TaxRx ATP Program
The TaxRx Active Tax Planning (ATP) program consists of the following components:
- Planning to reduce income taxes through income splitting among family members, using a Family Limited Liability Company (FLLC) and other strategies
- Planning to reduce income taxes attributable to rental properties
- Planning to reduce payroll taxes
Please schedule a meeting with the TaxRx team for details or review the accompanying description of each component.
ATP Program Components
As part of the Active Tax Planning (ATP) Program, the TaxRx team will analyze each client’s individual situation and develop a plan to minimize income taxes from real estate rental activities, minimize payroll taxes, and maximize the Qualified Business Income (QBI) tax deduction.
Planning to Reduce Income Taxes Attributable to Rental Properties
The tax law that governs income from rental properties is complex. Outcomes can include limited rental income being tax-free, limited losses being deductible, full losses being deductible, or no losses being deductible, depending on the number of days of personal and rental use, active or material participation in the rental activities, and overall income level. The ATP program includes an analysis of all of these factors, with a plan for the best approach, given the client’s goals.
Your residence can be rented to your practice for functions, office parties, meetings, etc. up to 14 days a year where the rent is deductible by the business but tax free to you. $14,000 a year will generate $5,180 in annual tax savings. Guidance on proper valuation of the use of the home and documentation to substantiate the rental is necessary for IRS purposes and provided by the ATP program.
Planning to Reduce Payroll Taxes
Income taxes are paramount when business owners think about taxes. However, with a rate of 15.3%, payroll taxes shouldn’t be ignored. Choice of entity and tax status election significantly impact self-employment taxes. For example, in an LLC that’s taxed as a disregarded entity, member’s pay payroll taxes on their full share of the LLC’s earnings, whether or not the earnings are distributed and irrespective of the level of “salary” or guaranteed payments the member receives. In contrast, in an LLC that elects S tax status, payroll taxes are due only on a member’s salary. In addition, payroll taxes can be avoided entirely on children’s wages who are employed in a family business in some circumstances. The ATP program includes strategies to reduce payroll taxes based on these variables.
- For 2022, up to $12,950 can be shifted to each child for work in the practice where the income is deductible by the practice but not taxed to the child. Annual tax savings = $4,792 per child. An additional $10,275 can be shifted to each child for work in the practice where it will taxed at 10% v. parent’s tax rate of 37%. Annual tax savings = $2,774 per child. Guidance on proper valuation of the work and documentation to substantiate the work that is necessary for IRS purposes is provided by the ATP program.
- The ATP program includes the creation of a Family limited Liability Company (FLLC). Children are given noncontrolling interests in the FLLC. Assets from the practice can be transferred to the FLLC can leased back to the practice. These assets are now protected from any liability the practice incurs. The FLLC provides further opportunities to shift income to children. The FLLC can create a 529 education plan as a fringe benefit for each child who works in the FLLC. Gifts to fund a 529 practice are not tax-deductible, but contributions to the plan are not deemed gifts in the case of the FLLC and instead are deductible by the FLLC and taxable to the children as compensation. Money in the plan grows tax free and can be used to pay for K-12 private school or college. Contributions to the plan are unlimited, but each child’s overall compensation must be reasonable. The FLLC can also be used to shift investment income to children where savings for three children under age 25 would be about $2,500 and unlimited for older children.
After an engagement is initiated, the ATP program provides a detailed plan with projected tax savings, and representation in the event of an IRS question of a deduction. A 3x return is guaranteed.
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