In my practice, I cater to businesses. The personal returns I end up doing are for the owners of those businesses. Most businesses pay me to do quarterly tax planning for them along with their write-up. The way I do tax planning is different from most accountants. I was taught to have a client buy a bunch of equipment, whether they needed it or not, and that was tax planning. That never made sense to me, so I adopted the theory of putting as much money in my client’s pocket tax free.
The simplest, and most obvious, way to accomplish that would be with either a solo 401(k) plan, if there are no employees, or a Safe Harbor 401(k), if there are employees. If the company is making a ton of money I would combine a 401(k) with a defined benefit plan (DBP).
A solo 401(k) is for a company with just the owner, or the owner and their spouse. They can put $18,500, if under 50, into the plan through salary deferrals. I usually like to use the Roth option for the deferrals. Then they can match 25 percent of their salary, up to $54,000.
A Safe Harbor 401(k) works the same. However they are designed for companies with employees. The 25 percent match is still valid for the owners, and the employees have to be offered the plan. If they participate, the company has to match their salary by 3 percent.
Then there’s the DBP. Depending on someone’s age, the amount they want to retire on, and other factors, the business owner can conceivably pay themselves $250,000, and then put another $250,000 into the DBP.
About Craig W. Smalley, EA
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.