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12 Active Investor Tax Policies

A primary reason we are currently in a low or no growth environment is that the Democrats and Republicans have pursued policies to support 20th-century ideals and promote large companies.  If we are to move to a higher growth environment we need to pursue policies that will level the playing field for Active Investors and support 21st-century challenges and opportunities.  

As a starting point, I identify some broad brush areas that I believe will reduce some of the excesses and imbalances in the current tax and policy environment.  There are certainly many more specific policies that can be added but I put these forth as a starting point for discussions on what will create a productive environment for Active Investors without blatant handouts.  I would appreciate hearing your ideas and comments on this article.

  1. SIMPLIFY INDIVIDUAL TAXES:  Currently we have Earned Income, Other Income, Long Term Capital Gains, Short Term Capital Gains, multiple types of Interest Income, multiple types of Dividend Income as well as others that all include different tax treatments.  When you pay bills, a dollar is a dollar – no one asks you where the dollar comes from.  One of the keys to successes of the Reagan tax cuts and the Clinton tax system that led to a balanced budget was a set of rules that reduced the differences between the different types of income.  POLICY PRESCRIPTION: Tax all income at the same rates to reduce resources focused on reclassifying income and to simplify our tax system.
  2. END CORPORATE DOUBLE TAXATION:  Currently dividends are only available from Corporate taxable income.  One of the rationales for reducing dividend payouts for corporations is the double taxation at the corporate level and the individual level.  This rationale has allowed Corporations to hoard cash and reduce the velocity of money in the economy.  In order to get money in people’s hands so they can spend it policy should encourage dividends.  POLICY PRESCRIPTION:  Allow Dividends to be deductible from corporate taxes to discourage hoarding of cash by corporations and improve the velocity of money in the economy.
  3. CAP DEDUCTIBILITY OF CORPORATE COMPENSATION:  Currently there is a cap of deductibility of regular compensation for executives but no cap for “performance-based” compensation which generally is provided through stock options.  This skews compensation to enormous stock-based bonuses even for mediocre or poor performance.  This policy steals from owners of corporations.  POLICY PRESCRIPTION:  Have cap of deductibility of compensation apply to both regular and performance-based compensation to protect the interests of investors and make compensation more closely tied to the actual value to the corporation.
  4. REDUCE ATTRACTIVENESS OF SHARE BUYBACKS BY CORPORATIONS:  More than half of corporate profits are being used to buy back corporate stock rather than investing in Research and Development or in distributing it to Shareholders.  Share Buybacks used to be illegal stock price manipulation and are now legal stock price manipulation.  Reinstituting this classification would make more capital available to be spent in the economy either by the Corporation or the Shareholder.  POLICY PRESCRIPTION:  Reclassify Share Buybacks as Illegal Stock Manipulation to reduce the ability of Corporate Communists to extract most of the value produced by the Corporation for themselves.
  5. SOLIDIFY TAX CREDIT FOR RESEARCH AND DEVELOPMENT:  Every budget fight in congress includes a debate over the tax credit for Research and Development.  In order to provide certainty for an innovation economy, the tax credit for research and development should be a central incentive for companies and should be committed to as an essential component of our economy.  POLICY PRESCRIPTION:  Make tax credit for Research and Development permanent.
  6. REDUCE GOVERNMENT SUPPORT TO LARGE CORPORATIONS AND FINANCIAL INSTITUTIONS:  Our policies of providing direct and indirect support to large corporation and financial institutions has led us to the current economic stagnation.  We may also want to encourage more vigorous enforcement of antitrust laws to reduce the prominence of these Too-Big-To-Fail Organizations.  POLICY PRESCRIPTION:  Reduce Government Support to Large Corporations and Financial Institutions.  
  7. REINSTATE GLASS-STEAGALL SEPARATION BETWEEN BANKS AND OTHER FINANCIAL SERVICES:  This will reduce financial risk taking and provide opportunities for smaller businesses.  Most of the problems with the financial environment can be traced to the chipping away and eventual repeal of Glass-Steagall.  POLICY PRESCRIPTION:  Reinstate Glass-Steagall Separation between banks and other financial service providers.
  8. EXPAND TAXATION OF NON-PROFITS:  Many Non-Profits have sham missions and conduct business in competition with For Profit companies.  A disproportionate amount of money flows to the benefit of directors and not to the supposed core mission of the organization.  Non-profits have become an industry and a slush fund for many people.  POLICY PRESCRIPTIONS:  Tax non-profit employee compensation above the social security cap.  Taxation to the extent that program costs are less than 50% of funds collected.
  9. MARKET BASED PRICING FOR USE OF COMMONS:  The current pricing for drilling, mining, grazing and logging rights on federal lands were set over 100 years ago.  In order to be a better steward of our resources, the Government should institute market-based pricing for use of our federal lands.  POLICY PRESCRIPTION:  Institute Market Based Pricing for Use of Commons.
  10. EXPAND ENERGY INDEPENDENCE:  The US is currently energy independent. However, there is more we can do to produce energy more cost effectively and more sustainably.  A barrier to the improvement of our energy supplies is we have an antiquated electrical grid and technologies to support a more modern approach to energy storage and transmission.  POLICY PRESCRIPTION:  Shift Government budget used to support existing energy sources to upgrade and improve our electrical grid.
  11. EXPAND IMMIGRATION:  In order to address the exploding demand for government benefits for retirees, we need more people working productively in the economy.  Immigration policy should encourage talented and educated people to move to the US.  Instituting asset based migration will also support our real estate market and our business investment climate.  Immigrants are our best entrepreneurs.  Smart Immigration will serve as a catalyst for growth in our economy.  POLICY PRESCRIPTION:  Expand our Immigration policy to allow for Smart Immigration including education and asset based immigration.
  12. IMPROVE CYBER SECURITY:  As we become almost entirely dependent on the Internet for daily functioning, cyber security is our most pressing innovation area which needs massive government support.  Foreign governments have developed aggressive cyber threats.  We need to improve our defensive cyber abilities as well as our offensive cyber defense abilities.  POLICY PRESCRIPTION:  Make Cyber Security the Central Innovation Area for Government Funding

I realize there are many related policies we could look at but I think these are important first steps for us to create an innovative growing environment that supports Active Investors.

What do you think?

paying taxes

You Have to be in It to Win It

“The only difference between death and taxes is that death doesn’t get worse every time congress meets.”
– Will Rogers

Tax Code

In a wacky election year, a major disappointment is that none of the tax policies being discussed are original, fresh or even thought provoking.  The same old ideas get hashed and rehashed without much progress or thought as to what is the purpose of the tax code.

Every tax is a disincentive and any tax cut or credit is an incentive.  As long as we are talking about the same basic structure of the tax code, adjustments to rates have no impact on the inherent disincentives and incentives in our current tax code.  Given that no one is happy with the growth prospects in our current system, we should be looking at a system that creates new disincentives and incentives geared towards getting us growing in a healthy fashion.

In Plan to Not Pay Taxes, I identify strategies to take advantage of the incentives that Congress has laid out there for us to address our own looming retirement crisis.  This is grounded in the 5Ps, Prior Preparation Prevents Poor Performance.

Many of our existing taxes, cuts, credits and government payments are based on a world that no longer exists.   One example are the fees paid for grazing, timber and mining rights on Federal Land were set over a hundred years ago – my bet is that a market based system might spur more productive use of these resources.   Why do some farmers receive significant payments to grow or not grow certain crops while others are left out of the system altogether?  Why do some companies receive marketing support while others are left to fend for themselves?   Why are we subsidizing 20th century businesses instead of incentivizing 21st century businesses?  We should have a tax code that provides incentives for modern growth opportunities and disincentives for 20th Century policy objectives.  I would like to hear from you as to existing taxes, cuts, credits and government payments that you think are superfluous in our current environment.

An idea that always makes me chuckle was brought up to me by a friend in Greece as they grapple with introducing a modern tax code to incentivize people to pay their taxes.  In order to provide a greater incentive for people to pay taxes, why not give someone an entry for every dollar in taxes paid in a weekly $1 million lottery.  For the cost of $52 million dollars a year the government would dramatically increase their tax collections and people would have a little more enjoyment when they pay their taxes.  That’s called tax humor – not very funny but at least worth a chuckle.  N.B. We actually spend over a billion dollars per week on lotteries in the US – more than movies, books, sports and other entertainment combined. 

Remember, what the government gives, it must first take away.

Paying to Be the Boss

Paying the Cost to Be the Boss – Like Bruce Springsteen

Paying the Cost to be “The Boss”

“The avoidance of taxes is the only intellectual pursuit that carries any reward.”  – John Maynard Keynes

Fans of Bruce Springsteen know that one of his nicknames is “The Boss”.  Legend has it that Bruce got the nickname because he loved playing Monopoly backstage while waiting to play at his gigs.  Bruce was always the banker and because he knew the rules of the game so well he generally won and earned his nickname – the Boss.

In order to be the Boss of your own Active Investing businesses, you need to take the time to learn the rules of the game.  For your retirement businesses, your largest potential expense is taxes.  In Plan to Not Pay Taxes, I lay out the basic rules for you to live up to half of your adult life on a tax free basis.

Your first step in implementing your Plan to Not Pay Taxes is positioning your money in a tax free circumstance.  Some people have already done this.  Some can do it in a few days.  Others may need several years before being able to implement their Plan to Not Pay Taxes.  Patience will definitely be rewarded in this circumstance.

Once your money is positioned in a tax free circumstance you will need to establish a company that your tax free money can invest in.  Then you need to select which type of businesses make the most sense for you to generate tax free income in retirement:

  1. Cash Flow Businesses
  2. Real Estate Businesses
  3. Licensing Businesses
  4. Angel Investing Businesses
  5. Financial Trading Businesses

I know this will be disappointing to some but to successfully implement these strategies, you will need the skill to run these businesses as an Active Investor throughout your retirement.  That’s why we participate in the Active Investor Group on Linkedin.  At the appropriate time, you can then convert these strategies to passive strategies so you can sit back and sip on pina coladas at a beach of your choice.

You Have to Pay Taxes

You Have to Pay Taxes – But You Don’t Need to Leave a Tip

You Have to Pay Taxes – But You Don’t Need to Leave a Tip

I’m proud to pay taxes in the United States; the only thing is I could be just as proud for half the money.
– Arthur Godfrey

When I wrote my new bestselling book, Plan to Not Pay Taxes, the last thing I expected was the outrage of a few commenters about how not paying taxes was not moral and ethical or how important it was that everyone pay “their fair share.”  Other than in cases of splitting a piece of chocolate cake by allowing the non-slicer to choose their piece or in a call-it-in-the-air-no-touch coin flip, there are very few objective sources of fairness in life.  When it comes to taxes, the only logical source is the tax code itself which in this case involves the US Tax Code.  While I am not aware of many people who enjoy paying their taxes, most people feel that they are paying their fair share if they pay what the tax code tells them they owe. 

I certainly can’t tell you I understand the logic or motivations of the US Congress in much of anything they do.  However, in the provisions of the tax code that allow you to generate tax free income for up to half of your adult life, Congress is trying to help those that follow its guidance to overcome the looming retirement crisis in the United States.  Congress says it’s ok to plan to not pay taxes.

Whether you plan to not pay taxes but want to contribute some to the government or just feel like you are being taxed too lightly, you are entitled to send additional money to the treasury as a contribution to reduce the debt.  For those who expressed moral and ethical outrage at the idea of planning to not pay taxes, you can go to pay.gov to pay via credit card or electronic transfer or send a check to the Bureau of Fiscal Service, Attn Dept G, Bureau of Fiscal Service, PO Box 2188, Parkersburg, WV  26106-2188.  Since 1996, individuals have contributed just over $50 million to reduce the debt (about $2.5 million per year). During that time the debt has risen from slightly over $5 Trillion to over $19 trillion

For everyone else, Plan to Not Pay Taxes provides you a guide to not participate in your own retirement crisis.

tax free business strategies

If It’s Free, It’s for Me: Tax Free Business Strategies

If It’s Free, It’s for Me: Tax Free Business Strategies

Once you have your money positioned for Tax Free Business Strategies as we discussed in our last post, you then want to identify potential high yield strategies for your Tax Free Wealth Assets.  These are high risk, high reward strategies so you need to limit this to an appropriate portion of your overall financial assets.  These strategies will provide tax free wealth and income for you after you achieve the age of 59 ½.  In order to implement these strategies you will need to break free from the financial services 401Ks and IRAs and have tax free vehicles which allow you to hold these specific types of assets.

Angel Investing

Think of the power of having an explosive startup and then not having to pay tax on the capital gains when you cash out.  Pretty cool.

Many business owners engage in Angel Investing in startups that hopefully have high potential.  We discuss how to identify high potential opportunities in The Business Godfather Treatment.  Angel Investing is definitely an area where you want to diversify across five or ten companies with investment amounts of between $10,000 and $100,000.  The basic rule of thumb for good angel investors is 2 out of 10 hit it big, 2 out of 10 provide some positive return and 6 out of 10 result in total losses.  If you are not good, it could be worse.

You can not pull a salary from these companies but you can serve as a Director and receive dividends from the company on a tax free basis.

Legacy Appreciation Corporation for Tax Free Retirement Income

I made up the Legacy Appreciation Corporation name but this strategy provides you with tax free income in retirement and a tax free business that you can hand down to your heirs.  This is less risky than the Angel Investing Tax Free Strategy and provides you the opportunity to leave a legacy for your family.  

To make this work, you need a business that generates cash flow without your day-to-day involvement.  You can not pull a salary from these companies but you can serve as a Director and receive dividends from the company on a tax free basis. Think of a convenience store franchise or some similar tested model that should stand the test of time.

Cash flow from the business can be used to invest in other businesses or can be distributed to you as Tax Free Income as beneficiary of the IRA once you are 59 ½.  You can then pass this on to an heir who can also be building up Tax Free Wealth that can provide them with a Tax Free Income stream when they reach 59 ½.  This is why I call it the Legacy Appreciation Corporation.  You will be leaving a legacy that your heirs really appreciate.  Who knows, they might build a statue to you or throw a parade every year on your birthday.

For specific guidance on the mechanisms, join the Business Godfather LLC Family or review  Swanson v Commissioner 106 T.C. 76  https://scholar.google.com/scholar_case?case=15277963416926279130&hl=en&as_sdt=6&as_vis=1&oi=scholarr

and

IRS Field Service Advice Number: 200128011 http://www.irafinancialgroup.com/IRAFinancialGroupFSA200128011.pdf

Real Estate Development and Improvement

Real Estate Development  and Improvement has built a lot of wealth over the years.  While generally holding rental real estate is preferable as a Taxable Investment due to the many deductions associated with rental real estate, if you are developing real estate or fixing and flipping real estate this can be used for Tax Free Wealth and Tax Free Income.

You will be restricted from directly benefitting from the real estate so no vacation homes or stuff like that.  You will not be able to draw a salary from your efforts either.  You will be able to pull out dividends and profits from the account once you are 59 ½.

Complementary Tax Free Income Strategies

Tax Free Income Strategies that can complement any of the three Tax Free Strategies listed above include medium risk, medium return strategies including Convertible Notes, Real Estate Tax Liens and Secured Commercial Lending.  Convertible Notes can be used to fund Angel Investments.  Real Estate Tax Liens can provide a cost effective way to generate income and acquire new properties.  Secured Commercial Lending can support any of the three strategies.

Harness the Power of Tax Free Wealth and Tax Free Income

Start harnessing the power of Tax Free Wealth and Tax Free Income Strategies.  The US government says you can do this.  No need to ask permission.  Just proper planning and preparation. Please let me know other areas you are interested in learning more about to build more valuable businesses for you and your legacy.

blood is a big expense

Blood is a Big Expense – But So are Taxes

Blood is a Big Expense – But So are Taxes

If I asked you what your biggest expense is for your business you would probably say people or products.  But what about for you personally?  For most successful business owners, taxes are probably your biggest expense, unless you are actively planning and working to reduce or eliminate your taxes.

This is true for your income but also for your wealth as you build more valuable businesses and even if you are squirreling money away in tax deferred vehicles like 401Ks and IRAs.  As it relates to your wealth, while you may not be paying taxes  each year, you may be growing a huge future tax liability.

There are four basic ways to hold and build your wealth from a tax perspective:

  1. Cash or Cash Equivalents
  2. Taxable Investments
  3. Tax Deferred Investments
  4. Tax Free Investments

For most business owners, their business assets would fall into the Taxable Investment category.  The most underutilized strategy to hold and build wealth is as a tax free investment.

Other than for the most civic minded of you, maximizing your tax free assets makes the most sense particularly as it relates to your wealth.  I understand one of the beauties of our humanity is we don’t need to be logical, however, developing Tax Free Strategies can help you get more benefit with little extra effort from the wealth you have developed as a business owner.

Before you can benefit from Tax Free Strategies, you need to position your assets in a tax free vehicle: either a Roth 401K or a Roth IRA.  The two basic positioning strategies are Contributions and Conversions.

Contributions

On an Annual basis everyone can contribute up to $18,000 after tax dollars in a Roth 401K provided that you make at least $18,000.  Additionally for those of you over 50, you can contribute up to $24,000 after tax dollars into a Roth 401K.  Plus your employer (you if it is a single owner company) can also contribute up to 25% of your earned income each year up to a combined $53,000 combined between your contributions and your employers contributions.  There are some special calculation rules for single owner companies so your maximum number may be lower depending on how much you make.  For more information, see https://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans

Another bonus for those of us over 50, we can contribute $6500 per year and the rest of you under 50 can contribute $5500 per year after tax dollars into a Roth IRA.  By combining these strategies over a four to five year period you can position over $100,000 to be used for your Tax Free Strategies and even more for your Tax Deferred Strategies.

If you don’t meet the income limits for direct contribution to a Roth IRA, you can contribute these amounts to a traditional IRA with after tax dollars and build up your basis in this strategy.  You can then convert your traditional IRA into a Roth IRA at a later date.

Conversions

There is currently no restriction on converting tax deferred assets into tax free assets.  The reason is that this conversion is a taxable event to the extent that your converted assets exceed your basis in the tax deferred assets.  If you have been building up tax deferred assets with after tax dollars, there is not tax on what you have contributed – only on the gains that you have made in the meantime.

Once you have your wealth positioned in a tax free basis you can start developing your Tax Free Strategies.  I understand that there are many analyses that demonstrate if you use a passive, low-yield strategy used by traditional financial services you will net out about the same amount.  But our goal as business owners is not to use Tax Free assets in passive, low-yield strategies but in finding high yield wealth and income strategies

Our next post will outline some high-yield, Tax Free Strategies.

tax_strategies

Tax Strategies for Serial Entrepreneurs

People that have bought and sold companies before rely on old structures that worked the first time and then refer to themselves as Serial Entrepreneurs (or Cereal Entrepreneurs if they ate a lot of corn flakes during the first start up).

If you are truly a Serial Entrepreneur and have some assets or other businesses that can provide you with income until you are 59 ½ you should consider funding your next startup with the Self Directed Roth IRA Strategy

There is a danger that your Tax Free Asset becomes an Asset Free Asset but all startups are calculated risks with the expectation that the upside rewards outweigh the risks substantially.  Repeating the main drawback of the strategy, you would not be able to receive compensation for your effforts in the new company.  This is why you need income from another source.  At the same time, imagine saving the 20-50% tax bite that you could experience on liquidation.  Or being able to leave the rewards of the next great business to future generations.  How cool is that!

If you are not using the Self Directed Roth IRA Strategy in your next startup, another little discussed strategy for Qualified Small Business Stock are Section 1045 Rollovers which allow you to defer the gain on Qualified Small Business Stock you sell to the extent you invest the proceeds in other Qualified Small Business Stock.  This is similar to the better known Section 1031 exchange used in commercial real estate transactions to defer recognition of gains.  Section 1045 Rollovers are basically designed for Serial Entrepreneurs so they can keep investing and building up big ideas.

Not tax free or tax deferred, but a tax reduction strategy is also available for Section 1202 Qualified Small Business Stock which basically cuts your tax bill in half for Qualified Small Business Stock which you have held for at least 5 years.

As a Serial Entrepreneur, I know you love making things but remember its not how much you make, its how much you keep.  Join the Business Godfather LLC Family and we can help your tax strategies so you get more out of your businesses and your life.