Business Innovators Radio - Interview with John Martin with Compass Wealth Strategies Discussing Business Tax Strategies

Episode Date: September 5, 2023

Hard-working business owners and Professionals shouldn’t have to forfeit paying unnecessary taxes while working and especially during retirement.John Martin, CEP, RFC, IAR of Advanced Tax Planners started his career 27 years ago as an independent financial advisory & wealth management firm in New York.He has served the business community by providing tax reduction strategies, along with creating, protecting, and preserving his client’s wealth for their families.John integrates education with holistic financial planning as the foundation for building real Financial Independence more rapidly, especially when taking advantage of all the tax reduction methods the tax code allows.Each client can expect the highest level of integrity and confidentially working together to design and implement the right strategies to best achieve their individual goals and aspirations, and to control their financial life.John is based in Western New York and married to his wife Kit. They have a son and a granddaughter Emma. He enjoys time with family, reading, golfing, and traveling.Learn More:https://www.compasswealthstrategies.net & https://redwoodtaxadvisor.comFinancial Advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation.Separate from the financial plan and our role as a financial planner, we may recommend the purchase of specific investment or insurance products or account. These product recommendations are not part of the financial plan and you are under no obligation to follow them.Investment Advisor Representative offering Independent Investment Management utilizing Tactical Active Management through Redwood Private Wealth, SIPC.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-john-martin-with-compass-wealth-strategies-discussing-business-tax-strategies

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of Influential Entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have with this John Martin with Compass Wealth Strategies and we'll be talking about business tax strategies. John, welcome to the program. Hi, Mike. Yeah, thank you for being on the show.

I want to talk all about how you serve your business clients because I know that businesses are so relevant today to the economy and when you can help them increase income, lower expenses, lower taxes. Boy, that just puts them on a better plane. But let's jump in before we do that and learn a little bit about yourself, what's your story and your background. and how did you get into the financial services industry? Yeah, well, you know, I grew up on a large farm, fruit and vegetable farm in upstate New York, and there was kind of a parting of the ways with some of the partners. So I drifted out into, I knew I wanted to be self-employed for the most part and independent growing up in that type of environment. and went into the insurance business with the Prudential as an advisor and agent with the Prudential

and kind of developed a specialty in the estate planning business market and became a wholesaler with a couple of different corporations where I advised other advisors and their business owner clients on protecting their wealth, preserving it, and transferring it to the next generation of theirs. And I did that for about 20 years. And the companies that I was with, they took that service in-house. I was acting as an independent advisor. They took that in-house.

And so I kind of bumped out of that business and decided that, you know, I had enough knowledge and experience in estate planning, business planning, tax planning to go out on my own. That's what I did in roughly 2006. Yeah, so that's really great because you can learn from the big companies, the big strategies that are working for large cases and then bring it down into your current clients when you're working with families and businesses. So where do you start with a business when you're working with them to look for opportunities for tax strategies? Where do you begin looking and what do you advise them to do? Well, I think you have to start with making sure they have the correct legal structure

so they can maximize their deductible expenses and through different strategies to shift some of their profits to what we call a split dollar S corporation where they can pay those taxes on those profits at a much lower rate. and there's a strategy where the owner can loan himself tax-free, loan himself, monies that removes those profits from the corporation. And the corporation is reimbursed at death when the client passes away through a specially designed life insurance policy. So it's a real nice program that works well for a lot of businesses.

You know, when you talk about legal structure, do you work with the business owner's attorney to get these set up, or do you bring in an outside attorney that can help make sure all of that is set up the right way? Well, part of my practice is I'm aligned with a national network of advanced tax planners, CPAs, attorneys, actuaries that help me design various programs to best meet a client's needs. We will also bring in the client's attorney and CPA if necessary, if the client desires. So we're all sort of on the same team with our analysis and recommendations. So yes, we work with all parties. You know, that's important because I think if I was a business owner hearing that, I would be thinking, I don't know how to do that, and I want to make sure it's done right. So that's wonderful.

and another benefit of that team approach that I really love is it's not sitting on your shoulders as John, the advisor, it's the whole team. You're bringing in experts to handle one piece of their need and then you're handling another piece and you bring in the other expert. And so that team approach really makes that business owner feel like they're taking care of as well as getting the very best advice, right? Absolutely. Definitely. That's a huge opportunity. So talk a little bit about some of the deductions and credits and things that you point out to your business owner clients once they're set up with the right legal structure. Well, I think most business owners and people in general will look at maximizing their contributions to qualified plans like 401Ks, IRAs.

There's a specially designed, defined benefit plan called a cash balance plan that allows for much greater deductions and contributions over and above 401Ks and profit sharing plans. You can fund up to about $350,000 a year and fully deductible. You can fund a total of about $3.5 million over time in those plans. Of course, all those qualified plans are deductible today, but they face, you know, income taxes and retirement upon withdrawal. Many people think that taxes are going to be much higher in the future with our debt and our deficit of $32 trillion. It calls for higher taxes in the future, and so should they be contributing money, to a future tax rate, tax bracket, or should they pay the taxes now, which is about the lowest tax rates we've ever had in history, and fund other vehicles that would grow tax-free and come

out tax-free? And those are raw fire raise, but those have income and contribution limits. You know, real estate is one avenue. And funding a high-coveillance. cash value life insurance policy, which acts as a super Roth, rose tax deferred, and comes out tax free through distributions and loans. You know, you make a really big point there that I want to just go a touch deeper on because I think a lot of people have remembered in decades past, we were all told, oh, your tax bracket is going to be lower and the taxes are going to be lower when you're tire. Well, that's not necessarily the case because of what you just said, because the only way

for us to close the gap on that deficit is two things. One is to stop spending as much, and that we know the government's not going to do that. And the other way to close that deficit gap is to raise taxes. So we already know we have our finger on the pulse of this tax or this deficit. We know that number, and we know it's growing. So does that make us feel confident that taxes are going to be lower in the future? Probably not. So I think once people have that realization, then what do you do about it? And I think that conversion idea for some people, not for everyone, you know, get with someone like yourself that can look at it.

But that could be really a positive move because you're paying taxes now when they're at their lowest rate in decades and probably will stay at the lowest rate because they're only going to go up. Yeah, especially for business owners. I mean, for, you know, the average W-2 employee, you know, their income might be the same or lower in the future, but for successful business owners, they're probably going to have just as much income and retirement as they have today. So we'll look at both and analyze what would be the most advantageous, and oftentimes it's a combination of both. another strategy is called a ERTC and business owners have been bombarded with calls for that service. It's an employee retention tax credit where businesses can get a credit for the COVID problem we had in 2020 and 21. if their businesses was impacted by a loss of revenue or they had a government requirement to slow down,

they can get up to $27,000 refund per employee if they were impacted by COVID during those period of time. So that's a huge credit right there. Yeah, that really is. Cost segregation studies is where you accelerate depreciation on commercial buildings, for the most part, commercial buildings, where you accelerate the depreciation from typically over a 30-year period to, you know, either between one and five years. So they get a lot greater depreciation deductions, you know, up front instead of over a 30-year period to, you know, either between one and five years. So they get a lot greater depreciation deductions up front instead of over a 30-year period. And when you're mentioning those things, that's definitely not something you can go Google, download a worksheet and do on your own. And it makes the requirement, like you already said, you need to make sure you've got the right legal structure.

So some of those things are very powerful, but very confusing for the business owner. and they probably would throw their hands up and say, well, I can't do it. But when they work with someone like yourself, you can point out the opportunities and show them the way. Correct. Yeah, we look at all strategies and try to make the determination of what would give them the most credits or deductions available. So when you mentioned some of those properly funded insurance contracts, that kind of ties into legacy. planning, right? So what are some of the steps that you can recommend to a business owner for them to put a lasting legacy in place for their business? Well, again, I think it starts with the proper wills and trusts that need to be set up.

About 45% of the population does not have a current will or a trust in place to transfer their, their assets to their loved ones in the right amount in the right time. So we make sure that wheels are in place. There's various trusts that can be designed to protect assets from potential litigations, creditors, divorces, and make sure that those assets are transferred to their errors when they want and how they want. They might not want to leave the assets outright. Maybe there's some spend thrift issues with children or grandchildren. So there's a various trust that can protect those assets yet, benefit those beneficiaries long term.

You know, and with a successful business, you've got a factor in succession planning, right? So what are you going to do with the business? Sell it outright? sell it to the employees, give it to the kids. And so what goes into secession planning as it relates to the legacy of that business? Yeah, very good point, Mike. Succession planning is really should be a priority for almost any business. It really spells out what happens to the business in the event of the event of death or disability and their retirement.

It spells out who will continue the business or who is going to be. sold to. And these are commonly addressed with a written buy-sell agreement, which properly funded with insurance to provide the funds for the buyer to purchase and makes the sellers, you know, airs whole at the same time, and they don't have to depend on the business for receiving the value of that business in those events. Also, along with that, a business valuation is a real starting point to address those issues. Most businesses do not have a business valuation which directs all of those buy-sell agreements,

succession planning, and a properly structured valuation will hold up in court, too, under the IRS guidelines for valuing the estate, the business, for state tax purposes. Yeah, that valuation gives you that baseline to know where to start with. Exactly, yeah. And then there's different ways to reduce the taxable estate through valuation discounts using family limited partnerships or limited liability companies to reduce the taxable estate. And many businesses, you know, high net worth businesses when they're sold, they're faced with high capital gains and estate taxes. And so you really need to look at what's the best way to sell that business to eliminate or defer those taxes, you know, really for life and also their children's life.

there's a structure called a structured installment sale. It falls under the IRS code of 453 installment sale. It's a trust where the business sells his business, her business to a trust. The seller holds a note from the trust pain in manywheres from, you know, 7 to 8% a year from the sale, from the full proceeds of the sale. and deferring the capital gains of the state taxes for life. You know, we've been talking a lot about saving taxes and getting deductions and credits and all these kinds of things. And once you have that amount of money, whether it's quarterly or yearly,

freed up, you better know what to do with it to put it to good use. So what are some investment options of retirement plans that business owners can look at with some of that freed up cash flow that will also provide them? some tax advantages? Well, one recently as a result of the Inflation Reduction Act is investments in solar and wind energy projects as part of the Act is offering tax credits of 40 to 80 percent off their income tax, and that tax can be carried back three years or can be forwarded if it's unused in three three years, over a 20-year period. And so that offers huge tax deduction.

So somebody's got a $500,000 tax bill. They could pretty much wipe that out over a couple of years. That's pretty amazing. Yeah. Well, as you know, under the Tax Reduction Act, They're funding billions of dollars into these renewable energy projects and offers a lot of opportunity for investment in those. Yeah, I think if you know what to look for, you would be able to take advantage of some of those things. But I think that too many times people just don't know what they don't know.

They don't realize these kind of opportunities are out there. And that's what you're able to help bring to their attention. Right. Yeah, another strategy is for business owners that, you know, need large amounts of life insurance, but instead of paying for it with after-tax dollars, through a profit-sharing plan, they can use the money in that profit-sharing plan to purchase life insurance with those tax-deductible dollars inside the plan. And then five to seven years out, you would buy the policy out of the plan. at roughly a 50% discount. So, you know, you're saving 50% of the premium dollar from taxes.

And then that policy is owned personally or you put it inside a trust where it all becomes tax, tax-free growth and tax-free distributions and a tax-free death benefit. So that's another strategy. Another one is utilizing what we refer to as a legacy IRA plan. It's typically used for larger 401K and IRAs where the owner has substantial assets and wealth outside of the IRA and won't, it doesn't expect to need the IRA in retirement. Because when you look at what that IRA is worth after income and estate taxes to the years, it's only worth about 33% to them. You're going to pay a combination about 67% and income in the state taxes. So we use the IRA to pay for a high cash value, last to die, life insurance policy again.

You turn a million dollars that's really worth 650,000 of the years into anywhere from 5 to 10 million tax-free to their errors, depending on the age of the owners. 100%. Yeah, that's, you know, whenever you hear. heirs and owners and your mind just goes to complexity. And I think that what you're able to do with these business owners is look at the big picture, see where they want to go, see where they are, and then show them this clear path forward, showing them some of these options.

And I'm sure that becomes such a huge relief off of the minds of these business owners when they see how it is explained and also see how some of that burden is relief off of them for taxes and wondering how they can accomplish their goals. Exactly. Yeah, there's so many different options available that, you know, they may not be aware of that can really maximize the value of all their hard work and risk taking and funding those IRAs and 401Ks and have a big share of it lost to taxes. One other area is called the medical expenses in retirement due to Irma, which is the Medicare's income-related monthly adjustment amount.

That's a mouthful. It's basically a surcharge to Medicare premiums for higher incomes. you know, typically costing well over a million dollars over their retirement years, which will, you know, reduce your Social Security income by that amount because Medicare is paid from out of your Social Security benefits. So if your Medicare premiums rises substantially, that would reduce and in some cases eliminates Social Security benefits. So having assets and tax-free accounts is the only way to reduce

the surcharges don't account as taxable income like Roth IRAs. Again, life insurance is designed correctly. Having the right amounts in tax-deferred, taxable, and tax-free accounts can get clients in close to a 0% tax bracket in retirement or close to it. And most people have most of their assets in tax-deferred accounts. and that will create the Irma surcharges, which will dramatically reduce the Social Security. And so that's another area that we address and look at closely. You know, I think, John, this has been so eye-opening to see that there's opportunities out there.

They're easy to access with the right guidance. And I think it's so great that you take businesses under your arms, and help them to achieve these. So what are some final thoughts? And then if someone is interested in reaching out and connecting with you, what's the best way that they can do that? Well, I appreciate the time with you today, Mike. I'm very insightful.

You can go to my website at compasswealth Strategies.net. And the other company I mentioned with the CPAs and attorneys is Redwood, TaxAdvisor.com. My phone numbers are on both of those websites and look forward to speaking with anybody that has any questions or issues I would like help with. Excellent. Well, thank you so much, John. It's been a real pleasure chatting with you today. Thank you, Mike. Same here.

You've been listening to Influential Entrepreneurs with Mike Saunders To learn more about the resources mentioned on today's show or listen to past episodes, visit www. www. Influential EntrepreneursRadio.com