Expecting high income in 2018 ($1m+) looking for advice

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MassiveDynamic
Posts: 5
Joined: Sun Nov 26, 2017 6:47 pm

Expecting high income in 2018 ($1m+) looking for advice

Post by MassiveDynamic » Mon Nov 27, 2017 6:28 am

Hi Bogleheads,

This community has been an invaluable resource over the last 6 years as I've transitioned to self employment, incorporated, established a solo 401k plan, and begun to invest. Everything has been going well and that's why I'm seeking advice. 2018 is going to be my strongest year yet, but I'm also going to get killed in taxes.

I'm realistically looking at +/- $1,000,000 gross income for the coming year.

I'd greatly appreciate any insights relating to tax planning, retirement planning, asset allocation, company structure, and any lifestyle or general tips.

**Of particular interest is how much I should pay myself on w-2 for 2018 vs the amount to take on a k-1.

Summary:

- Age 33
- Self employed in sales
- Incorporated (S-corp)
- Single, living and working in SoCal
- Debt free (worked through state school, Real Estate major :thumbsup)
- Pay credit cards in full every month
- Currently renting ($1,700/mo) 1bd/1ba condo 600sf
- I drive a 90's SUV with 300k miles on it that I've had since college

Considerations:

I'm planning to buy a "heavy vehicle" in 2018 for about $70k to get the accelerated depreciation. I'm also open to buying a home, but 60-year-old condos in my area are going for $800k+ and I think we're a bit late in this cycle.

Speaking of cycles, my income is highly exposed to economic fluctuations of the greater economy and the oracles I've consulted see this run ending either late 2018 or 2019. Whether that's right or wrong, I want to put as much of this income as possible to work so that I can have a livable residual if the wheels really come off and I can't close a deal for a while. (Same oracles also said 2021 - 2029 will be a great economy, but 2030 is when the world will implode - YMMV).

Lastly, I'm of the assumption that our state and federal governments will almost certainly have to raise taxes during my lifetime (and raise them considerably). With that in mind I'm willing to pay taxes now to max out whatever Roth options I have available to me now. More on that below.

That's the gist of it though. If you'd like to know more I've written out the details below. Thanks everyone!

- - -

Self employment background:

Occupation: Commercial real estate tenant rep. Specialty in retail, restaurant, and entertainment brands. I find the locations that work best for the brands that I represent and then negotiate the major deal points of lease agreements for those locations. I earn commissions on the gross value of each lease when that client opens for business.
Region: Western US / SoCal
Sales cycle: 9 - 15 months.
Deal volume: 25 to 35 deals per year
Average commission: $25k to $50k (some $10k, some $100k+) per deal
Close rate: 3 out of every 10 offers submitted

I'm affiliated with a brokerage which will take a cut of the total commissions. At this level it works out close to 75/25 cumulatively (80/20 at the margin). The brokerage then pays my S-corp which is then where I manage my business, including taking a W-2 wage.

2018 projected gross income from self employment:

Commissions tracked in several stages:

- Closed/Receivable: $450,000 (16 deals / 99% confidence). Waiting for each business to open. Payable Q1/Q2 2018
- Late-Stage Negotiation: $680,000 (17 deals / 90% confidence) Closing Q4 2017 / Q1 2018. Payable Q2/Q3 2018.
- Active Negotiation: $400,000 (+/-15 deals / 75% confidence). Closing Q1/Q2 2018. Payable Q3/Q4 2018.
- Shared Accounts: $80,000 (10 deals / 75% confidence) my cut of shared deals that junior reps are working)

note 1: These are all deals in play as of today. There will be more, but deals started after about April 2018 will not pay until 2019.
note 2: confidence percentages are based on a sample comprised of the last 400 deals to go through my brokerage.

Assuming some failure rate and/or delays that push a few payments into 2019, I'm looking at +/- $1.4m total commissions for 2018. My company will then be taking in +/- $1,050,000 in gross income after splits to the brokerage.

Pay structure/History:

2018:
- I can probably spend about $60,000 in legitimate deductible business expenses, not counting a business vehicle.

2017:
- Total commissions: $400,000
- Gross income: $285,000
- Payroll: $120,000 ($130,000 including payroll/SE taxes).
- Employer 401k contribution: $30,000 (25% of W-2 wage)
- Business deductions: $40,000 for business travel, M&E, equipment, mileage, etc.

2016:
- Total commissions: $345,000
- Gross income: $205,000
- Payroll: $120,000 ($130,000 including payroll/SE taxes).
- Employer 401k contribution: $30,000 (25% of W-2 wage)
- Business deductions: $30,000 for business travel, M&E, equipment, mileage, etc.

2015:
- $130,000 gross income

2014-2011:
- I made around $30,000/yr gross. Interned 2 years no pay prior to that.

Retirement Savings:

Solo 401k plan (established 2016)

2018:
- Planning to pay the tax now and max out the Roth account with a $55,000 contribution / backdoor conversion

2017: $54,000 contributed
- $30,000 employer contribution (tax deferred)
- $24,000 personal contribution (after tax) converted to roth via backdoor conversion.

2016: $53,000 contributed
- $30,000 employer contribution (tax deferred)
- $23,000 personal contribution (after tax) converted to roth via backdoor conversion.

2015:
- $5,500 Roth IRA

These funds are not yet invested in anything.

Investments:

- $65,000 invested in a client's business which is returning $50,000/annually.***
- $20,000 loan to friend's business at 10.0%/yr
- $5,000 in a taxable Robinhood account (currently up to $7,000)
- $5,000 in cryptocurrencies (currently valued at $50,000+) can sell at long term capital gains

*** Really sweet deal. In 2018 I'll be making similar investments into two more locations with this client and project returns of $35k/yr each but those won't be cashflowing until late in the year or possibly not until 2019. At least one of these will be made with 401k funds, preferably in the Roth account.

Cash Savings:

- $75,000


If you made it this far thanks so much for reading. 8-)

bgf
Posts: 435
Joined: Fri Nov 10, 2017 9:35 am

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by bgf » Mon Nov 27, 2017 8:28 am

MassiveDynamic wrote:
Mon Nov 27, 2017 6:28 am

- $65,000 invested in a client's business which is returning $50,000/annually.***
:shock:
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

investingdad
Posts: 1335
Joined: Fri Mar 15, 2013 10:41 pm

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by investingdad » Mon Nov 27, 2017 8:38 am

No advice, but congrats on the great income. Sounds like a great opportunity to set yourself up for the future if planned correctly.

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jfn111
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Location: Minnesota

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by jfn111 » Mon Nov 27, 2017 8:50 am

I'm also in the RE business, not commercial though, and we all know the business can be cyclical. I'd work on getting your cash savings up to a point where you can ride out any downturns in the commercial sector.
But, overall congrats. You look like you're doing great. :sharebeer

MassiveDynamic
Posts: 5
Joined: Sun Nov 26, 2017 6:47 pm

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by MassiveDynamic » Mon Nov 27, 2017 1:10 pm

bgf wrote:
Mon Nov 27, 2017 8:28 am
MassiveDynamic wrote:
Mon Nov 27, 2017 6:28 am

- $65,000 invested in a client's business which is returning $50,000/annually.***
:shock:
General example: A business costs $1m to build, which then grosses $4m annually, nets 20% to EBITDA, which is then split according to the pro-rata share of any investment.

The client in this case wanted to be sure we had mutually aligned interests in selecting the best location at the best terms. It was certainly motivating :sharebeer

MassiveDynamic
Posts: 5
Joined: Sun Nov 26, 2017 6:47 pm

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by MassiveDynamic » Mon Nov 27, 2017 1:15 pm

jfn111 wrote:
Mon Nov 27, 2017 8:50 am
I'm also in the RE business, not commercial though, and we all know the business can be cyclical. I'd work on getting your cash savings up to a point where you can ride out any downturns in the commercial sector.
But, overall congrats. You look like you're doing great. :sharebeer
Thanks. In a way it feels like I'll finally be able to pay myself back for 2009-2014.

Other than a business vehicle and the interest on a mortgage (assuming I tackle both), are there any significant deductions or tax strategies that will will help me save more cash?

niceguy7376
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Location: Metro ATL

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by niceguy7376 » Mon Nov 27, 2017 3:07 pm

MassiveDynamic wrote:
Mon Nov 27, 2017 6:28 am

2017:
- Payroll: $120,000 ($130,000 including payroll/SE taxes).
- Employer 401k contribution: $30,000 (25% of W-2 wage)

2017: $54,000 contributed
- $30,000 employer contribution (tax deferred)
- $24,000 personal contribution (after tax) converted to roth via backdoor conversion.
How were you able to contribute 24K as EmployEE since you are in 30s age group?

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Duckie
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Re: Expecting high income in 2018 ($1m+) looking for advice

Post by Duckie » Mon Nov 27, 2017 3:59 pm

niceguy7376 wrote:
MassiveDynamic wrote:2017: $54,000 contributed
- $30,000 employer contribution (tax deferred)
- $24,000 personal contribution (after tax) converted to roth via backdoor conversion.
How were you able to contribute 24K as EmployEE since you are in 30s age group?
There are three possible ways to contribute as an employEE:
  • Pre-tax 401k ($18K maximum in 2017)
  • Roth 401k ($18K max in 2017, shared with pre-tax)
  • After-tax 401k sub-account (up to $54K max in 2017, shared with pre-tax, Roth, and employER contributions)
MassiveDynamic contributed to the after-tax sub-account.

ralph124cf
Posts: 1935
Joined: Tue Apr 01, 2014 11:41 am

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by ralph124cf » Mon Nov 27, 2017 11:13 pm

As you know, California has nasty tax laws. Is there any chance you could realistically and legitimately move your business and residence to Nevada?

Ralph

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knpstr
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Location: Michigan

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by knpstr » Mon Nov 27, 2017 11:14 pm

congrats
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

mass_biker
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Joined: Thu Feb 17, 2011 2:53 pm

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by mass_biker » Tue Nov 28, 2017 12:08 am

Adding to the congrats roll-call...

1) pay yourself - take 2/3ds and put it into simple, tax efficient funds (for me, it is 2/3s stock funds, 1/3 munis).

2) prefund a massive 529. Reading through your post, no kids, and while this will not result in a deduction in your AGI, in the years you got it, pay the taxes, front load the contribution, and get time working on your side in case you go down the path of parenthood. I did each time I had a PRSU or business sale...and now, with 3 kids I have narrowing in on 7 figures in 529 monies cranking away. Hopefully my kids matricuate appropriately. If not, I will use it to fund my long-deferred experiment at culinary school.

3) get your DAF on. This will help your tax situation (modestly). And again, in the years you got it, take the deduction (i.e. is it better to write the check for charity vs. taxes) and then let it work for you and figure out how best to disburse it.

If you follow #1 - you have enough cushion to provide ballast
If you follow #2 - you let time work for you to provide some optionality
If you follow #3 - you can shave some off your AGI and feel good about doing it

#1 should be the focus.

Goal33
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Joined: Sun Apr 12, 2015 12:30 pm

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by Goal33 » Tue Nov 28, 2017 12:11 am

ralph124cf wrote:
Mon Nov 27, 2017 11:13 pm
As you know, California has nasty tax laws. Is there any chance you could realistically and legitimately move your business and residence to Nevada?

Ralph
Yes, move.
A man with one watch always knows what time it is; a man with two watches is never sure.

MassiveDynamic
Posts: 5
Joined: Sun Nov 26, 2017 6:47 pm

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by MassiveDynamic » Wed Nov 29, 2017 12:20 am

ralph124cf wrote:
Mon Nov 27, 2017 11:13 pm
As you know, California has nasty tax laws. Is there any chance you could realistically and legitimately move your business and residence to Nevada?

Ralph
I'm willing to look into it. I'm assuming that would mean dissolving the CA entity and reincorporating in a new state or is there a mechanism to 'move' my existing company?

MassiveDynamic
Posts: 5
Joined: Sun Nov 26, 2017 6:47 pm

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by MassiveDynamic » Wed Nov 29, 2017 12:21 am

Duckie wrote:
Mon Nov 27, 2017 3:59 pm
niceguy7376 wrote:
MassiveDynamic wrote:2017: $54,000 contributed
- $30,000 employer contribution (tax deferred)
- $24,000 personal contribution (after tax) converted to roth via backdoor conversion.
How were you able to contribute 24K as EmployEE since you are in 30s age group?
There are three possible ways to contribute as an employEE:
  • Pre-tax 401k ($18K maximum in 2017)
  • Roth 401k ($18K max in 2017, shared with pre-tax)
  • After-tax 401k sub-account (up to $54K max in 2017, shared with pre-tax, Roth, and employER contributions)
MassiveDynamic contributed to the after-tax sub-account.
This ^^

inbox788
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Joined: Thu Mar 15, 2012 5:24 pm

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by inbox788 » Wed Nov 29, 2017 2:47 pm

MassiveDynamic wrote:
Wed Nov 29, 2017 12:20 am
ralph124cf wrote:
Mon Nov 27, 2017 11:13 pm
As you know, California has nasty tax laws. Is there any chance you could realistically and legitimately move your business and residence to Nevada?

Ralph
I'm willing to look into it. I'm assuming that would mean dissolving the CA entity and reincorporating in a new state or is there a mechanism to 'move' my existing company?
Corporations do a reverse merger. You could buy a Bakery in Nevada established in 1800 and make the impression your business has been around a long time. :happy

pepperz
Posts: 216
Joined: Sun Jan 24, 2016 7:13 pm

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by pepperz » Thu Nov 30, 2017 7:33 am

Get an amazing CPA, preferably one that has hands on experience helping people in your industry / position.

That person will have amazing insight as to what you can do to leverage your income.

Also they’ll answer the W2 Salary vs Distribution question for sure... there are rules around this you don’t want to screw up. (ie- you cannot pay yourself a low salary and take high distributions)

Tachyon
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Joined: Wed Nov 08, 2017 9:03 pm

Re: Expecting high income in 2018 ($1m+) looking for advice

Post by Tachyon » Mon Dec 04, 2017 4:16 am

MassiveDynamic wrote:
Mon Nov 27, 2017 6:28 am
- $65,000 invested in a client's business which is returning $50,000/annually.***
Reading through your post, this is what caught my eye. Wow.

What to pay yourself. I actually think you have good basis to look up that "average" commercial real estate broker in your area and pay yourself that, and take the rest as distribution. I suspect the average is going to be around $75K.

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