Demystified Blog Archive #47 – Reduce your taxes with entities

One thing we know for certain is that all markets move in cycles.
There are always ups and downs, booms and busts. Tough times always follow the good.

And, at 3,446 day, within a week of the all-time record, this bull market is clearly very late in its cycle.

The nature of this particular bull market is also quite peculiar.
Unlike the 1990s, there are no game-changing geopolitical or technological trends underpinning this bull market.

Instead, the key driver of higher asset prices has been 10 years’ worth of nearly 0% interest rates, giving everyone the ability to borrow cheaply.

This has driven real estate prices to all-time highs, in many cases to absolutely absurd levels.

Bond markets are still near all-time highs.

Companies like Netflix and Tesla which lose money and rapidly burn through their investors’ capital have no problems borrowing billions of dollars.

And there are still trillions of dollars’ worth of bonds out there with negative yields.

Many stock markets around the world are at/near all-time highs as well, with investors paying record high valuations for their shares.

This means that, in many cases, investors have literally never paid a higher price for every dollar of a company’s revenue, earnings, and assets.

And the shares of nearly every well-managed, high quality business have been bid up to mind-blowing levels.

Legendary investor Warren Buffett seems to have thrown up his hands with the ridiculousness of this market.

Buffett has stockpiled $110 billion, but there’s nowhere for him to allocate his capital.

Bargains are so scarce, in fact, that Buffett is going to resort to buying back shares of his own company, Berkshire Hathaway.
This is a pretty big deal.

No one knows how much longer this historic bull market is going to last. Or what’s going to end it.

But it’s safe to say that there are fewer days ahead of us than behind us.

And, in times like these, it might make more sense being prudent than being greedy.

One way to hedge against any pending economic collapse is to legally slash your taxes.

In particular, reduce your taxes with entities.

It is very common for businesses to form an entity (LLC, corporation, partnership, etc.) for their business in order to reduce taxes.

The reason entities are able to reduce taxes is because they can be treated as a completely separate taxpayer from the owner.
Because of this, it's very important that the line between the owner and the entity doesn’t get crossed.
Two examples include:

1. Avoid commingling of business and personal funds
Most people are well aware that commingling funds should be avoided.

Personal expenses should never be paid with business funds. Doing so is inviting the government and others to make the case that your entity is really just you since you are treating its checkbook like your personal checkbook.

Business expenses are a little different. It is a standard business practice for a business to reimburse its owners or employees for certain expenses. In these cases, it is fine to pay for these expenses with personal funds and have your entity reimburse you.

This reimbursement policy should be well documented and followed. Only the specific business expenses allowed in the policy should be paid personally. An expense report should be submitted timely and reimbursement should be made timely.

2. Keep meeting minutes

Additional documentation is highly recommended to protect your entity for tax purposes.

Without additional documentation, there may be room for the government (and others) to make the argument that the entity form is not being respected which puts the tax savings at risk.

Minutes are an ideal way to provide further support as to why expenses, income or assets are treated the way they are by the entity.

Here are a few examples of what can be documented in minutes:
• Approval of distributions made to the owner
• Approval of salary paid to the owner
• Approval of loans to or from the owner
• Approval of the purchase or sale of assets
• Approval to obtain a new loan or refinance an existing loan
• Intent with a particular piece of property (for example, will the property be a “buy and hold” or a “fix and flip”)

While minutes are usually done to document annual meetings, they can also be used to document any meeting.

Review the minutes for your entity to make sure they are up to date and that they properly document the details of your tax strategy.

Be sure to compare your minutes to your tax return to make sure the items reported on your tax return match your minutes. For example, distributions and salaries reported on the tax return should match what is documented in the minutes.

Of course, there is always additional information you should consider when setting up any type of business, finance, or taxation strategy plan. And, you should always be working with a team of professionals to help mitigate the risk of any investment.

To your investment freedom