Tax Planning For Franchisees: What, Why, How!? | By: John Mollica – CPA & CISA
Tax Planning For Franchisees: What, Why, How!?
So you own a franchise. Maybe you just purchased it, or maybe you have owned it now for several years.
What is tax planning?
Tax planning is the process of taking certain, calculated actions (or inactions) throughout the year to permanently reduce, or at least defer, your tax liability. In simpler terms, tax planning is doing things in your business to pay less taxes. – John Mollica
Well there’s just one problem.
In the 60,000+ pages of IRS tax code, they made sure to make it extra complicated to determine which actions and which inactions to take, and when, to reduce your taxes. What does this mean for you?
Let’s take a simple example.
Let’s say you own a Dunkin’ Donuts. For simplicity, let’s say your annual revenue is $1M. Your total expenses (other than tax) are $600K, leaving you with $400K in before-tax income.
If you do nothing else, and assuming you are set up as a passthrough entity (such as an LLC), you will be in the 35% tax bracket or, in other words, $400K (less your standard deduction and self-employment tax) is exposed. Your total taxes on $400K, including federal and FICA taxes, is roughly $100K.
Now imagine that instead of paying $100K on $400K of income, you instead pay ZERO and retain $400K.
So which is better? $400K in your pocket, or $300K?
Personally I’d pick the $400K.
What does it take to achieve this $100K in savings?
Why it Pays to Have a Professional Franchise Tax Planner
This is where expertise and knowledge come into play.
Every person and every franchise require different actions/inactions to maximize tax savings.
You’d have to spend a lot of time to learn:
- Which strategies are applicable to you at this point in time;
- Of the strategies applicable, which ones it makes sense to take now vs. which ones should be taken next year, in two years, etc.:
- How to defend the strategies you take against an IRS audit;
- How to efficiently implement strategies to maximize the savings for each
If I could write to you, here, “just do A, B and C and your taxes will go away!”, I would. But I can’t. Why?
Every franchise is different, every person is different, and every situation is different. To determine which tax-reducing strategies are available to you requires a deeper analysis of your current situation and life.
How do we make sure our franchisees pay the least taxes possible?
We focus on the following items:
A) Deductions Review
A Deductions Review involves taking a look at which legal deductions are available to you and your business.
Knowledge Check: How often should you perform a Deductions Review for your franchise?”
Answer: You should do a Deductions Review for your franchise AT LEAST annually, but quarterly would be better. To perform a Deductions Review, you should consider the following items and how they are factored into your franchise and your taxes:
- Home office
- Travel expenses
- Meal categories
- Hiring children and grandparents
- Maximize depreciation
- Health care strategies
- Fringe benefits
- Accountable plans
- Medical reimbursement plans
- Home administrative office
B) Legal Entity Review
A Legal Entity Review is considering which business entity structure will result in the lowest tax liability.
Knowledge Check: Among the five main legal entity structures (Sole Proprietorship, Partnership, LLC (partnership or S-Corp), or C-Corp/C-Corp with S election), which type results in the lowest possible tax liability?
Answer: It depends (you’ll hear this phrase a lot from accountants). It really does depend. There are instances where an LLC is the best structure, and others where a C-Corp is best from a tax perspective. It is very important that your legal entity structure is optimized for your situation.
C) Retirement Review
A Retirement Review is considering what options available to you to save for retirement will result in the lowest possible tax liability.
Knowledge Check: True or False: The only retirement options available to me are 401(k)s and IRAs.
Answer: False. There are MANY retirement savings vehicles that you can employ to save on taxes. You can even stack them, so if your income is high, you can use several vehicles to save even more.
Among retirement vehicles, just a few include:
- Profit-sharing plans
- Traditional vs. Roth 401(k)
- Cash Balance Plans
- Self-Directed Retirement Funds
- Defined Benefit Plans
- 412e3 Plans
D) TCJA (Tax Cuts and Jobs Act) Review
This is a very new item. President Trump introduced new tax legislation effective in 2018 which contains some attractive tax updates for business owners, including franchisees.
Knowledge Check: TCJA changed the S-Corp tax rate to 21%.
Answer: Technically an S-Corp is a passthrough tax classification; therefore, it follows your personal tax rate. TCJA changed the C-Corp tax rate to 21%.
It also introduced some other important concepts and changes, such as:
- Opportunity Zone Credits
- Favorable Depreciation Rules
- Non-Grantor Trusts and Sections 199A and 1202
- GILTI Tax
- C Corps and FDII
In addition to cross-checking the above strategies to your above situation, it is also important to properly document all positions so that, in the event of a random IRS audit, you are 100% covered.
Recap: Why is tax planning important?
- It will add tens or hundreds of thousands of dollars into your pocket;
- It is legal and your competitors are doing it. So if you don’t, you’re already behind;
- You can use the money saved to grow your franchise, build wealth, and set up a handsome retirement
If you have any questions on tax planning and how it would look for your franchise, I invite you to click the link below and select a time to speak with me. I’m happy to help.
To Your Success!
Your Franchise CPA,
John Mollica – CPA & CISA
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