LLCs and excessive taxable income

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boglerich
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LLCs and excessive taxable income

Post by boglerich »

My father, whose wealth I help manage, is transitioning from CEO of his current company to a salaried employee at a new company. As a result, his NQDC (non-qualified deferred compensation) plan is going to be paid out in full over 3 years. This is going to be an extra 300k income per year from 2022-2024. He'll be receiving 170k next year from this year's bonuses. His new job, starting in January, is going to pay him 200-600k / yr, depending on how he chooses to structure his compensation. So his taxes would now be in the highest bracket.

There apparently isn't anything at all he can do about the NQDC 300k/yr for 3 years. He is committed to this new job (although the compensation details are in the air still). The additional tax implications of moving from the second-highest to the highest tax bracket seems to be well over 6 figures. Is creating an LLC and using business expenses, or potentially operating losses to offset his taxable income a reasonable option here? Should we be starting a business? Can you Bogleheads offer your insights?
afan
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Re: LLCs and excessive taxable income

Post by afan »

From what you describe, it is not at all clear what role an LLC would play. If the income from the new job would be salary, then there is nothing for an LLC to do.

If he will be an independent contractor, which does not sound like what you describe, then likely would want to do some tax planning. This would not likely be an LLC, which does not affect his taxes.

If he can structure his new job to take a lower salary during the years that his deferred comp plan is paying out and make it up later, then maybe there is some room to plan around that. I still do not see how an LLC would fit in. He would need to be careful about IRS regulations if he structured multiple years of salary that way.

How about another deferred comp plan?
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Lee_WSP
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Re: LLCs and excessive taxable income

Post by Lee_WSP »

He'd need to have some long sessions with a tax planning attorney to suss out the viability of that, but generally the answer is no.
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TomatoTomahto
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Re: LLCs and excessive taxable income

Post by TomatoTomahto »

Lee_WSP wrote: Wed Nov 24, 2021 7:07 pm He'd need to have some long sessions with a tax planning attorney to suss out the viability of that, but generally the answer is no.
Yes, OP, if you come up with some wrinkle, please do share. It is, as I’ve heard very often, a first workd nice-to-have problem, but one without a secret solution.
I get the FI part but not the RE part of FIRE.
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boglerich
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Re: LLCs and excessive taxable income

Post by boglerich »

LLC would likely consist of creating cash flow via a real estate business. Absorb his NQDC compensation through an SEP, turn income into liabilities by purchasing rental properties, hire employees, create liabilities, generate some income, reduce personal tax liability as a business owner via equity contributions and business expenses
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Lee_WSP
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Re: LLCs and excessive taxable income

Post by Lee_WSP »

Absorbing the comp would just delay it again. He'd want to make sure it actually results in a lower marginal rate otherwise it doesn’t work.
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boglerich
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Re: LLCs and excessive taxable income

Post by boglerich »

Lee_WSP wrote: Wed Nov 24, 2021 10:39 pm Absorbing the comp would just delay it again. He'd want to make sure it actually results in a lower marginal rate otherwise it doesn’t work.
Sorry- wasn't clear about the idea.. that is, his equity contributions would significantly decrease his taxable income
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Lee_WSP
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Re: LLCs and excessive taxable income

Post by Lee_WSP »

boglerich wrote: Thu Nov 25, 2021 1:21 am
Lee_WSP wrote: Wed Nov 24, 2021 10:39 pm Absorbing the comp would just delay it again. He'd want to make sure it actually results in a lower marginal rate otherwise it doesn’t work.
Sorry- wasn't clear about the idea.. that is, his equity contributions would significantly decrease his taxable income
Investments are not business expenses and are not deductible. Otherwise we'd all be deducting our index funds.
afan
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Re: LLCs and excessive taxable income

Post by afan »

If he actually had a separate business, then he could deduct his business expenses from his business revenue. He would not need an LLC to do that. It might be a good idea for other reasons, but not for taxes. If he had a separate business,.he would not be able to deduct investments in that business on his personal income tax return.

Here, he does not appear to have a business at all. Since the revenue will be his salary, which is paid to him for his work, it would not matter whether he had another business or an LLC. The salary income would would be taxable to him. If he subsequently put some of his salary into his separate business, that would not reduce his income tax liability.

If he has deductible expenses from his job, then that can reduce his taxes somewhat. The rules on this limit what he could deduct. They have to be expenses regularly associated with his line of business. Investments he makes once his employer has paid him would not count.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
neverpanic
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Re: LLCs and excessive taxable income

Post by neverpanic »

boglerich wrote: Wed Nov 24, 2021 6:21 pm Is creating an LLC and using business expenses, or potentially operating losses to offset his taxable income a reasonable option here? Should we be starting a business?
Do start businesses in an effort to make money.
Do NOT start businesses in an effort to manufacture operating losses solely for tax reasons.

Yes, people do it, but of the number of ways things can go, a lot of them are bad.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
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