost Segregation

If you find yourself holding investment real estate, such as an office building or other rental property, there are often depreciation benefits that can be dramatically accelerated, even into the year of purchase. This is accomplished by implementing a strategy called cost segregation or asset componentization. 

Basically, the strategy allows for the breaking down of the value of the “component parts” of the real estate asset.

As an example, if you were to purchase a rental property, this would be seen as a property composed of both the land and the building. Should you earn rental income from this property, current IRS rules allow you to depreciate the cost of the building portion over a period of roughly 30 years. 

Through asset componentization, the pieces of the building are looked at in isolation. The building is more than walls and a roof and foundation. There are other components of that building that don’t last as long, such as flooring, lighting, window coverings, appliances, and certain kinds of landscaping. 

The process assigns sub-values to each component, and these components can then be depreciated on a much shorter timeline. Many of these additionally qualify for bonus depreciation, allowing for a large deduction in the first year of purchase.

Strategy #2: Cash Balance Plans

Cash balance plans are a type of defined benefit pension plan, but with slightly less restriction. If your business demographics are right, a cash balance plan can be like 401K/ profit sharing on steroids (no, I’m not advocating the use of steroids). 

What is the potential benefit?

Well, imagine the power of increasing your pre-tax plan contributions from a total of approximately $69,000 per year to over $200,000 annually, or more. Think of how quickly money piles up when taxes are deferred on $200K of contribution, and the resulting growth, every year.

To be clear, this is YOUR contribution, for you the owner. Yes, employees must be covered under the plan, but required EE contributions are often already largely covered through existing 401K/PS contributions. Still sound too good to be true? Remember, as I mentioned above, the demographics of your business need to be right. I have personally seen such favorable demographics many times.

I have also seen a large disparity between plan calculations performed by what I will describe as general purpose actuaries, and those that specialize in sophisticated plan design. This is another area where it pays to have the right players on your team. 

Strategy #3: Charitable Planning

A famous philanthropist and entrepreneur was once quoted, likely behind closed doors, as saying, “Charitable planning is the ultimate tax dodge.” I agree completely, however, I am also aware that some individuals, no matter how good the numbers look, are just not charitably inclined. Their loss.

Charitable tax strategies can be, in my experience, one of the most overlooked out there. I think this may be due to the fact that they are often described, by well meaning advisors, in their plain vanilla form – simply giving money away to a worthy cause.

Philanthropic planning is one arena where “simple” doesn’t cut it.  This type of planning, at its optimum level, works best when it is custom fitted and designed to the individual.

Within this highly effective subject area exist multiple “game changing strategies” which can be used to dramatically minimize capital gains, estate taxes, and yes, even federal and state income tax.

Vanilla is fine, but if you fail to look a bit beyond the simple you may miss out on one of the very best ways to tailor something that truly fits with the values, goals, and intended outcomes of your family, and business, All while keeping more of what you’ve earned working for you. 

Much more where this came from…

While, as with most high level discussions of wealth planning, we have barely scratched the surface, we have given you an inside track to three game changing tax strategies, all of which are, of course, on the right side of the U.S. Taxman’s line of aggression. The Cash Balance Plan is limited to use by business owners, while the other two; Cost Segregation and Charitable Planning are available to anyone.

Please note that the concepts contained in this article may not apply to everyone and should not be considered personal advice. Either way, the very best ideas are always going to be those that are tailored to you, and that you actually use to help build the life you want. 

Tired of getting pounded? Keep an eye out for the release of the planner I mentioned earlier, and meanwhile, please feel free to reach out with any questions or thoughts.

For now, my special thanks to  Jeff Hamilton, CPA, of Sierra View Tax & Consulting for his help in putting this article together.

Until next time,

Dan Darchuck, CFP, CPWA

CEO & co-founder

Topturn Capital LLC


Get The Free Succession Breakthrough Planner™

Enter Your Information And Click 'Send Me The Planner'

Success! Check your email inbox for next steps!