Transcription
Most people think taxes are so complicated that the only way to save big is by paying someone a fortune for some shady offshore account or complex trust scheme. But let's be real, if you want to commit tax fraud, you don't need to pay to do it. You can accomplish that all on your own.
However, there are legal options and I'll show you what those are and how to keep an extra $50,000 in your pocket. And I'm Jasmine Deluchcci. I'm a practicing tax attorney, CPA, and enrolled agent. I got my first tax license in high school. And in today's video, I'm going to show you exactly how to implement five legal tax strategies that can each save you tens or even hundreds of thousands every year.
Strategy one, an S-corp election done right. Okay, here's the deal. As a sole proprietor or single-member LLC, you pay self-employment tax on your entire business profit. That's 15.3% on income up to the Social Security wage base, plus 2.9% Medicare tax on everything above that, plus an additional .9% Medicare surtax if you're over the threshold. But with an S-corp election, you only pay payroll tax on your reasonable W2 salary. The remaining profit flows through as distributions, which aren't subject to self-employment tax. For example, if you have a $400,000 annual business profit as a sole proprietor, you would pay self-employment tax on the full $400,000 over $37,000 annually. If you make a proper and timely S-corp election and set your reasonable salary at $150,000, then you only pay payroll tax on $150,000, saving over $11,000 per year from this one change. That's how it can work well.
Now, here's what to avoid. I have seen countless clients show up and already have made an S-corp election in a prior year as a tax planning recommendation and the result, an increase in tax. It happens all the time when you buy assets inside an S-corp with financing. Picture this: $100,000 of net income and a social media strategist says, "Once you're over $50,000, elect S-corp status, you'll save $7,650 in self-employment tax." Sounds great, right? But here's the reality check. You live in California, so you pick up the state 1.5% S-corp tax. You're now paying an accountant an extra $2 to $4,000 every year for additional payroll and business returns. And the big one: because you have a fancy vehicle with financing, you blow through your stock basis and end up converting tax-free distributions into a taxable gain the next year. Or you create disallowed losses from what you thought was going to generate a tax benefit. So instead of a win, you end up with thousands more in tax, extra compliance costs, and less flexibility. Moral of the story: choose an S-corp in the right situations, which is usually with net income that far exceeds your reasonable compensation, and with a service business, and avoid third-party debt, including financed assets.
Strategy number two, short-term rental tax benefits. Yes, short-term rental tax benefits exist, but in practice, I see them implemented poorly all the time. And I know this because I'm representing IRS audits on this exact issue. And the reason is because it can create a massive paper loss in year one. And the IRS knows it. They're watching social media just like you are. And they know where the abuse is happening. Here's the foundation. Real estate is powerful for tax purposes because of depreciation. You get a paper loss without losing actual cash. Essentially, the best of both worlds. Normally, Congress limits your ability to use rental losses against other income. But the regulations carved out an exception for short-term rentals, letting you treat them like an active business instead of a passive rental property. Now, these rules aren't a free-for-all, though, okay? You still need to meet certain requirements, just not the stricter ones that apply to long-term rentals. The key tests are the average stay must be 7 days or less, and you must meet the standard material participation rules for an active business. Do that, and those short-term rental losses driven by depreciation can offset W2 wages or other active business income dollar for dollar.
There are three key points I see for people who are successful with the strategy and people who are not. People who are successful do not hire a property manager. Do not hire a property manager and do not hire a property manager. Trying to make a point. And they also do a couple more things. Okay. They actually rent out the property to multiple tenants at fair market value before year-end. Not to a family member where it's easy to argue is personal use. And they actually track and keep records in real time.
Strategy number three, purchasing self-rental real estate for your business. Okay. Most of the attention online goes to real estate professional status or short-term rentals. But one of the simplest ways to get the same tax benefit is often overlooked. Owning the building your business already operates in. For example, say you run a plumbing company and need office and warehouse space. Instead of renting, you purchase a commercial property. And for liability protection, most owners put that building in a separate LLC. Also smart. But here's the trap. Under the IRS self-rental rules, the default tax treatment is the worst of both worlds. Profits are treated as non-passive, so you can't use passive losses to offset them, but losses are treated as passive, so you can't offset them against active business income. The fix in many cases: making a special grouping election allows you to combine your rental activity with your operating business. That means you can use accelerated depreciation and cost aggregation to create deductions that offset active income.
Let's walk through an example. Say you buy an office building for your business with a $2 million business value. On straight-line depreciation, that's about $51,000 per year spread out over nearly four decades. But if you do a cost segregation study, that could frontload as much as $600,000 in immediate depreciation. At the 37% tax rate, that's worth up to $222,000 in year 1 tax savings. And here's the catch: that benefit only works if you properly make a grouping election. Okay? If your preparer misses it, what should have been $222,000 of savings usually turns into 0. And worse, it's not something you can fix later. You cannot retroactively reclass a self-rental from passive to active on an amended return. A simple mistake can lose you a few hundred thousand bucks overnight.
Strategy number four, properly structured investments. Okay, there are a lot of tax-advantaged investment options out there. Some are legitimate, some are overly risky, and some cross the line entirely. But one strategy that has stood the test of time and has Congress's explicit stamp of approval is oil and gas investments. Here's why. Under IRC 469(c)(3)(A), if you own a working interest in oil and gas property, your income or loss from that activity is not treated as passive, provided you don't limit your liability. Okay? In other words, if you take on general liability of a working interest, not just a limited partnership interest, the losses can be used to offset your active W2 or business income. That's a rare exception in the tax code because normally losses from investments like rentals or partnerships get trapped in the passive bucket.
So, how does this work in practice? Oil and gas drilling projects often generate large intangible drilling costs in the first year. Costs that can be written off immediately rather than capitalized. And if you're structured with a true working interest, those intangible drilling costs flow through as deductible active losses. For a high-income earner, that can mean tens or even hundreds of thousands of dollars in year 1 deductions against W2 wages, professional practice income, or business profits. For example, you invest $100,000 into a properly structured working interest. In year one, 75 to 80% of that investment could qualify for intangible drilling costs, generating a $75,000 to $80,000 deduction. Because of 469(c)(3), those losses are non-passive and can offset your W2 income at a 37% tax bracket. That's roughly $28 to $30,000 of tax saved in year 1.
Strategy number five, don't forget the basics. Paying tax timely. Here's what often gets lost when everyone chases fancy tax strategies. The basics alone can save you serious money. Under IRC 6654, the IRS expects you to make quarterly estimated tax payments. Skip them and you'll face penalties plus daily compounding interest. The safe harbor rule is straightforward: Pay 100% of last year's tax liability, or 110% if your adjusted gross income was over $150,000, in four equal quarterly installments. Do that and you're protected from underpayment penalties, no matter how much you actually owe at filing. And don't forget, you can extend the time to file your return, but you cannot extend the time to pay. Everything you owe for the prior year must be paid by April 15th, or it starts racking up penalties and interest. And if you want more detail on exactly how to go about calculating your estimated tax payments, then it's in the next video.