In this article, we will very briefly touch on some concepts to make the reader aware that these concepts even exist. These concepts are for individuals with higher incomes or net worth. Each of these concepts can provide certain tax benefits where appropriate. Consult with your tax advisor. This article is only for informational purposes only. We have a lot of ground to cover in this article, so let’s jump in!
Leveraged Deductions
These offer individuals as partners the opportunity to acquire minerals, commodities, and other raw materials on terms typically only available to large industry and institutional buyers. This is done by negotiating large allocations of assets but making them available in smaller lots.
Purchasers acquire individual, undivided ownership of the assets, directly or via an entity. Additional support is also available to assist owners in commercializing or managing the assets. (These are not pooled arrangements or investment contracts; purchasers have full ownership and responsibility for them). The assets are able to be purchased at bulk discount and then contributed to charity at retail value yielding a significant tax benefit. It is a real asset and the value is not built on inflated appraisals. This concept is built on the current Internal Revenue Code.
Solar Credits
Solar investments can turn a tax liability into an asset. They can unlock valuable tax benefits for high-income individuals (HNIs) and family offices. By acquiring solar projects, HNIs can significantly reduce their tax burden, while also contributing to a cleaner and greener future. Large corporations reduce taxes by choosing to acquire Solar Projects that generate tax benefits, effectively offsetting a large portion of their tax liabilities:
- Investment Tax Credit (ITC) between 30-50%
- Bonus Depreciation
- Income Stream during Hold Period
Oil and Gas
A longer-term investment, oil and gas take advantage of Intangible Drilling Costs (IDC), Depreciation and Depletion Allowance. This concept can help in tax planning in that it allows an IDC deduction in the first one to two years, and provides a tax-preferred income stream based on real assets. It can be appropriate for high 1099 or W-2 income earners, helping with Roth Conversions or RMDs, or in the sale of a business. It can help with portfolio diversification. It provides a non-correlated asset to equities and bonds and it can provide a long-term income stream that can be reinvested to compound returns.
Structured Ownership
This strategy can reduce the client’s out-of-pocket expense from 23.8% capital gains tax rate (plus state income tax) or 37% ordinary income tax rate (plus state income tax) down to 13.5% (capital gains) or 16% (ordinary income) with full liquidity.
- Does not require a charitable structure.
- Client can take entire basis tax-free in case of capital gains.
- Reduction of capital gains or ordinary income in the year the plan is implemented (possible carry forward if business loss exceeds income).
How it works: Client makes capital contribution of 10% in the case of capital gains income or 12.5% in case of ordinary income of desired tax deduction. Client will get a negative K-1 that will offset income of 10x (cap gains) or 8x (ordinary income) of their capital contribution plus a one-time 3.5% administration fee on the total amount. The taxes will be deferred for 15 years and then can be deferred another 15 years and so on until client is able to receive a step up in basis as current law permits. There are no additional fees to renew deferral.
Client will receive a 3% to 5% income on capital contribution, but will not receive capital contribution back (otherwise, tax would be triggered).
Example: Client sells real estate (or business) with $1 million of capital gains. Client contributes $100k into Master LLC. Client will get negative K-1 of 1 million to offset capital gains. Client will pay a one-time administration fee of 3.5% on K-1 amount. Client’s total out-of-pocket is $135k (or 13.5%) rather than paying tax of 23.8% capital gains plus state income tax.
Client will receive income of 3% to 5% ($3k to $5k) income per year from original $100k capital contribution.
In conclusion, there can be more options for tax planning than is realized. This is by no means a comprehensive list. It can be beneficial to sit with your advisor and ask what other options are available.
Please Note: All charts and numbers are for illustration purposes only. Accuracy is neither warrantied nor implied. We are not attorneys or tax advisors. This information is educational only. Not to be considered as advice or recommendations. It is imperative that you consult with a tax advisor and/or attorney when considering any of these concepts. In addition, it is critical that the attorney, tax advisor, and financial advisor are knowledgeable and practiced in these areas. If you would like help finding such an advisor, we will be glad to introduce you to an experienced planner with your best interest in mind. Please give us a call at 1-800-522-4324.
