Weekly Case Studies- February 2022
Wednesday, February 2nd, 2022
Below are two case studies that demonstrate how you can use TaxPlanIQ to handle intricate client issues and show them the value of working with you.
Case #1
David met with Sharla to discuss a tax plan for a prospective client. He wants to help them save as much money on their taxes as possible given their unique situation.
Background Info
David’s potential client is a married couple, filing jointly. They started a tech company in 2020 and are co-owners, with one of them owning 60% of the business and the other owning 40%. In 2021, the business’ gross income was $52k. However, Owner 1 was paid a salary of $25k while Owner 2 did not receive a salary, taking the BGI down to $27k. Owner 1 being paid a salary is improper practice for a partnership. They are considering filing a late S-Corp election. The business won several government contracts in 2021, so their BGI is expected to be higher in 2022 on, due to said long-term government contracts.
In 2022, the forecasted BGI is approximately $611k. The business’ 2022 net income after the owners’ proposed salaries is approximately $150k.
Ways to Save
David had several strategies laid out for this prospect, and Sharla discussed several strategies that would help David save his potential client money.
David’s Plans
David plans to propose Owner 1’s salary be reduced from $150k down to $100k. He will also propose looking into compensating Owner 2 through a Defined Benefits Plan or other profit sharing measure. Additionally, he intends to recommend a $100k contribution to a Defined Benefits Plan from Owner 1.
Choice of Entity
Sharla began by looking at the Choice of Entity section, which contains both the self-employment tax and Medicare deductions. NY has a double taxation system that would mean that the client would be taxed 10% individually and 8.85% as an S-Corp.
Despite a projected $7300 in federal savings, converting the business over to an S-Corp would cause a $12,125 increase in state taxes.
“In New York City, an S-Corp may not be the most optimal way to go anymore.”
She then took a look at the other strategies proposed by David, starting with the Accountable Plan, which would plan for $5000 and save a projected $1600 combined federal and state tax. David had $100k listed as the planned amount for the Defined Benefits Plan, which would save $32k combined federal and state tax. And the prospects rent their home for business for just over $2k, which equates to about $670 in combined federal and state tax savings.
Taking a look at the ROI, Sharla was stuck on the Choice of Entity election and encouraged David to find a workaround. The S-Corp election would cost the prospect $6545 in both year one and year two.
“It just seems counterintuitive that New York would permit this, where it’s going to cost them money to have an S-Corp.”
David agreed, saying “That’s why in New York a lot of people don’t convert to S-Corps, because it may not make sense. The only reason they have to is because they’re paying salaries to the owner, and that’s improper for a partnership.”
Potential for C-Corp
Sharla queried about converting them to a C-Corp. David hadn’t considered that yet.
The owners hadn’t done any distributions, only reinvestments into the business, so that opened up the possibility of converting them to a C-Corp. The only issue with that is the limitations on funds. Sharla asked if the amount they would be earning would be sufficient for them to live comfortably in New York.
David said yes but that they wouldn’t be able to reinvest into the business, into employees and technology.
David also clarified that converting over to a C-Corp wouldn’t get them around the NY State tax, as the state tax is on corporations in general.
A False Ending
As they started wrapping up, Sharla noted that David could save his prospective client $27,727 in Year One and Year Two. The client would see a 309% return on investment and would be looking at a total savings of approximately $266k over the next 10 years, provided that David found a more affordable Defined Benefits Plan administrator and made a slight price adjustment to his implementation fee.
Findings
However, just as they were about to end, David had a realization that due to the client’s contributions to a Defined Benefits Plan and an Accountable Plan, the prospects actual net income would be much lower in 2021, therefore altering all of the Choice of Entity calculations.
Some of the strategies Sharla discussed with David include:
- Determine whether to use an S-Corp or C-Corp election
- Lower Owner 1’s income to $100k
- Have Owner 1 make $100k contribution to DB plan
- Look into paying Owner 2 through DB Plan or other cost sharing plan
Going back to the ROI statement, David could save his prospective client $37k in Year One and Year Two. The client would see a 446% return on investment and would be looking at a total savings of approximately $356k over the next 10 years, provided that he includes the same stipulations as before.
Case #2
Gary met with Sharla to discuss a tax plan for a new client. This client has had a business advisor in the past and Gary was looking for some direction as to how to help him get the tax deductions he’s looking for.
Background Info
Gary’s new client is a 41-year-old, single doctor from Nevada. He doesn’t have any kids but supports his parents in LA. He works for a hospital in Nevada and does contract work for a hospital in California. His salary is approximately $641k.
He has 6 long term rentals across different states, and a Wyoming holding company holds his Florida rentals in an LLC. He had some non-payer tenants in Florida in 2021. A business advisor suggested setting up a WY trust with the holding company due to some “unique rules”— potentially a WING/NING situation (Wyoming Incomplete-gift Non-grantor Gift/Nevada Incomplete-gift Non-grantor Gift).
His Texas and North Carolina rentals are not in the LLC; he’s the sole proprietor. Generally, the rentals are netting positive cashflow, but he’s not getting the tax deductions that he was expecting.
Recommendations
Sharla offered a few recommendations to Gary to help guide his conversation with his new client.
Rentals
Sharla’s first recommendation to Gary was to determine what those unique rules and situations are. She said some business advisors extoll the benefits of setting up in this state or another and oftentimes those situations can be illegitimate or sketchy.
The other suggestion she had for Gary is looking into placing all of the client’s properties into one LLC. She recommended placing them in a Series LLC.
After looking at his 2019 tax returns, Sharla had a few comments and a recommendation. She noted that the client doesn’t have a Schedule 1 despite having multiple rental properties and encouraged Gary to look into that.
She also said that the client received $38k in rental payments and approximately $15k in interest, and he had $43k in expenses. After reviewing the client’s Schedule E, she noted that the client won’t ever be able to be qualified as a real estate professional due to his having two jobs. However, Sharla recommended seeing if he could be characterized as an active investor which would entitle him to a $25,000 deduction at very least.
Contract Work
Being that the contract work with the California hospital is new, she recommended putting the contract work in an S-Corp, do a benefits review for the Nevada hospital, and then place that contracted income into a solo 401k or an IRA. Putting it into an S-Corp would minimize the self-employment taxes.
Findings
While Sharla didn’t have enough information to do a full tax plan, she did give Gary some guiding questions that will help determine the best course of action for that client going forward.
Wednesday, February 9th, 2022
Some clients can be a bit on the fence about employing your services as a tax preparer or planner, so it helps to have a tool, like TaxPlanIQ, to help you demonstrate value to those clients. TaxPlanIQ’s reports show the total tax savings and the return on investment your clients will see when they work with your firm.
Below are two case studies that show how you can use TaxPlanIQ to demonstrate both the return on investment and the tax planning options that you are offering your clients and potential clients.
Case #1
Shelita discussed a plan that she created for a couple of clients with Sharla. Sharla helped Shelita optimize the plan in order to get her clients the maximum amount of ROI.
Background Info
Shelita’s clients are a married couple. The clients are in their mid-50s, with a salary of $165,463. They had $153k in IRA distributions in order to purchase some property in syndication the husband is involved in. Sharla noted right off that there’s some tax money potential for that in the future. The wife owns a new consulting business and had a Home office carryover. The client has filed a 1040 and a Schedule E. They also have a negative Schedule C, which Sharla noted may need to be shifted around to other places. Concerning Schedule E, he has one rental, received approximately $11,500 in rent, and claimed approximately $12k in losses.
Ways to Save
Shelita had a plan already worked up for them to review, so Sharla went through each item in the plan to help Shelita optimize it.
Shelita’s Plans
In her plan, she had designated funds for charitable giving and a medical expense reimbursement plan (MERP). She had also set up an accountable plan for them. She proposed having the wife file taxes for her consulting business via an 1120S and their joint filing through a 1040.
MERP & Home Office Carryover
Sharla recommended having the wife’s consulting agency pay over a management fee to the husband’s Schedule C to cover the home office carryover. Additionally, Shelita had a choice-of-entity option on her plan with the intention of making an S-corp election in order to save the spouse about $20k. Sharla noted that a MERP would not be available as an option in an S-corp but that it would be in a C-corp or a Schedule C.
“What she could do is pay her spouse a management fee on a 1099, properly declare it, and then have the spouse include a MERP on his Schedule C.” Sharla updated Shelita’s plan to include a $25k management consulting fee paid out to the husband’s Schedule C, with $11,000 of that being dedicated to MERP and $12,500 of it going toward the home office carryover.
Sharla also suggested that Shelita looks into getting them set up with an HSA. She just needs to look at their insurance documentation to ensure that they have a high deductible.
Real Estate
The husband has one rental, received approximately $11,500 in rent, and claimed approximately $12k in losses. Sharla noted that there’s a potential for the client to claim active Real Estate agent status and qualify for the $25k tax credit, and she recommended Shelita look into that for her client.
Shelita also mentioned that the client has two LLCs that he isn’t currently doing anything with and asked what to do about them. Sharla recommended keeping those active and using them when she wants to place properties into an LLC.
Just the Beginning
Sharla said that she would present this plan as Phase One to the clients. Until the client’s real estate investments start becoming more lucrative and profitable, they will be stuck on Phase One. Once they become profitable, Shelita can start mapping out Phase Two.
Findings
They took an initial look at the client’s ROI and saw that it was at 229%. Generally speaking, Sharla recommends that TaxPlanIQ’s TaxLab participants aim for a 300% minimum ROI. She noted that there appeared to be something that they could do about that. To start with, Sharla looked at the fees Shelita is charging and found that she could split her 2022 recurring maintenance fees and the 2023 maintenance fees. Because Shelita won’t be charging her clients for January or February, the ROI would go up due to fewer maintenance fees in 2022. That change alone shifted the ROI from 229% to 280%.
Some of the strategies Sharla discussed with Shelita include:
- Paying a management fee to the husband’s Sch. C to cover MERP & Home Office Carryover costs
- Looking into setting the clients up with an HSA
- Having the husband claim active status as a real estate agent
- And keeping the two LLCs active in order to maintain tax flexibility in the future
Shelita’s Phase One tax plan would save her clients approximately $19,600 in Years One and Two, and her clients would see a 280% ROI. The Phase One plan would save the clients $186,000 over a ten-year period.
Case #2
Luba met with Sharla to discuss a tax plan for a new client. The client’s payment method and state laws have presented an interesting and delicate situation that requires careful tax planning.
Background Info
Luba’s client is an insurance agent with a 1040 and a Schedule C. Her client’s income on the 1040 is just over $140k. She is being paid commission as an insurance agent. This can be problematic. Luba was considering making a choice-of-entity election with the client, but the issue is that commission pays into social security.
Recommendations
Sharla offered a few recommendations to help Luba navigate the complexities of her client’s particular situation.
Choice-of-Entity Election
Luba was considering making a choice-of-entity election with the client, but the issue is that commission pays into social security. The Texas Department of Insurance makes it difficult to make entity elections for individual insurance agents. Sharla recommended potentially designating income to shift over to another entity, however, Luba noted that there was a court case that made it impossible to designate funds to an entity for anything other than business purposes.
Sharla asked if the client was able to set up an entity and pay commission through the entity. Luba stated that it would be extremely obstructive to attempt that due to needing contracts and special insurance, then there’s the issue of whether that would even be allowed in Luba’s area. Sharla responded to those objections by stating that due to the client’s income that it would be beneficial for her to consider it.
“Your play, here, is to make an S-corp election and then get a lot of deductions.”
Son Living at Home
Luba also noted that the client has a 22-year-old son that still lives with her, but she is unsure of whether the son is still going to be considered a dependent for her client. If so, she could pay her son, as a student, and claim an Educational Assistance Program through the S-corp.
Sharla posed the idea of looking into whether or not a Schedule C can sponsor an EAP. She also stated that if the client is paying for her son’s college education, it may be worth paying him a $30k salary, as long as he’s actually doing things for her, and have him pay for his own college.
Setting Up an HSA
Sharla made the additional recommendation to have the client set up an HSA, regardless of whether or not they’re perfectly healthy, because HSAs are tax-deductible, they grow tax-free, and are withdrawn from penalty-free for medical purposes. Additionally, if you’re over 65, the medical-purpose-only stipulation drops off and that money can be used for anything.
Findings
This particular case wasn’t ready for a plan to be put together for it yet, but she did give Luba solid information that will help determine the best course of action for her client going forward.
Wednesday, February 16th, 2022
Case #1
Sharla met with Monique to discuss a tax plan for a new client. The client’s was previously doing Self-Prepared tax returns.
Schedule A
Schedule C
2 kids <5 years old
Capital Gains
Income >$1.6
Wife has W-2 and Husband has W-2 and Schedule C
One Time: Phase I Implementation Fee $7,479
Recurring: Monthly Advisory & Compliance $947
One Time: Monthly Advisory & Compliance - Year 1 ($947/10 months) $9,470
Strategy: Accountable Plan/Home office Deduction
Strategy: Choice of Entity
Strategy: Choice of Entity
Strategy: Day Trader Tax Status (TTS)
Strategy: Maximize Employer Retirement Match
Strategy: Pre-Tax Benefit: 401K
Strategy: Pre-Tax Benefits: Employer Benefit Package Review
Year One ROI: 308%
Year One ROI: 508%