Path (Creation an Action Plan)
3 Principles of wealth building:
1. Leverage of Money & Time (Put your work into 4 categories: energy (gain energy while doing), excellent, competent, incompetent, leverage others for incompetent category, and create a system for excellent and competent area. This allows you to do more of the “energy” work).
2. Velocity – increase the velocity of your money: Look for untapped cash reserve, access the equity of your real estate, eliminate bad debt, increase good debt, monitor all assets, increase your time leverage by the use of systems in your business and investments, and exploit every legal tax loophole available.
3. Cash Flow: In business, collect on receivables faster, give discounts for case, use good debt, apply for credit from suppliers, maximize short-range and long range income, weight the cash consequences of every change in your business, watch your current statistics closely.
Seven steps of Jump Start!
1. Create a business: hobby vs. business, independent contractor (20 IRS factors), change the type of income your business receive into portfolio or passive income. Have your LLC own the business building. Business structures: LLC, Limited Partnership, General Partnership, S Corp (flow through income tax, no self-employment tax, good for a small business with loss or income < $50K), C corp (its own tax schedule, income > $50K. Business Structure Considerations: Tax planning, Funding sources and exit strategies, asset protection. This huge chapter has a very comprehensive explanation for various corporate structures.
2. Discover your hidden business deductions. Commonly overlooked business deductions: auto, bad debt, business start-up (legal, business structure setup, filing fee, accounting fees, office equipment, office furniture, costs of investigating business, office setup costs), education, entertainment, legal and professional fees, travel, interest, moving expenses, software, charitable contribution/promotion, taxes (sales tax, etc.). Hidden business deductions: boat, children, clothing, gifts, home offices, medical reimbursement, personal care, pets, travel/vacation. Tax credits: work opportunity credit, welfare to work credit, ADA tax credit. Others: group life insurance.
3. Pay your taxes. 7 ways to minimize taxes: 1. Business structure timing (fiscal year). 2. Timing payroll withholding (at the end of year), 3. Wise use of tax deferrals, 4. Income splitting with business structures, 5. Income splitting with dependents, 6. depreciation, 7. carryforward losses. Passive losses can be used to offset passive income unless you’re real estate professional. RE Dealer vs. RE developer (subject to uniform capitalization rules) status.
4. What’s left goes into real estate. Smart Real Estate Investing: Buy the building your business is in. Then charge your business rent for use of the building. Holding titles: joint tenancies with or without survivorship, community property, tenants-in-common, land trust (privacy). Transfer title to a land trust, then transfer (no public record) your beneficial interest to an LLC.
5. Real estate income comes out tax-free.
6. Buy a house the right way.
7. Make your home give you money (equity).
Four ways to make money from real estate: cash flow (cash-on-cash return), tax benefits of ownership, debt pay-down, appreciation. In high appreciation area, two strategies: 1. rent-to-own program. 2. Buy and resell.
Protecting your own home: 1. Homestead exemption, 2. Single-member limited liability company (use a land trust to avoid due-on-sale clause), 3. debt.
Home Loopholes: 1. Live in your home for two years… 4. renting room, 5. Above $140K income, move interest deduction off Schedule A through home office deduction. 6. Home equity loan full deductibility: prove the additional debt is used for investment or business purposes (out of schedule A). 7!9. Controlled entity sale (to your own multi-owner LLC) at the appreciated value to step up depreciation. Use the same strategy to save the “two-year” residency requirement. Be flexible between cash-flowing properties and appreciation strategy.
New Tax Strategies for C Corporations:
Getting money out of your C Corp: tax-free benefits, salaries, loans (lend money to your investment LLC or LP), and money partner(form an LLC, in which both you and your company are members. The corporation provides and money and you provide the management). Double taxation occurs when dividends are paid. Avoid control-groups situation by mixing up controlling owners. Double taxation is still cheaper than flow through at 35% personal tax rate.
7 secrets of C Corporations
1. Own tax rate: first $50K is 15%. 2. Medical reimbursement plan (can’t discriminate against other employees). 3. Disability insurance (tax free). 4. Accumulate dividend income. 5. Receive dividend income. If there is no ownership in the corporation paying the dividends only 30% of the dividend income is taxable. If owns 20% or more, only 20% of the dividend income is taxable. 6. Ability to borrow from pension plans. 7. Ability to go public.
When NOT to use a C corporation:
1. Your business has losses. (can’t offset the loss against other income). 2. You business has high income. (may need to distribute in salary), 3. Your business is a qualified personal service corporation. (stuck with a professional LLC, professaional LLP, or an S corporation. 4. Your business is a personal holding company. (high capital gain tax rate, and liquidation of the company). 5. You want a simple structure. (need professional bookkeeping).
This book went from A to Z on how to the rich structure entities to take advantage of their benefits. Quite an eye opener. The key takeaways for me are the use of different strategies for different economic conditions (cash flow and appreciation of real estate), deeper understanding of the S- vs. C-corporations, the idea of using debt to protect your real estate assets, and many other ideas. I’ll probably have to get an updated edition when it comes to the time to “Jump Start” the process for myself.