Lesser Known Federal Tax Planning Strategies for Business Owners and High Net Worth Individuals

When it comes to federal tax planning, most business owners and high-net-worth individuals are familiar with the basics: maximize retirement contributions, utilize charitable donations, and claim all possible deductions. But there’s much more beneath the surface of the tax code that can help minimize your tax burden and maximize wealth. Leveraging lesser-known tax strategies can yield significant savings—if you know where to look.

So, what are some overlooked federal tax planning strategies that savvy individuals can use? Below, we’ll highlight unique ways to reduce your tax obligations and keep more of your hard-earned money.

Why Think Beyond the Basics?

If you’re already using traditional tax strategies, you may wonder, “Is it really worth my time to go further?” For high-income earners and business owners, the answer is a resounding yes. Once you’ve maxed out common deductions, the next step is to dive into advanced strategies that allow you to minimize taxes on investment income, plan effectively for estate transfers, and even defer income under specific conditions.

Tax planning isn’t just about paying less this year—it’s about long-term financial health and achieving your goals more efficiently. These lesser-known strategies can help you do just that, but it’s essential to work with a tax professional who understands these nuanced approaches.

Lesser-Known Tax Strategies to Consider

Here are some strategies that could significantly benefit high-net-worth individuals and business owners:

1. Establish a Donor-Advised Fund (DAF)

If you’re charitably inclined, a Donor-Advised Fund (DAF) offers an efficient way to give while reducing taxes:

1. How It Works: Contribute assets (cash, stocks, etc.) to a DAF, where they grow tax-free. You get an immediate tax deduction for the contribution and can decide later on how and when to donate to chosen charities.
2. Benefits: DAFs allow for a large, upfront tax deduction while providing flexibility in timing charitable distributions.

For those who donate frequently, setting up a DAF can be a more tax-advantageous option than regular, annual giving.

2. Take Advantage of Qualified Opportunity Zones (QOZs)

A Qualified Opportunity Zone is a federally recognized area designed to spur economic growth. Investing in a QOZ allows you to defer capital gains taxes and potentially reduce your overall tax burden:

1. How It Works: Invest capital gains in a Qualified Opportunity Fund (QOF), and defer tax on those gains until the investment is sold or until 2026, whichever comes first.
2. Benefits: If held for over 10 years, gains from the QOZ investment itself are completely tax-free, making it an attractive option for high net worth individuals looking to manage capital gains tax liabilities.

Investing in a QOZ requires careful planning and due diligence but can offer substantial tax savings with the added benefit of supporting community development.

3. Use a Section 179 Deduction for Immediate Asset Expensing

For business owners, the Section 179 deduction is a powerful way to reduce taxable income by writing off the cost of equipment and software:

1. How It Works: Purchase qualifying equipment or software, and write off the entire cost (up to a specified limit) in the year of purchase instead of capitalizing and depreciating it over time.
2. Benefits: Reduces taxable income immediately, which is ideal for businesses needing to lower their current tax burden.

It’s important to know that certain items, like vehicles, have their own limits and qualifications under Section 179, so make sure your purchases qualify.

4. Defer Compensation with a Non-Qualified Deferred Compensation (NQDC) Plan

For high-earning executives and business owners, an NQDC plan offers an opportunity to defer a portion of income, lowering current taxable income:

1. How It Works: An NQDC plan allows you to defer part of your compensation to a future date, typically during retirement when your tax rate may be lower.
2. Benefits: Reduces taxable income in the year the income is earned, potentially saving on taxes if your future tax rate will be lower.

An NQDC plan needs to be carefully structured and executed, as the IRS has strict guidelines on its use. In this category, and even lesser known, are welfare benefit plans including so called “death benefit only” plans which can offer even greater tax benefits but are complicated to set up.  Consulting with a tax professional is essential to navigate these requirements.

5. Leverage a Family Limited Partnership (FLP)

If you want to transfer wealth to family members while retaining some control over assets, a Family Limited Partnership (FLP) can be a useful tool:

1. How It Works: Set up an FLP and transfer assets to it. Family members become limited partners with partial ownership, but as the general partner, you maintain control.
2. Benefits: This structure allows for tax-efficient wealth transfer, as the value of the partnership shares can often be discounted for tax purposes due to lack of marketability or control.

FLPs require careful legal and tax structuring, but they’re a powerful way to protect family wealth and reduce estate and gift taxes.

6. Utilize the ‘Backdoor’ Roth IRA Conversion

For high-income individuals who don’t qualify to contribute directly to a Roth IRA, the backdoor Roth IRA conversion offers a workaround:

1. How It Works: Contribute to a traditional IRA and then convert it to a Roth IRA. While the conversion is a taxable event, future growth in the Roth IRA is tax-free.
2. Benefits: Avoids income limitations on Roth IRA contributions and allows for tax-free growth and distributions.

The backdoor Roth IRA is an excellent way for high-income individuals to secure the tax-free benefits of a Roth, but there are specific IRS rules to follow closely.

Objection Handling: “Aren’t These Strategies Complicated?”

Many people hesitate to explore advanced tax strategies, worried that they’re too complicated or costly to implement. While these approaches do require some upfront planning and, often, professional assistance, they can result in substantial long-term savings and increased wealth protection.

If the idea of navigating complex tax strategies feels overwhelming, remember that a qualified tax attorney or financial advisor can help. These professionals can handle the complexities and ensure that the strategies align with your unique financial goals.

Why Work with a Tax Attorney for Advanced Tax Planning?

Navigating lesser-known tax strategies is easier with a professional by your side. Here’s how a tax attorney can add value to your planning:

1. Customized Guidance: A tax attorney tailors strategies to your unique financial situation and keeps you compliant with ever-changing tax laws.
2. Expertise on Complex Tax Code: Advanced tax strategies require in-depth knowledge of the tax code, which a tax attorney can offer.
3. Risk Management: Improperly implemented strategies can lead to IRS scrutiny. An experienced attorney helps you avoid errors and audits.

Plan Now to Secure Your Financial Future

By taking the time to explore advanced federal tax strategies, you can secure a stronger financial future and minimize your tax burden significantly. Whether you’re interested in Opportunity Zone investments, deferred compensation plans, or unique wealth transfer methods, these strategies can help maximize your wealth over time.

Contact our firm today to schedule a consultation with one of our tax attorneys. Together, we’ll create a customized tax plan that helps you reach your financial goals while keeping your tax obligations as low as possible.

Smart tax planning requires strategy, insight, and the right partner. Get in touch, and let’s start building a tax plan that works for you.

Mitchell C. Beinhaker, Esq. is a business lawyer and estates attorney who runs a solo legal & consulting practice representing business owners, entrepreneurs, executives, and professionals. Through his 30+ years of experience, Mitchell has handled business development, marketing, firm management, along with business transactional work for clients of the firm. He has extensive experience with corporate governance, commercial transactions, real estate, and risk analysis. Using his years of practical experience, he drafts contracts, negotiates purchases, and can manage outside counsel for any corporate situation. For business owners and executives, he creates and implements estate plans, along with succession plans to help companies continue for future generations.  

Mitchell is the co-author of 10 Ways to Get Sued by Anyone & Everyone:  the small business owners guide to staying out of court, available in paperback and kindle from Amazon.

If you are a non-participating provider and need help with your NSA arbitrations, contact our office for a free consultation.  You can email us at info@beinhakerlaw.com.  To learn more about Mitchell and his practice, visit beinhakerlaw.com.