8 Powerhouse Tax Strategies

Oct 3

Navigating the tax landscape can be complex, but implementing the right strategies can lead to substantial savings and enhance financial growth. Below are eight key strategies that business owners and high-net-worth individuals (HNWIs) should use to optimize their tax planning and financial success.

1. Maximizing Health Savings Accounts (HSAs)

For business owners and high-net-worth individuals with high-deductible health plans (HDHPs), Health Savings Accounts (HSAs) offer a triple tax advantage: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. HSAs can also serve as a long-term tax-deferred savings vehicle, functioning similarly to a retirement account for medical costs. The 2024 contribution limits are $4,150 for individuals and $8,300 for families.

HSAs provide unique flexibility because there are no mandatory distributions at any age, unlike other retirement accounts. This allows business owners and HNWIs to let the funds grow indefinitely, providing significant future healthcare security. Moreover, after age 65, HSA funds can be used for non-medical expenses without penalties, although income taxes will apply.

IRS Code Reference: 26 U.S. Code § 223 - Health Savings Accounts

2. Leveraging the Augusta Rule (Section 280A(g))

The Augusta Rule allows business owners to rent their homes to their own business for up to 14 days per year without having to report the rental income. This can be a lucrative strategy, especially for business owners who regularly host meetings, events, or retreats at their primary residence. The business can deduct the rental expense, while the income remains tax-free for the homeowner.

Detailed documentation, including a rental agreement and comparable market rental rates, is critical to ensure compliance with the IRS. This strategy offers a unique opportunity for tax-free income and additional deductions for business owners with a qualifying property.

IRS Code Reference: 26 U.S. Code § 280A(g) - Business Use of Home

3. Implementing Accountable Plans (Section 62(c))

An Accountable Plan allows businesses to reimburse employees—including owner-employees—for legitimate business expenses like travel, meals, and home office costs, without those reimbursements being considered taxable income. For S Corporations and C Corporations, this reduces the business’s tax liability and provides non-taxable cash flow to employees.

Reimbursements must follow IRS guidelines: they need to be business-related, substantiated with receipts, and reimbursed promptly (typically within 60 days). Accountable plans can significantly reduce taxable wages and employment taxes, making them essential for business owners aiming to optimize their tax strategy.

IRS Code Reference: 26 U.S. Code § 62(c) - Accountable Plans

4. Hiring Children for Tax Savings (Section 3121(b)(3))

Business owners can hire their children for legitimate work in their company, providing significant tax benefits. Wages paid to children under 18 are not subject to Social Security or Medicare taxes if the business is a sole proprietorship or partnership owned by both parents. Additionally, the income paid can be tax-free up to the child’s standard deduction, which is $13,850 for 2024.

Hiring children offers both tax benefits and the opportunity to transfer wealth within the family while providing valuable work experience. It’s important, however, that the wages are reasonable for the work performed and that thorough records are maintained.

IRS Code Reference: 26 U.S. Code § 3121(b)(3) - Family Employment

5. Optimizing Entity Selection

Selecting the right business entity can have a major impact on taxes. For many high-net-worth individuals and business owners, transitioning from a sole proprietorship or Schedule C to an S Corporation or partnership can yield significant savings, especially when it comes to self-employment taxes.

An S Corporation allows the owner to take a salary, which is subject to payroll taxes, and distribute the remaining profits as dividends, which are not subject to self-employment taxes. For some business owners, converting to a C Corporation with a flat 21% corporate tax rate may also be advantageous, particularly if they plan to retain earnings within the business rather than take distributions.

Entity selection should be carefully considered based on income level, business growth projections, and tax objectives, ensuring the structure aligns with both personal and business goals.

IRS Code References: 26 U.S. Code § 1361-1379 - S Corporations; 26 U.S. Code § 11 - C Corporations

6. Maximizing Retirement Contributions

Business owners and high-net-worth individuals can greatly reduce their taxable income by maximizing contributions to tax-advantaged retirement accounts. For 2024, the contribution limit for traditional 401(k)s is $23,000, with an additional $6,000 catch-up contribution for individuals over 50.

For business owners, Solo 401(k) plans and SEP IRAs offer even more opportunities to shelter income from taxes. The SEP IRA allows contributions of up to 25% of compensation or $69,000 for 2024, while Solo 401(k)s allow both employer and employee contributions, potentially increasing contribution limits further.

High-income business owners can also explore Defined Benefit Plans (DBPs), which allow for larger contributions and substantial tax savings, especially for those with significant disposable income.

IRS Code References: 26 U.S. Code § 401-408 - Qualified Retirement Plans; 26 U.S. Code § 415 - Limitations on Contributions and Benefits

7. Exploring Alternative Investments: Oil & Gas and Renewable Energy

For high-net-worth individuals looking to diversify their portfolios and benefit from substantial tax deductions, oil and gas investments offer unique tax advantages. These investments allow the deduction of Intangible Drilling Costs (IDCs), which can provide immediate tax savings by offsetting other income.

Another option is renewable energy investments, particularly in solar energy projects. These investments often qualify for tax credits, such as Passive Solar Credits, which can reduce a taxpayer’s overall liability. These investments carry higher risk but can be valuable for clients looking to align their investments with tax-efficient opportunities.

IRS Code References: 26 U.S. Code § 263(c) - Intangible Drilling Costs; 26 U.S. Code § 48 - Energy Credit

8. Real Estate Investment Strategies: Cost Segregation, Real Estate Professional Status, and Short-Term Rentals

Real estate investments can be highly tax-efficient when strategies such as cost segregation, real estate professional status, and short-term rental status are leveraged.

Cost Segregation accelerates depreciation on specific property components, allowing business owners and high-net-worth individuals to deduct significant amounts in the early years of ownership. With bonus depreciation still in effect (80% in 2023, phasing out by 2027), this strategy is particularly valuable.
Real Estate Professional Status allows qualifying individuals who meet the criteria (over 750 hours of real estate activities and 50% or more of their total working time) to use real estate losses to offset active income, providing significant tax savings.
Short-term rentals with an average rental period of seven days or less can be treated as non-passive activities if the owner materially participates. This allows the investor to offset active income with losses from short-term rentals, without needing to qualify as a real estate professional.

These strategies are particularly advantageous for business owners and high-net-worth individuals with significant real estate holdings, helping reduce taxable income and maximize profitability.

IRS Code References: 26 U.S. Code § 168 - Accelerated Cost Recovery System (Cost Segregation); 26 U.S. Code § 469 - Passive Activity Losses (Real Estate Professional and STR Status)

Conclusion

These eight powerhouse tax strategies provide business owners and high-net-worth individuals with a comprehensive approach to reducing their tax burden and maximizing financial growth. Tailoring these strategies to individual circumstances allows for optimal tax savings and ensures compliance with IRS rules. Staying informed about evolving tax laws and proactively utilizing these strategies can lead to significant long-term financial benefits.

Ryan Eldridge