How The Rich Use S-CORPS To Explode Their Wealth

Summary

This video script offers a comprehensive guide on leveraging an S corporation to significantly boost wealth. The speaker, a CPA and attorney, outlines three key strategies: avoiding self-employment taxes by adopting an S corporation status, maximizing wealth through a solo 401K, and utilizing a board of directors for tax deductions and business growth. The presentation debunks myths about S corporations, emphasizing their simplicity and benefits, including reduced audit risk, to empower business owners to optimize their financial strategies.

Takeaways

• 🚀 Using an S Corporation can significantly increase your wealth by optimizing tax strategies.
• 📚 The speaker is a CPA, attorney, and best-selling author with extensive experience in tax and legal industries.
• 🏢 An S Corporation is a way of doing business that can be applied to an LLC or a corporation to maximize tax benefits.
• 📝 Unlike LLCs, S Corporations file their own tax returns, which can lead to significant tax savings, particularly on self-employment tax.
• 💰 By using an S Corporation, you can avoid paying self-employment tax and ACA taxes on profits, as long as you take a reasonable salary.
• ⚖️ Reasonable salary allocation is key to maximizing the tax benefits of an S Corporation. The speaker provides examples and reassures that this approach is audit-safe.
• 💼 Strategy 1: Converting to an S Corporation helps split income between salary and pass-through profits, reducing overall tax liability.
• 📈 Strategy 2: Use tax savings to fund a Solo 401(k), which allows for substantial tax-deferred growth and investment flexibility.
• 👨‍👩‍👧‍👦 Strategy 3: Form a board of directors with family and close associates, enabling legitimate tax deductions for business-related expenses and activities.
• 🔄 Regularly maintain your S Corporation’s corporate records and minutes to ensure asset protection and reduce audit risk.

Q & A

What is an S corporation and how does it differ from an LLC or a sole proprietorship?

An S corporation is a type of business entity that allows the income and deductions to flow through to the shareholders' personal tax returns. Unlike a sole proprietorship, where the owner reports business income on Schedule C, an S corporation files its own corporate tax return. Unlike an LLC, which does not inherently change the tax treatment and still requires self-employment tax on profits, an S corporation can avoid self-employment taxes on distributions, not considered salary.

Why might someone choose to structure their business as an S corporation instead of an LLC?

An S corporation can be advantageous because it avoids self-employment taxes on the portion of profits not paid as salary, potentially reducing the overall tax burden. This is in contrast to an LLC, which does not provide any tax benefits over a sole proprietorship and still requires the owner to pay self-employment taxes on the profits.

What is the 'Trifecta' strategy mentioned in the script, and how does it relate to business operations and wealth building?

The 'Trifecta' strategy refers to the alignment of operations, assets, and the tax return (1040) to optimize business performance and wealth accumulation. On the left side, operations are conducted through an S corporation or an LLC taxed as an S corporation. On the right side, assets like rental properties or investments are managed, possibly through an LLC. The bottom represents the tax return, where the goal is to minimize taxes through strategic business structuring.

How can an S corporation help in reducing self-employment taxes?

An S corporation allows business owners to pay themselves a reasonable salary, with the remainder of the profits distributed to them as dividends, which are not subject to self-employment taxes. This can significantly reduce the tax burden compared to a sole proprietorship or an LLC, where all profits are subject to self-employment taxes.

What is a 'reasonable salary' in the context of an S corporation, and why is it important?

A 'reasonable salary' is an amount that is considered ordinary and necessary for the services provided by the owner of an S corporation. It is important because it is the portion of the income that is subject to employment taxes, while the remaining distributions are not, thus reducing the overall tax liability.

Can you explain the concept of a solo 401K and how it can be used to build wealth in an S corporation?

A solo 401K is a retirement plan designed for self-employed individuals or small business owners with no full-time employees other than the owner and/or spouse. It allows for significant contributions, both as an employee (W2 wage deferral) and as an employer (K1 profit), which can be invested and grow tax-deferred, thus building wealth more efficiently.

What are the benefits of establishing a board of directors within an S corporation?

Establishing a board of directors in an S corporation allows the business owner to include family members or close associates who can provide support and advice. It also enables tax deductions for related expenses such as travel, meals, and equipment, as these are considered business expenses when associated with board activities.

How can the savings from avoiding self-employment taxes be utilized to fund a solo 401K?

The savings from avoiding self-employment taxes can be directed towards funding a solo 401K, which allows for tax-deferred contributions, both from the salary (W2) and from the profits (K1). This not only reduces the current tax burden but also invests in retirement, further building wealth.

What is the potential downside of not having a proper salary structure in an S corporation?

Without a proper salary structure, the IRS may reclassify the distributions as salary, which would then be subject to employment taxes. This could result in additional tax liabilities and potential penalties if the business is audited.

How does the script suggest dealing with the complexity of managing payroll and taxes for an S corporation?

The script suggests hiring a payroll company to manage payroll reports and taxes quarterly. This approach allows the business owner to review the profitability and adjust the salary and distributions accordingly, ensuring compliance and simplifying the process.

What are the potential benefits of using an S corporation structure in terms of audit risk and asset protection?

The script mentions that using an S corporation structure can significantly reduce the risk of an audit compared to an LLC. Additionally, maintaining proper corporate records and structure, such as minutes of board meetings, can provide asset protection and ensure audit protection.