Where to Earn Your Money for the Best Tax Benefits

In this episode of Coffee with Carl, attorney Carl Zoellner explains why you need to plan ahead when you’re thinking how and where you earn your money.

Today, I want to talk a little bit about where to earn. 

We want to talk about some of the different scenarios of earning, which often come from very basic task planning. 

As many, who are familiar with Anderson Advisors, we’re not only a law firm, we’re also a tax firm. There’s a lot of cross-strategizing that goes on within our business. It’s important to discuss each of these, whether you’re running your own business or you have investments, you can choose in most cases where you earn or bring in that income.

It can really make a difference to your overall strategy–and improve your earning potential, by reviewing and properly structuring your business. 

So let’s talk about a couple of the options here to do that. 

Often when we look at where we’d like our earnings to come from, there is generally a prescribed earning destination. So if we’re talking about wholesaling and flipping, then it’s prescribed that we should earn in our corporation. 

The main focus is that we don’t want to be tagged as a dealer in real estate. This is because it comes along with some unsavory pieces of the tax code. A corporation is exempt from dealer status. So, there’s a nice, clear path on how we should earn our income in regards to our active investments in real estate. 

Lending

Other things are less clear when we start looking at lending. Maybe it makes sense to loan out my corporation if I have a substantial reimbursement burden I’m trying to overcome, or if I have lots of losses in my corporation, where I could afford to earn. There are some additional reimbursements there as well. 


If I’m just trying to generate a little extra cash flow, then I could do it in the corporation. It’s a great fit. Now, if my reimbursements are all burned up, and I don’t have a lot of deductions left, then it probably doesn’t make sense to earn my lending income from my corporation. Unless, once again, I’m forced too, because it’s my active business or my entity’s business that is lending. 

But generally, that income that comes from interest income is passive. Therefore, I could run that through my corporation if I choose, or my holding company, or an LLC that may be disregarded to me, or taxed as a partnership depending on your strategy. 

So we have the ability to choose in several different investment areas

Where is the best place to invest, and where do I want to recognize that income? We can even extend so far as to talk about investment opportunities in your retirement plans. There are some significant differences between IRAs and 401Ks if we start looking at investing flexibility, the risk of loss, the ability to use debt, and things like that. 

So depending on what my strategy is, it could be that you want that income to land in a retirement account. Or if you already have money funded to that retirement account, it may make sense to invest with it. 

For the purpose of this post, I wanted to talk a little bit about where you can choose your income to fall and where you may want it to be.

If you don’t know, or you’re feeling a little bit of confusion here, I would suggest setting up a tax consulting appointment. We can help you do some planning so that you’re not wondering if you’re making the most of your income. 

You always have a choice. However, the real value when it comes to taxes is in the planning. The prep, not so much. We want to take advantage of the planning, so we can choose where that income falls. Therefore, it can be part of our larger overall strategy, to build your wealth. 

From my perspective, and from Anderson’s perspective, if you’re only dealing with the liability side of what you’re doing, or if you’re only dealing with the tax side of what you’re doing, you’re missing half of the equation. 

The Takeaway

As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.

Additional Resources:

Got an idea for a future Coffee with Carl? Send it to Carl at cwc@andersonadvisors.com.

 

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