A solo 401(k) plan in which the only participants in the plan are the business owners and spouses of course, the spouses are employees of the business...

The ideal tax planning setting is to deal with the transaction before it is consummated. However, more often than not, the planner is engaged after the transaction has been completed.

Oftentimes the planner is ask to deal with an event which is included in a filed tax return.

The tax planning strategies will fit into one or more of those mentioned below:

  • Converting ordinary income into long-term capital gains
  • Structuring transaction to defer the payment of taxes to future years. This strategy preserves the investment base since that base is not eroded by income taxes.
  • Fringe benefits not taxable to employees but that are deductible by the employer. Payments which are currently deductible by employer but are tax deferred to employees. Additionally, growth (appreciation and income) in the investment is not currently taxable to employees.
  • Retirement plan contributions are an example. Good tax planners possess good tax research skills. Sometimes there is a tendency to focus solely on the tax research tools (i.e., research software of research volumes in law libraries) and pay little heed to the research process. Tax research tools are important. The Tax research process is responsible for arriving at the best solution to the issue. The thing that separates the best tax professionals from those that are not the best is ability of the best to effectively and efficiently research tax issues.



Charitable Giving

Long-Term gain assets:

For individuals, donating long-term capital gain property is preferable to selling the property and donating the sales proceeds. Why? Individuals takes a charitable contribution in the amount that the property can be sold for. The difference in fair market value and cost of property is not subject to taxation. The taxpayer deducts the amount the property would have sold for. Property held for a long time, received as a gift, or stock held in companies that have spun-off other companies stock (e.g. AT&T) present almost impossible bookkeeping problems to determine the property’s cost. If property is given to a charity, its cost is a moot question.

Corporations may contribute inventory to charities that minister to the ill, needy or infants. The donation is equal to the corporation’s selling price minus half of the profit if sold.

For the charitably inclined, a charitable remainder trust is an option. Taxpayer contributes high valued, highly appreciated property to a trust. Taxpayer names a non-charitable beneficiary (ies) to receive annuity payments from the trust for life or lives or for a term of years not to exceed 20 years. The charity receives the remainder in trust at the end of the term or at death of the last non-charitable beneficiary.

The annuity payments received are broken into three taxable components: return of capital; long-term gain element and ordinary income element. At the time of the contribution, taxpayer receives an income tax charitable deduction equal to the present value of the remainder interest.

The trust may be structured as a CRAT (Charitable Remainder Annuity Trust) which pays non-charitable beneficiaries a fixed amount at least annually. Alternately, the trust may be structured as a CRUT (Charitable Remainder Uni-Trust) which pays a variable annual amount to non-charitable beneficiaries. The variable amount is a percentage of beginning of year trust principal. The percentage must be at least six percent but not more than 50 percent.

The Charitable remainder trust is used to provide an annuity to income beneficiaries with remainder paid to the charity.

The charitable lead trust pays the charity annual income for a term of years. The remainder is paid to non-charitable beneficiaries. Jackie Kennedy used CLTs to reduce her estate tax liability to about $100,000. The CLT may be structured either as a fixed payment or a variable annual payout trust. The CLT is useful for taxpayers who beneficiaries (including themselves) earning sufficient income for their support during the term of the trust.

A useful strategy is to contribute a high valued, illiquid asset to a charitable remainder trust. The trust is a tax free entity. The trust sells the asset-no tax- and invest the proceeds into a diversified portfolio of securities or real estate.

Example: Parents own a family farm. Their children have chosen occupations other than farming. Parents form a charitable remainder trust (WARNING. A trust document is a legal document only an attorney may draft a legal document). The trust sells the farm without tax liability. Annuity payment from the trust are sufficiently large enough to provide parents’ needs and to pay life insurance premiums on a policy large enough to replace the value of the farm at parents’ death.

Donor-Advised Fund

The Community Foundation of Western North Carolina is an excellent organization to use when employing this strategy. How does it work?

Taxpayer wishes to make a sizable contribution but, has not decided which charity to receive the benefit. The contribution is made to the foundation this year. The contribution deduction is taken this year. The donor directs to whom the contribution will be made in future years. The fund earns investment income. The income is not taxable because the foundation controls the fund. The earnings are available to benefit the donor’s chosen charity in the future.

Employer Established Retirement Plans

For the successful business, the best tax reduction strategies are tax free fringe benefits provided for employees and owners. The benefits are provided to the business’ employees and owner tax free. The business is given are current tax deduction for the contribution made.

The best such benefit is for employer to establish a qualified retirement plan. The employer receives a current deduction for the amount it contributes to the plan, if any. The employee pays taxes on the contribution plus the earnings on the contribution and on the earnings when the benefits are paid from the plan.

The maximum amount the employer can contribute to the plan annually is 25 per cent of total compensation paid to plan participants. If the plan offers a 401(k) component, as most do, the participant may make a pre-tax contribution annually equal to 100 per cent of his/her compensation not to exceed $ 17,500 (2014 limit). If participant has attained age 50 by year-end, an additional $ 5,500 (2014 limit) may be made. Plans can be designed to accommodate employer matching or safe harbor contributions for employee benefits.

There are different formulas for the allocation of an employer contribution to each participant’s account. The maximum annual addition to any participants account is $ 52,000 (2014 limit) plus $ 5,500 for those who have attained age 50. Additions to an account include employer contribution allocation, forfeitures and employee’s deferrals.

Following is a brief description of how employer contributions are allocated under different plan designs:

Profit-sharing plan: Generally, a factor is determined for each participant based on a combination of age, length of service, and level of covered compensation. All participant factors are determined as a percentage for total factors. Each participant percentage is applied to employer contribution to determine the amount of addition from employer contribution to participant’s account.

Age-Weighted Profit Sharing Plans: Is a type of plan that allocates proportionately larger employer contributions to participant who are relatively older than the other plan participants. The age-weighted profit sharing plan allocates employer contributions based on age and compensation. Frequently, business owners, highly compensated employees, and long-term employees are older than the other employees. In these situations, an age-weighted plan formula results in as much as 90 per cent of the employer contribution being allocated to owner(s) and long-term faithful employees.

As with all profit sharing plans, a pre-tax deferral (401 (k)) plan component may be a part of the plan.

Cross-Tested Profit Sharing Plans: These plans allocate proportionately larger employer contribution to highly compensated participants than to other plan participants. Cross-Tested profit sharing plans weigh employer contributions in favor of highly compensated participants with earnings above a specified level. The plan can be designed to provide the same percentage of contributions for a particular category of participants (e.g., owners or key employees) even though their ages vary significantly. Also, the plan can be designed to provide the same percentage allocation, based on compensation, for all other employees, rank-and-file employees.

Permitted Disparity (Integration with Social Security): The tax paid by employers for Social Security benefits is currently 7.65% of gross wages. Of the 7.65%, 1.45% is for Medicare benefits, 0.5% is for disability benefits and 5.7% is for retirement benefits. The Social Security wage base for 2014 is $ 117,000. The disability and retirement benefit portion is taxed up to the wage base, which is adjusted each year. Since the tax and ultimately the retirement benefit received from Social Security considers wages only up to the taxable wage base, the system provides a disproportionate share of retirement replacement income to employees who earn less than the wage base. For this reason the Internal Revenue Code allows for a larger allocation of employer contribution to those whose earnings exceed the wage base. The disparity in allocation of employer contribution is usually based on earnings above the wage base. However, the amount of disparity may be lower than the Social Security wage base. The tradeoff for a lower amount is a lower percentage applied to the chosen wage base than is allowed if the SSWB amount is used.

Solo 401 (k)) Plan Also Known as “Uni-K”:

The one-participant (401 (k)) plan covers a business owner (i.e., one person corporation, one-person disregarded LLC and sole proprietorship). These plans have the same rules and requirements as any other 401 (k) plan. Since it is a plan that covers only the owner and spouse, if spouse works in the business, the complex discrimination test are not necessary.


Elective deferrals of up to 100% of compensation (earned income” in the case of a self-employed individual) up to the annual contribution limit, $ 17,500 (2014 or $23,000 if age 50 or over). Employer non-elective contributions up to 25% of compensation as defined by the plan, or for self-employed individuals a special computation to calculate the maximum that may be contributed to the plan.

The total addition to the retirement account for 2014 is $ 52,000, $ 57,000 if participant has attained age 50 by year end.

Simplified employee pension (SEP) Plans

A SEP is a written plan that allows the employer to establish a SEP-IRA for each eligible employee. Eligible employees are those that have worked for employer at least 3 of the last 5 years; have attained age 21, and have received at least $ 550 in compensation from employer in 2014.

Setting up a SEP is a simple task. Using Form 5305-SEP fulfills the written agreement requirement. Form 5305 SEP adopts a model plan. With Form 5305-SEP there are no annual filing requirements. The employer may choose to establish custom designed SEP-IRA. If employer so chooses, it should seek professional assistance.

Contributions and establishment of SEP-IRA plans may be made as late as the employers extended deadline for filing the income tax return. SEP-IRA establishment/contribution limit are the most liberal of any qualified or deferral plan including an IRA account with respect to extended time to establish and fund.

Contribution limits are 25% of employee’s compensation not to exceed $52,000. For the self-employed individual, the contribution limit is the plan’s contribution percentage reduced to the ratio of contribution percentage provided for by the plan divided by 1 + the contribution percentage. Example: Plans contribution percentage is 25%; self-employed maximum -25/1.25=20%.

(SIMPLE) Savings Incentive Match Plan for Employees

A SIMPLE can be structured as either a 401(k) or an IRA. Neither are subject to nondiscrimination rules generally applicable to qualified plans.

The employer/sponsor is required to satisfy one of two contribution formulas. Under the matching contribution formula, the employer is required to match employee elective contributions on a dollar-for-dollar basis up to 3% of employee’s compensation. Under a special rule applicable to SIMPLE IRAs only, the employer can elect a lower percentage matching contribution for all employees. The lower percentage matching contributions cannot be less than 1% of each employee’s compensation. The lower percentage cannot be elected for more than two out of any five years.

The employer may elect to make a 2% of compensation non-elective contribution on behalf of each eligible employer whether or not the employee makes an elective deferral.

No contributions other than employee elective contributions and required employer matching or, if elected, non-elective contributions can be made to a SUMPLE account.

Employees may make elective deferral of $12,000 annually (2014 level) and if employee has attained age 50, a catch-up contribution of $ 2,500.

Private Letter Ruling Request and Closing Agreement

As with most areas of taxation dealt with by the tax professionals, request for a private letter ruling requires excellent tax research skills which will produce a request that is, complete, accurate, and much more likely to receive the desired response from the IRS.

A Private Letter Ruling (PLR) is an answer sent by the IRS in response to a request for an opinion concerning a tax issue received from a taxpayer (requester).

Requesters send requests for a PLR when they would like to receive an explanation or clarification of the tax law before they carry out a transaction. The PLR gives the requestor assurance before embarking on a tax matter. If the request follows the prescribed format, is complete and accurate as to the facts, the favorable ruling is binding on the IRS as to that requestor.

Sometimes, the IRS may take these written decisions, redact identifying information, and publish them as revenue rulings. As a revenue ruling the decision becomes binding on the IRS and other taxpayers.

Tax Exempt Organization Application

Following are the forms needed to apply for tax-exempt status. Also there are brief explanations of the Internal Revenue Code Section that cover the subject for which exemption is desired.

Form 1023 Section 501 (c) (3) Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code.

Form 1024 Recognition of Exemption under Section 501(a) Section)

Sec 501(c)(4) Civic Leagues, Social Welfare organizations (including certain war Veterans’ organizations), or local associations of employees.

Section 501(c) (5) Labor, agriculture, or horticultural organizations.

Section 501(c) (6) Business leagues, Chambers of Commerce.

Section 501(c) (7) Social Clubs

Section 501(c) (8) Domestic fraternal societies, promoting life, sick, accident, or other benefits to members.

Section 501(c) (9) Voluntary employees’ beneficiary Associations (VEBA)

Tax Return Preparation

We prepare the following types of tax forms:

  • Individual
  • Fiduciary (Income Tax Returns for Estate and Trusts)
  • Partnership
  • C Corporation
  • S Corporation
  • Employee Benefit Form 5500
  • Estate Tax Returns
  • Gift Tax Returns
  • Exempt Organization Form 990