$200k tax bill options

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eltron
Posts: 143
Joined: Wed Apr 06, 2016 2:25 pm

$200k tax bill options

Post by eltron » Fri Nov 08, 2019 5:01 am

Hi all,

A buddy of mine is a practice owner and just had an end of year sit down with his accountant and was told he was looking at a $200k tax bill for 2019. This obviously came with some alternatives to lessen the blow of this, i.e. make some business purchases before the year ends.

I was thinking on this and wondering if there was anything he could do with his retirement to effectively maximize his tax sheltering. He currently funds a SIMPLE IRA which isn't sheltering a ton of money for him.

I'm curious if there was any way, or loophole, for him to set up a separate LLC where his main company, let's call it John Doe PA (where his SIMPLE IRA is setup) pays a separate entity (John Doe LLC) for consulting work. In doing so, he would be his sole employee and could fund a solo 401k and tax shelter quite a bit more (56k vs 13k). I'm wondering what the legality of this is, or if it's even possible. My guess is this is not a solution or it's at least frowned upon to create a separate company outside of your primary company and then pay yourself.

For some context, this new LLC consulting company could have a legitimate function in doctor recruitment, office expansion, etc. The counter argument could obviously be his primary company could do the same thing since he's the primary owner of both. Would a loophole to this potential loophole be that his wife could be the primary owner of the LLC consulting company and his company pay her - or is that irrelevant since they're married?

Again, I feel I know the answer to this but the idea cropped up in my head at 5am and now I can't sleep because I'm intrigued on this. This is outside of my arena and I'm not overly familiar with his type of setup so any other legitimate suggestions from the crowd that might help lessen the blow of that sort of tax bill would be appreciated as well.

Thanks.

HomeStretch
Posts: 2503
Joined: Thu Dec 27, 2018 3:06 pm

Re: $200k tax bill options

Post by HomeStretch » Fri Nov 08, 2019 7:38 am

Both companies would be part of a “controlled group” as your friend would own both. As such, the IRS controlled group rules would not allow your friend to have and contribute to a SIMPLE IRA for one and a Solo 401k the other. Google the term for more info if needed.

For future years, your friend would likely be able to contribute more to a Solo 401k than a SIMPLE IRA.

To have a large tax bill, your friend likely had a high income year and just needs to pay a portion in taxes.

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