Business Owner Tax Questions Answered: Strategies That Could Save You $10K+

Every year, business owners ask different tax questions: Can I deduct free food at my restaurant, can I rent my house to my business at the cost of a fancy hotel, or how do I avoid double taxation with a C Corp?

But underneath, they’re all asking the same thing:

Am I doing this right, or am I about to overpay the IRS?

In this article, we’re answering real business owner tax questions in the exact order they came in. These are practical scenarios from real entrepreneurs. Some of these strategies, if implemented correctly, can save five figures.

Let’s walk through them.

1. How Do I Use the Augusta Rule Correctly?

Q: If a friend is staying at my home for business purposes, can I rent my home to my business under the Augusta Rule, and how do I determine a reasonable rental rate?

Yes, you can use the Augusta Rule if there’s a legitimate business purpose.

The Augusta Rule allows you to rent your home to your business for up to 14 days per year without reporting that rental income personally under Section 280A of the Internal Revenue Code.

To do this correctly:

• You need a clear business event or meeting.

• You should have documentation.

• The rental rate must be reasonable.

If someone is staying overnight for business, the safest comparison is usually a local hotel rate. That tends to be more defensible than using short-term rental platforms unless the entire property is needed for an event.

When structured properly, this creates a business deduction while the rental income remains tax-free to you.

2. What Do I Need When Hiring a Foreign Contractor?

Another common business owner tax question involves international contractors.

Q: We’re hiring a foreign entity to perform services. What tax documentation do we need from them?

If you hire a U.S.-based contractor, you need a signed W-9 on file.

If you hire a foreign contractor, you need a W-8 BEN or W-8 BEN-E according to the IRS Form W-8BEN instructions.

In most cases, you do not issue a 1099 to foreign contractors, but you must maintain proper documentation.

This is a simple compliance issue. Collect the form. Keep it. Stay organized.

 

3. I’m in a Partnership. How Do I Lower My Taxable Income Without Buying Equipment?

Q: I’m a 50 percent owner in a partnership LLC. We made around $200,000 in profit. How can we lower taxable income without buying more equipment or using Section 179?

That’s a strong question because it focuses on structure instead of spending.

In a typical partnership, your share of profit is subject to self-employment tax.

One strategy is forming your own LLC taxed as an S Corporation to own your portion of the partnership, as outlined in IRS guidance on S corporations.

That structure can:

• Reduce self-employment tax exposure

• Allow strategic salary planning

• Provide flexibility for individual tax strategies

This approach often produces meaningful savings without purchasing assets you don’t actually need.

4. Can I Deduct Business Expenses Paid from My Personal Account?

Q: I paid for business expenses from my personal bank account before I opened a business account. Can I still deduct them?

Yes.

If the expense is legitimate and business-related, it’s deductible regardless of which account paid for it.

However, mixing personal and business transactions increases audit scrutiny. The IRS may look more closely at your documentation.

You should:

• Keep detailed receipts

• Document the business purpose

• Separate accounts going forward

Clean records reduce risk and make everything easier.

5. Do I Need My Subcontractor’s Tax Return for Insurance?

Q: An insurance company is asking whether we need our subcontractor’s tax return to verify they’re truly a sole proprietor. Is that normal?

No.

That is not standard practice.

What you need is a signed W-9.

The W-9 tells you:

• Whether they are a sole proprietor
• Whether they are an LLC
• Whether they are taxed as an S Corp or C Corp

If they provide incorrect information, that falls on them. Your obligation is proper documentation.

6. Can I Deduct Free Food in My Restaurant or Bar?

Q: We own a small restaurant. We provide free employee meals and sometimes give free food or drinks to customers. Can we deduct those?

Yes, but the deduction is based on your cost.

If a drink sells for $10 and costs you $2 to produce, your deduction is $2.

The same applies to employee meals. You deduct what it costs your business to provide them, not what customers would have paid.

Proper documentation and clear policies help support the deduction.

7. Should I Use an FSA or an HRA for Medical Expenses?

Q: I’m not eligible for an HSA. Should I set up an FSA through my LLC to deduct medical costs, or is there a better option?

For many business owners, a Health Reimbursement Arrangement, or HRA, provides more flexibility.

HRAs can:

• Allow reimbursement of out-of-pocket medical expenses
• Create deductible business expenses
• Provide planning flexibility depending on entity structure

This strategy becomes meaningful when out-of-pocket expenses exceed approximately $5,000 per year.

Entity structure and marital status heavily influence implementation.

8. Is Holding Investments Inside a C Corporation Worth It?

Q: I have a large taxable brokerage account that was placed inside a C Corporation to reduce taxes. Is this strategy worth the complexity?

In most cases, placing passive investments inside a closely held C Corporation introduces additional complexity.

If the corporation’s income is primarily passive, such as dividends and capital gains, it may trigger Personal Holding Company rules. That can result in additional taxes on undistributed income.

C Corporations are sometimes used to retain active business earnings. They’re rarely ideal for holding passive brokerage investments.

This is an area where professional review is critical before continuing the structure.

9. Where Should New Business Owners Start?

Q: We’re first-time business owners and taxes feel overwhelming. What free resources should we use?

Start with the fundamentals:

• Keep detailed records

• Separate business and personal finances

• Understand your entity structure

• Plan before year-end

Most tax savings come from structure and timing, not last-minute filing decisions.

Asking business owner tax questions early in the year gives you room to act on the answers.

 

Final Thoughts on Business Owner Tax Questions

The biggest savings don’t come from random write-offs.

They come from:

• Proper structure
• Clean documentation
• Proactive decisions
• Asking the right questions early

The difference between guessing and planning can easily exceed $10,000 per year.

If you are asking business owner tax questions before filing, you are ahead of most entrepreneurs.

The goal is not to be aggressive.

The goal is to be strategic, legal, and defensible.

 

Additional Business Owner Tax Questions

Q: Do we have to convert our entire partnership into an S Corporation?

No. Many times, each partner forms their own LLC taxed as an S Corporation to own their share of the partnership. This allows individual planning flexibility while keeping the partnership intact.

Q: How much self-employment tax can an S Corporation save?

In a partnership or sole proprietorship, all profit may be subject to self-employment tax. With an S Corporation, only your salary is subject to payroll tax. Distributions are not. For six-figure profits, that difference can mean thousands in annual savings.

Q: What are Personal Holding Company rules?

If a C Corporation earns mostly passive income, it may be classified as a Personal Holding Company. That can trigger an additional 20 percent tax on undistributed passive income.

Q: Does Texas have state income tax for business owners?

Texas does not have a personal state income tax. However, businesses may be subject to franchise tax and sales tax requirements.

Q: When does an HRA start to make sense?

An HRA often becomes more useful when out-of-pocket medical costs exceed about $5,000 per year. Entity structure and employee status affect how it’s implemented.

 

Transcript: Introduction and Common Tax Questions

Every week business owners send us questions that all sound different on the surface, but underneath. They’re really asking the same thing. Am I doing this right or am I about to screw myself with the IRS? Today’s episode is a rapid fire Q and a, pulled straight from real business owners, restaurants, contractors, partnerships, first year lcs, even someone with eight figures trying to avoid double taxation.

There’s gonna be no theory here, no fluff, just real scenarios, real rules, and what actually works.

Alright, so let’s dive into those listener. Questions.

Understanding the Augusta Rule

The first question we have is from just, and they said, we have a friend visiting from out of town who is here to help with some business stuff this weekend.

I know with the Augusta rule, we can rent [00:01:00] out our space for him to stay. Am I limited to finding comparable prices from Airbnb and VRBO or can I comp the hotel just up the street for a rental reimbursement? Estimate. So great question Justin, and what they’re talking about here is the Augusta rule, the 14 day home rental rule where you rent your home out to your business for business related events and that you hold at your house.

This could be if you’re holding an event there, if you’re holding, having a client member, stay over a team member, stay over. There’s various different opportunities. And the big thing with the Augusta rule is we need to have a clear rental agreement in, in an actual event, an actual activity for that rental reason.

We need to have a reasonable rate. That we’re paying for that rent, if this is done correctly. You get a business deduction and you pay potentially no income taxes on that payment that you receive for that. So this specific question related to that strategy is saying, Hey, I, I have a colleague that we’re gonna be talking about, business related items and they’re gonna be staying at our house.

And so instead of putting them up in a hotel where we would normally have to pay for that hotel because this is business [00:02:00] related, we’re just gonna have ’em stay at our house. So what is the comparable for that for me? We’re looking at the hotel, that comp for the hotel, what is the hotel that’s local to you or the average hotels in your area?

What does it cost for a one night stay in that hotel? That’s typically gonna be the comp that we’re looking at here. Now you mentioned Airbnb and VRBO. That’s usually gonna be even a higher number, but for that, typically we’re saying they’re renting out the whole house. So, you know, if you’re holding a retreat at your house, that’d be something where you’d need the whole house for.

But if you’re just renting out, if you just need someone to stay in a room. All you really need is that room rental. Now maybe you’re hosting, board meetings. Maybe you’re doing different things like that. So there could be a potential, a piece where we just want to adjust that slightly if there’s more that you’re renting out in this specific situation.

But. Oftentimes it’s a team member staying over, a client, staying over something. In that aspect, we’re just using that kind of average hotel rate in your area. Totally cool number to do. We have a question from an anonymous Facebook member, and if you’re not part of our Facebook group, go there now.

Just go into Facebook, type in small business tax [00:03:00] secrets, answer a few questions and join our Facebook group. This is from an anonymous Facebook group member. 

Hiring Foreign Contractors

And they said that we are planning to seek the services of a foreign entity. The owners perform the marketing services physically in the us. What do we require from them for tax purposes?

So if you are. Hiring or requesting services from a foreign entity that form that you’re typically, whenever you’re paying any type of contractor as a business owner, and this is, this is a good, this is a good thing to be talking about, especially this time early in the year, if you’re paying a contractor for anything, we want to grab a W nine from them.

Now, W nine would be for a US based contractor. If you have an international based contractor, you’re gonna be requesting a W eight BEN, or a BEN. E and so that’s for international companies. That’s the form you’re gonna request. So generally staying, if you’re paying someone internationally, no 10 99 required, as long as you have that W eight BEN, or BENE, to rectify that.

If you’re paying someone domestically, you’re gonna request a W nine from them, [00:04:00] and then you may or may not have to file a 10 99 depending on how much you’re paying them and what that W nine says on there, so if they’re a C corporation, if they’re an S corporation, generally stating we’re not paying, sending them a 10 99.

So to answer your question, for an international foreign entity that you’re paying, that you’re hiring as a contractor you’re just gonna keep that W eight, Ben or Benny on file. And that’s just gonna prove to you that this is a foreign entity. Now if it’s a US based entity. We’re grabbing a W nine, so hopefully that was helpful.

Tax Strategies for Partnerships

And we have a question from Ryan and he said, I’m part owner in a partnership LLC two members, and I’m looking at ways to lower our taxable income without buying another truck or piece of equipment using Section 1 79 and having another four to five year monthly payment. And Ryan, I just wanna stop here and say thank you.

This is what we want to hear now. Section 1 79, bonus depreciation. These can be really super powerful, really good items, but. We don’t want you buying things that you don’t need just for the tax deduction. And so I, I love that you’re putting this out here saying that, Hey, these can [00:05:00] be valid strategies if we needed a new piece of equipment, if we need a new truck.

But if we don’t need those things, why are we doing this? So, so great, great item there. So you’re looking for ways to lower your taxable income. Next part of the, the question is, we did about $550,000 in sales this year, net profit of about $200,000, and both members were paid around 35 to $40,000 in owner withdrawals.

From my little research, I’m thinking either opening a solo or a SAP to lower income was wondering what the best option was. We would likely only contribute to the account out of our business and not personal, no employees currently, what possible in the future based in Texas? In, in various other things there.

So first off, Ryan, you’re in a great place. Everything that we talk about every single week on our podcast, on our YouTube channel, in my book, all of that is really good information. Really different strategies that you can implement here. So I just wanna say, start to dive into those things. But as far as quick hitting items, some of the top items I want you looking at here in 2026, your profit’s about $200,000.

You’re set up as a partnership, LLC. That likely means that you’re not hacked [00:06:00] as an US corporation first order business year in Texas. They can be friendly to S corporations, your first order of business based on your setup. Everything I’m thinking here is probably look at an S corporation. Now, before we do that though, we wanna make sure that we’re setting this up correctly when we talk to somebody in a partnership.

Normally we like to leave that partnership as is, but the ownership structure of the owners in that partnership. We like to be through an S corporation. So let’s say you have X, Y, Z partnership. Ryan, you own 50% of it. Now with that 50% that you own, we don’t say we don’t want Ryan to own that 50%. We want Ryan s Corp, LLCS Corp to own 50% of X, Y, Z.

Partnership LLC. So we want your ownership in that partnership to be an LLC entity that you own, that you elect to be taxed as an S corporation. And so what does that mean? It means that the income from that LLC partnership is gonna flow through to your S corporation. And so in this case you had $200,000 in profit.

That means that a [00:07:00] hundred thousand dollars in profit would flow through. To your S corporation, and then you would have expenses in your S corporation. So let’s say, Ryan, that you wanted to hire your kids in your business and your partner didn’t have any kids. Who cares? Because you are doing it in the S corporation, at the S corporation level, not at the partnership level.

You’re doing it at the S-corp level. Let’s say that you wanted to get your own vehicle and you wanted to drive A BMW, but your partner wanted to drive a Prius. It doesn’t matter because you can do that each at the individual s corp levels without affecting the other ones. You can look at things like home office.

You can look at various different tax strategies that might not affect your other partner in that. So first things, first things I want you to look at that’s gonna be a big bang for your buck here in early in 2026 is look at the S corp structure. Now, when we look at the SCORP structure, we can either have that partnership LLC, be taxed as an S corporation or.

Our preferred method is to have each owner in that partnership have an LLC, that’s an S corporation that owns their share, and then do that S-corp activity at that level. Now the downside to that is now [00:08:00] we have a partnership LLC tax return. We have an S-Corp tax return for one partner, and we have another S-Corp tax return for another partner.

So there’s a little bit more complexity there, but. Especially as your business starts to grow it’s gonna give you more planning opportunities in your s corporations that won’t necessarily affect the other partner. It can be super powerful, especially if you’re getting into other types of businesses.

We have podcast episodes in S corporations. We have podcast episodes, YouTube videos on this partnership structure in our preferred way. We talk about it all the time in Taxo walking people through how to actually implement this. So definitely check that out. But the main reason for going the S-Corp route in this situation is to help minimize the amount you’re paying in self-employment taxes right now.

If your net profit was $200,000 and you’re 50 50, each of you as a net profit of a hundred thousand dollars, you’re paying self-employment taxes on 100% of that. So you’re paying 15.3% in self-employment taxes plus your normal income tax rate. If we organize this as an S corporation and, make that election, we’re cutting that self-employment tax bill.

In half or significantly reducing it. So instead of paying [00:09:00] 13 $15,000 in self-employment taxes, maybe that’s seven, maybe that’s eight. We’re significantly reducing that self-employment tax bill by doing that S Corp option. And so that’s the main reason we’d look at an S corporation. That’s the first place to start.

But tune in. We have plenty of time this year to start implementing all the things that we’re talking about. Tune into what we talk about. Super helpful for you. 

Business Expenses and Personal Accounts

Our next question is from Aaron and they said, I’m new to business. I now have a business bank account, but I really didn’t start using it until well into October of last year.

Prior to that, I was using my personal account. I still tracked all my business spending and I have receipts. Can I deduct that spending on my taxes even though I spent it outta my personal account? And. Paid myself back from the business. And then they said, chat, PT told me I can just consider this an owner’s contribution or capital contribution and I don’t have to move money around to consider it on my taxes.

I just want to hear it from a real person. That sounds good. Well, Aaron, thanks for coming out. I’m a real person, so hopefully we can give you some good advice here.

It really depends on how your structure is set up. I’m assuming you’re a single member, LC or even a sole proprietorship.

Generally stating, when we [00:10:00] start a business, we want to have clear separation. So when we start that business, we wanna open up a business bank account, a business credit card if we can, and we wanna make sure business items are all ran through that and personal items are separate. Now when you’re first getting started and in your situation you had kind of a mix of it, yes, you can still take any valid business expense related to you, whether you paid for it personally, whether you paid for it through the business, you get a deduction for any valid.

Business related expense. Now, we’ll say this, in the event of an audit, if you have everything co-mingled, the iris is gonna definitely scrutinize it further. But that doesn’t mean you don’t get the deduction. And I’ll give you an example. Let’s say that you, you co-mingle all your expenses and you’re saying, well, I went to Buffalo Wild Wings, and this was a business expense.

but it was on your personal card. The Iris can say, I need to see the receipt. I need to see the backup. I need to say who is with you. I need to have a detailed receipt. They’re gonna look into that a lot deeper. Because they see co-mingling where not to say that they’re not gonna do that if it was all on the business side.

It’s just, it’s a lot more obvious to the IRS that, you’re clean, you set up cleanly on that end. And the IRS wants to make [00:11:00] sure that you’re doing things correctly. So I will say co-mingling can just sometimes bring some heavier scrutiny in the event of an audit.

But that doesn’t mean, don’t take. Valid business deductions. As long as you have the receipts, everything to back it up. Writing on the receipt, who, what, where, and why. Why is it a business expense? Write in the receipt, that’s totally fine. Just fix it moving forward. Make sure anything business is going on.

The business, anything person’s going on the personal. If you need money personally, remove it from the business to your personal account owners. Draw distribution and that’s the way to do it. As far as how you do it, yes, you can do it as an owner’s contribution, where you consider that an owner’s contribution, take the expenses for that.

You could also use an accountable plan or reimbursement where you’re going to have the, the business reimburse you for those items. So whether it’s owner’s contribution or a reimbursement. Both are, both are valid options. Either way. If it’s a valid business deduction, you get the deduction for it.

Just fix it moving forward because it’s gonna make things a lot easier, especially in the event of an audit. 

Free Resources and Final Thoughts

Alright, now real quick, if you are a business owner and you’re just tired of guessing when it comes to taxes, we have our tax savings starter kit and it’s a hundred percent free. Inside, you’re gonna get our ultimate list of business [00:12:00] deduction.

You’re gonna get real case studies showing how others have saved 5,000 to $25,000 and more. And you’re also gonna get access to a bonus discovery call with our tax out team. Just head on over to tax savings podcast.com/starter kit to grab your free copy. Again, that’s tax savings podcast.com/starter kit.

Alright, back to the episode. Our next question is from an anonymous Facebook group member, and they said we are an S corp contractor. We hire subs. Some are incorporated, some are LLCs, some are sole proprietorships. Are insurance companies asking us to obtain one of our subs, subcontractors, tax returns to prove that they are an actual sole proprietor?

Is this for real? I can’t imagine asking someone to give me their tax return.

Absolutely not. I’ve never heard of this and, you know, likely something I wouldn’t, you know.

Different people out there, and banks do this all the time too, where they try to take any risk and push it off somewhere else, so they’ll try to put risk on a CPA.

Sometimes they’ll say, Hey, if you’re a business owner and you’re looking for a loan, I need your CPA to say that you can definitely [00:13:00] maintain this loan that you’re looking to get from us. As a CPA, even if I believe in it, I can’t control, I’m just a CPA, I can’t control my business.

I can’t guarantee that they can make loan payments. So a lot of different industries will just try to push risk off. Never have I ever heard of an insurance company requiring you to get a tax return for one of your subcontractors Now. There could have been a miscommunication there.

There could have been something missing there, and what they’re really asking you, Sue, is they just want a W nine. That’s what we always want from subcontractors. A W nine is gonna show whether they are a sole proprietorship. It’s gonna show whether they’re an LLC, and if that LLC is Texas an S corporation, a partnership, a sole proprietorship.

They’re gonna tell you if they’re a C corporation, that W nine is gonna tell you everything that you need to know. Make sure that it’s signed, make sure it’s dated, make sure it’s active for this year. That’s what you need to have on file to prove what they are. Now, if they’re lying to you on that W nine, that’s a different story.

They’re signing that thing. You have to depend on what they’re giving you and if they’re lying or putting misinformation on there, that’s a completely other issue. But that’s all the [00:14:00] information that you have, at least from a tax standpoint to be going off of. So get that W nine, that’s gonna tell you how that business is organiz.

We have a question from Brianna and she says, hi Mike. My partner and I own a small restaurant in Bar Business. I’m working on learning more about taxes and how to help us as a small business. First off, Brianna Great. Also check out my book Small Business Tax Savings Handbook and Finding on Amazon and various other places is a really good desktop guide for all small business owners that are just getting started or have been operating for a while.

Really helps walk you through that. No, she said, we are an. Corporation have less than 10 employees Currently, we don’t offer benefits obviously. However, one benefit we offer is free employee meals per shift, that they work 200 to $400 a week. Is there any way for us to use that to benefit the business on that same area?

How about drinks and meals that we buy our customers throughout the year? Any other tips you have specific for restaurants and bars would be a great help, Brianna? Great questions. And so, let’s talk about the second item first. If you pay for, and let’s say you’re at a bar and you say, okay, every.

Three drinks, someone buys, we we, we’ll buy their fourth, or [00:15:00] whatever it might be. Or someone comes there many times a week and you say, Hey, we’ll buy your meal. Once you buy eight meals, we’ll buy your ninth, or whatever it might be. In those instances, does that benefit your business?

Yes. But do you get. The value of that drink or the value of that meal as a business deduction? No. So let’s say you have a $5 drink, a $10 drink, whatever it is. If you give someone a free drink, you don’t get a five or $10 deduction. Now what you do get is the cost of that drink. Your cost of that drink is still tax deductible.

So let’s say that drink costs you a dollar or $2 to make your selling it for five, your actual business deduction. There is gonna be a $2 or whatever the cost is of that drink, you still get that deduction as the normal operating cost of paying for that drink or that meal or whatever it might be.

So just keep that in mind, is that. A lot of people think that, you know, if I give something away, I get to take a deduction for the value of it, what they would’ve paid. And that’s [00:16:00] not true. You get to deduct the cost of it, especially for cash basis filers, which most bars and restaurants are. And so if we look at accrual, that might be a little bit different, but a completely different story as well, because it was short income when we haven’t received it yet as well.

So generally stating, yes, you can get a deduction when you’re giving stuff away for those instances, but you’re gonna get the cost. It’s gonna be your deduction. You’re not gonna be able to take a deduction on the retail value, if that makes sense. Same thing with employee meals generally stating yes, same thing.

You can take the cost of this as a deduction, especially if you’re providing it to them in it’s food that you have in your restaurant. And especially if they’re working over a time period that would constitute a meal. There is some policies that you wanna put into place here. We have a few of those templates that you can use as an example in tax sound, but definitely something there.

So a lot of planning opportunities with bars and restaurants. But those are some of the general things and a lot of things that we do with bars and restaurants, we do with contractors, we do with consultants, we do with everything else. So, start to look at those opportunities and depending on where your income level is at, we’ll determine kind of what type of strategies we’re looking at.

Now we have a question [00:17:00] from George, and he said, I’m looking at starting an FSA to take advantage of the tax savings to pay for healthcare costs that I’m not eligible for an HSA. Can you do this as an LLC small business or would the administrative overhead to manage the program be more than the tax savings?

George, great question. So whenever somebody comes to us with high out-of-pocket medical costs, so again, we’re talking over and above. Health insurance premiums ’cause health insurance premiums. If you’re a business owner, those are tax deductible. So the health insurance premiums tax deductible no matter what.

But if you have high out of pocket, over and above health insurance premiums, we can look at something that I, I don’t typically like to look at an FSA. I like to look at something called an HR rate or health reimbursement. Arrangement, and there’s different ways that we can work this out. It’s gonna depend on if you have employees or not employees, if you’re married or not married, on what that setup might look like.

But there’s definitely ways where you can get a deduction for all those out-of-pocket medical costs by setting up an HRA, especially if you don’t have employees now. If you’re married or not, and how your entity is structured is gonna different, how you get that deduction. Sometimes [00:18:00] you need to have a side business, fold some of your income into another type of business, whether that’s a C corp, whether that’s a proprietorship, and then you hire your spouse in some of those instances.

A lot of different planning around that, but just know that it, that it is possible. Now, one thing you said is the administrative overhead to manage the program more than the tax savings. That’s a valid question because a lot of times we look at a tax strategy and we say, okay, this sounds great. Oh, but it’s gonna cost this much, so I’m gonna spend $5,000 to save.

$4,000 in taxes. Ah, that doesn’t make sense. Typically in this type of setup, an HRA, when does it make sense? Typically, we’re gonna say it starts to make sense once you have out of pocket medical costs over and above $5,000 or more. So $5,000 out of pocket, over and above health insurance premiums of $5,000 or more.

That’s when we start to look at health reimbursement arrangement or an HHRA. We talk about the different setups of this, how it looks based on your entity structure, married, not married, all that different stuff within a tax element as well.

We have a question from Darren and he says, I hi. I’m retiring soon from a W2 job.

I have [00:19:00] 10 million in invested assets, both qualified and non-qualified. My taxable brokerage account has 5 million, and a financial advisor years ago convinced me to title this brokerage account as an LLC and file as a C corporation. I am not retiring and there’s a $2 million gain in the account. To avoid double taxation, I now need to take a salary, deduct expenses, use an HRA for pre-Medicare insurance.

Blah, blah, blah, blah, blah. I’ve done bunch of different things. The question comes down to, I’m finding it is incredibly complex to avoid double taxation, but is it worth it? What asset level is it worthwhile? Why do 99% of financial advisors I speak to advise against this or don’t even know that this is an option?

Does it make sense? I don’t know you, the first thing I would say in your instance, you have $10 million in invested assets and qualified and nonqualified. First thing I wanna talk about is do you have a trust and estate plan set up? Because that’s something that you’re starting to hit that limitation where you might want to just make sure you have that.

So make sure you have a trust in will set up that just helps protect probate court and for your heirs and everything else makes that [00:20:00] a lot easier. So that’s a side note, that’s a side soapbox that I can talk on. Just get that set up if you don’t already have it set up and make sure it’s updated.

Again, a revocable living trust and RLT revocable living trust and a will is typically what we’re gonna start out with from that planning to help avoid probate. And we might look at estate planning depending on where that income or, that total wealth starts to trigger.

Now let’s go to this idea of investing. Within a C corporation. So a few different things. Generally stating, we’re not recommending this and generally stating we’re not looking at this. And sometimes in very few cases we say, yes, it does make sense, but in most cases we’re saying not a few different things to think about if the corporation, the C corporation, is closely held and earns mostly passive income.

So think of things like dividends, interest, capital gains, things that a brokerage account all the income is loaded on if the majority of the income from that. A C corporation is passive income earned by dividends, interest, capital gains. It’s gonna fall into what the iris calls a personal holding company, and [00:21:00] it’s gonna get hit with an additional 20% tax on any undistributed, undistributed per personal holding company income.

So this might be something that, that you might have already kind of hit this benchmark. Now there is some safe harbors income over a certain amount in, in various different aspects. I don’t know if you have other income flowing through this C corporation or not. If you have a side business side gig that’s running through there, or if this is just a brokerage account, likely running into some issues here with this PHC personal holding company that you’re gonna wanna look into.

Now, when is it beneficial? Oftentimes, it can be beneficial when you are intentionally retaining earnings long term inside the C corporation at the 21% corporate tax rate, and you’re not distributing them for a very long time. And. You’re comfortable with an eventual second layer tax. Now, typically, when do we see this most often?

It’s mostly with business owners. We’re typically not seeing this in the form of a brokerage account. We’re typically seeing this in the form of business owners that wanna separate some of their income, where they’re not, where they’re producing, say a million dollars of income, they’re living on 500 and they don’t need that other 500.

So instead of paying that high tax rate of [00:22:00] 37% or more, depending on your state, on, on the million dollars of income, they’re saying, Hey, let, let’s move some of that income. Into a C corporation, pay the lower 21% tax, knowing we’re gonna have a double taxation layer issue later on. We’ll kind of figure that out.

But we don’t necessarily wanna pay it today. So typically when we’re talking about a C corporation in general, small business talk, typically it’s gonna be a small business owner that is making more income than what they need to live on, and they want to keep some of that, retain some of those earnings.

It can be a strategy that we look at. very few times will we ever see it in the form of just a brokerage account again, because you also run into that personal holding company, which could be an additional tax, which now you’re talking additional 20% tax is 41% on that tax, which, you know, can negate any type of potential planning opportunities there.

So just something to think about. Look at, look at that. Look at prior tax returns. It’s two more questions. Question from Sale Washington. Love the podcast, would like to set up a call for our consultation. How can I do that? I’m assuming you’re talking about Tax Elm. Tax Elm is our software that helps you pay the least amount of taxes as legally possible.

You have unlimited access to our team of tax [00:23:00] experts, not AI garbage. You’re talking to real human tax experts unlimited access to us. We help you understand what strategies are available to you and how to implement them. We offer a free demo in consultation to look through the software and find out if it’s the right fit.

For you. Just go to tax home.com and click demo. We have some prerecorded demos if you just wanna check that out. Otherwise you can book a free demo with our team. We’ll kinda walk you through the software. Alright, final question. This question’s from Austin, Texas and they said hello. Appreciate your podcast.

It’s my wife. In MA’s first rodeo as a retailer, we are leather workers, candlemakers and silversmiths in a small Texas town. We get to share our craft and interactive workshops and have about 10 artists We’ve known for years as consignment in our shop. Pretty decent keeping record of everything, but taxes are definitely freaking me out right now.

Any free resources you could shoot our way to check out, that would be good. That would be, that would be appreciated. Breakdown 2025 gross sales. 127, 120,000. Net around 80,000 expenses. Should be [00:24:00] around 80,000, if not more as well. We are heavily reinvesting first year as an official LLC, been paying state taxes quarterly.

Great. So, a little confused on Texas paying state taxes, unless you’re talking about sales tax. ’cause Texas generally doesn’t have a state income tax. Now they do have a franchise tax for businesses, but that doesn’t come in until you hit higher income levels. So hopefully you’re talking about income sales tax, whatever it might be.

Sounds like a really cool business. Would, would love to kind of check out your shop. But as far as free resources first, check out our tax savings starter kit. Go to tax savings podcast.com/starter kit. Go to our free Facebook group. Type in small business tax secrets on Facebook. Download or or purchase my book on Amazon Small Business Tax Savings Handbook.

Check out our YouTube channel. Tax savings tv.com. Check on our podcast, small Business Tax Savings podcast. We put a lot of free content out there. All that to say there’s all really good resources that are gonna help you along this journey. My probably starting point would be the podcast in, in YouTube channel is, is a starting point.

But get the book, ’cause the book is gonna be really good and, and, and be a really good [00:25:00] desktop reference guide for you as you’re going along this journey. When the time’s right. Check out Tax home, we can help you there. But, but overall, really it sounds like you got some really cool things going on and, and would love to be able to help you out wherever we can and hopefully those resources are helpful to you.

So if this episode sounded like it was reading your mind, that’s because these are the exact questions business owners should be asking before they file, not after. If you found this helpful. Don’t forget to hit subscribe, hit that like button and share it with a business owner who’s sick of paying too much in tax.

And if you want help from our team of tax professionals implementing these strategies we talked about today in hundreds more, visit us@taxelm.com. That’s TAX elm.com, or click the link into the description for a free discovery call. We are helping people like you legally lower your tax bill every single day.

Thank you, and I’ll see you on the next one.