Tax Planning for Business Owners: An Insider's Perspective

Steve Parrish, Contributor writes for Forbes: While business owners have gotten tired of hearing about the new tax law, we in the advisor community are just getting revved up. Several of the big, annual, tax planning conferences are over and we’re getting a handle on ideas to help the business owner save on taxes. I wanted to see what my fellow colleagues in the business were experiencing with their clients, so I went old school. I picked up the phone and called one of the experts. The conversation was basically “Hey Terry, what are your business owner clients asking, and what are you telling them?”

Terry Stanaland is a Greensboro, NC-based national speaker and author on tax planning issues for business owners and their families. It’s impressive enough that he’s an attorney, CPA and Chartered Financial Consultant. More importantly, he serves on the front line, serving as an attorney for many business owners. Below are some of the comments Terry shared with me concerning the new tax law (American Tax Relief Act of 2012) and new planning opportunities.

How long is the new estate tax going to last?  When I asked about his clients’ mood concerning the new tax law, Terry quickly commented, “a lot of my clients are asking about how permanent this new estate tax law really is.” In Terry’s mind, this law may indeed be permanent for the foreseeable future. Congress knows the estate tax issue has been a political football, and this compromise legislation may well hang around for a while, leaving our legislators an opportunity to deal with other fiscal issues.

What’s a hot tax issue for business owners?  Terry is concerned with the ramifications of the 3.8% Medicare surtax on unearned income. This provision, a part of the Affordable Care Act, taxes the investment income of higher income taxpayers, and it applies in and above regular income taxes. One specific example Terry provided relates to business owner rental income. A common business structure is to have the company’s physical property placed in a separate LLC, an entity which is typically owned by the founder. The LLC charges the company rent for use of the building, thereby giving the owner an additional stream of income. The concern is that this rental income is unearned income for purposes of the new 3.8% surtax. Rather than saving taxes, this time- tested technique may actually increase the business owner’s personal taxes.

Will private business owners consider a C Corporation structure?  Terry agrees that C Corps may indeed come back into vogue with private businesses. With the top marginal bracket now being lower for C Corps (35%), than for individuals (39.6% plus the 3.8% surtax), we once again will have tax arbitrage by using a separate entity. Further, the C Corp structure allows more flexibility in benefits planning — another way to save on taxes.

Business versus personal assets.  In many of his lectures, Terry has railed against business owners holding too many personal assets, particularly passive income assets, in their businesses. He points out that, originally, most businesses became S Corps or LLCs in order to provide asset protection from personal creditors. However, as wealth actually accumulates in the business, the concern becomes asset protection from business creditors. When excess wealth accumulates, it should be taken out of the business, and either enjoyed or reinvested. He also notes that accumulating personal wealth in the business is a planning challenge: “Don’t hold passive assets in the business; all it does is complicate business succession.”

Last thoughts.  Terry Stanaland says it well for all of us who seek to help business owners with their taxes: “One thing this new tax law is not is simplified. We are now down to learning and applying tax trivia. It really gets in the way of true tax planning.”

Thanks Terry for your insight on what’s going on in the business owner tax world!