At Reeder CPA Group, we understand that high-income earners face unique financial challenges and opportunities, particularly when it comes to tax planning and wealth management. Our team is positioned to guide high W-2 earners through the complexities of franchise business ownership. Our approach is tailored to uncover the many potential tax benefits and wealth-building potentials that a franchise can offer. From maximizing deductions and deferring income to strategic retirement planning, our team is committed to helping you navigate these avenues to optimize your financial portfolio and reduce tax liabilities.
Potential Tax Advantages
Leveraging Tax Deductions:
- Business expenses such as payroll, ongoing franchise royalties, lease payments, equipment, supplies, and utilities are generally fully deductible in the year they are incurred, reducing taxable income. Moreover, for qualified fixed assets, accelerated depreciation allows for potentially significant tax deductions in the year these assets are acquired (via Section 179 and/or bonus depreciation).
Enhanced Retirement Contributions:
- Franchise owners have access to robust retirement savings options like SEP IRAs and 401(k)s. SEP IRAs allow contributions of up to 25% of compensation, with a maximum limit of $69,000 in 2024. This type of plan is beneficial for high earners as it offers a higher contribution limit compared to traditional IRAs.
- 401(k)s are another attractive option, featuring similarly high contribution limits. These plans allow for salary deferral up to $23,00 in 2024, or $30,500 for individuals aged 50 and over. Moreover, 401(k)s include a profit-sharing component, enabling the business to make employer contributions. The combined limit for employee and employer contributions can reach $69,000, or $76,500 with catch-up contributions.
- In addition to these defined contribution plans, franchise owners might also consider setting up a defined benefit plan. These plans can offer even higher contribution limits, depending on factors like age and income, and can be layered on top of a SEP IRA or 401(k), further maximizing retirement savings potential.
- Moreover, employing a spouse or children in the franchise can provide additional retirement planning benefits. By adding them to the payroll, they become eligible for contributions to the business’s retirement plan, further increasing the total family retirement savings while potentially reducing the overall tax burden.
Income Splitting Within the Family:
- Paying family members for legitimate work allows the income to be taxed at their potentially lower tax rates. The IRS allows reasonable compensation for family members who contribute actual work.
Capital Gains Advantage When Selling:
- Long-term capital gains tax rates are typically 0%, 15%, or 20%, depending on the individual’s taxable income, which can be significantly lower than the income tax rates for high earners.
Asset Appreciation for Wealth Accumulation:
- Franchises in growing industries or desirable locations can appreciate significantly. This increase in value is not taxed until the business is sold, offering potential for considerable capital gains. However, even in the event of a capital gain from the sale, there are various strategies available to defer or mitigate the tax impact.
Strategic Income Timing and Utilization of Startup Losses:
- Franchise owners can strategically time significant expenses, income, and utilize startup losses to align with their tax planning strategies. This includes leveraging initial startup losses, which are common in the early stages of a franchise, as these losses can offset other income sources, potentially reducing the overall tax burden.
Expansive Business Expense Deductions:
- Deductible expenses for franchise owners extend to marketing, business travel, auto expenses for business use, and certain home office expenses if part of the home is used regularly and exclusively for business purposes.
Salary Control through S-Corp Structure:
- By opting for S-Corp status, franchise owners have the flexibility to structure their compensation using a combination of salary and profit distribution. This approach allows them to pay Social Security and Medicare taxes only on the salary portion, rather than on the entire profit. This is a significant advantage over sole proprietorships and partnerships, where owners pay these taxes on all business profits.
Conclusion
At Reeder CPA Group, we are dedicated to providing high-income earners with comprehensive and personalized strategies for leveraging franchise ownership to their financial advantage. Our expertise in strategic tax planning, coupled with a deep understanding of the franchise industry, allows us to provide custom solutions, ensuring that your financial decisions are not only tax-efficient but also aligned with your long-term wealth accumulation and estate planning goals. Contact our team to transform the way you manage your finances and harness the full potential of franchise ownership.
