Tax Strategy Insights: Paying Children in Your Business and Charitable Giving Options
Maximizing Tax Strategies for Business Owners
As business owners, it is essential to skillfully navigate the intricate terrain of tax planning to optimize financial efficiency and minimize liabilities. Over the past few months, we've received several pertinent tax questions from business owners seeking to optimize their tax strategies. Let's delve into two key inquiries and explore actionable solutions.
Question 1: Should I be paying my kids to work inside my business?
A common query among business owners revolves around compensating their children for work performed within the business. The key factor to consider here is defining what constitutes "work." According to tax regulations, paying children for legitimate services rendered within the business is permissible and can be a viable tax strategy. Tasks such as clerical work, marketing assistance, or cleaning services qualify as legitimate services.
Compensating children for their work enables you to leverage tax benefits while fostering a sense of responsibility and work ethic in them. The IRS requires that compensation be commensurate with the services provided, and payments should only be made for actual work performed. It's essential to maintain proper documentation of the work performed by your children to ensure compliance with tax regulations.
Moreover, paying your children up to the personal exemption threshold, around $14,000, allows you to take advantage of the 0% tax rate efficiently. Additionally, exploring further planning avenues such as Roth contributions can offer enhanced wealth creation opportunities for your children. Nevertheless, it's essential to engage with a CPA or tax professional to guarantee adherence to tax regulations and optimize the advantages of employing this strategy.
Question 2: Charitable Strategies
Another common tax question revolves around charitable giving and the most tax-efficient strategies for donating to causes of interest. One effective strategy is donating appreciated securities to charitable organizations. Suppose you hold securities that have appreciated in value, such as stocks or mutual funds. By donating such appreciated securities, you can take a tax deduction for the full fair market value of the assets at the time of donation, while also avoiding capital gains tax on the appreciation. This strategy not only benefits the charitable organization but also provides tax advantages for the donor.
For instance, if you purchased Apple stock at $10 per share and it has since appreciated to $20 per share, you have the option to donate the stock directly to your chosen charity or another vehicle (discussed below). By doing so, you can claim a tax deduction for the full $20 value of the donated stock without incurring capital gains tax based on the initial $10 acquisition cost. This allows you to maximize your contribution to the charity while minimizing your tax liability.
Additionally, creating a Donor Advised Fund (DAF) offers flexibility and tax benefits for charitable giving. A DAF allows you to make a charitable contribution to a fund typically held at one of the major custodians, such as a financial institution. You can donate cash or appreciated securities to the fund and receive an immediate tax deduction for the contribution. The funds in the DAF can be invested, allowing them to grow tax-free until you advise the fund to distribute the donations to charitable organizations of your choice. While the assets you have donated to the DAF are a completed gift, you can maintain advisory control over the timing and direction of donations, providing flexibility in charitable giving.
While we're always delighted to address tax inquiries, we frequently notice an influx of questions, particularly in December. We are purposefully writing this in February to emphasize that tax planning for business owners is not a once-a-year endeavor; rather, it should be an ongoing and proactive process. Effective tax planning entails considering multiple years of income and anticipating potential events. By employing tax-efficient strategies like compensating children for work and optimizing charitable contributions, business owners can reduce tax burdens and enhance financial effectiveness. There may be better years than others to deploy such strategies. Seeking guidance from tax professionals and financial advisors is crucial to ensure adherence to tax regulations and to uncover opportunities that work well for you.
If you have a question or simply want to talk through your financial planning, we are here to help.
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DISCLOSURE: Jarrod Musick is an officer of Destiny Capital and Entrepreneur Aligned, a DBA of Destiny Capital. This article is for informational purposes only and should not be relied upon as a basis for your investment, business, or personal financial decisions. We recommend consulting with your wealth advisor, CPA/tax advisor and/or attorney, as applicable to your situation, prior to implementing any new tax, legal, or investment strategy. Advisory services provided by Destiny Capital Corporation, a Registered Investment Adviser.
ABOUT JARROD
Jarrod was born into financial planning and solving financial problems. With his financial advisor father Steve telling stories about finance around the dinner table from an early age, the idea that everyone has a different financial situation was always there. After an early professional career spent in nonprofit and government, Jarrod came back to his roots helping people plan and invest in 2011. Since then, he has worked with individual clients, led internal teams and ultimately became partner and the CEO of Destiny Capital in 2017. With a passion for helping entrepreneurs change the world, Jarrod ultimately oversaw the creation of Entrepreneur Aligned in 2020. With both Destiny Capital and Entrepreneur Aligned, Jarrod leads teams that help people live lives of abundance where money is simply a tool to let everyone be a positive force for the world around them. When he isn’t working with the talented teams for EA and DC you can find him chasing his twins, wily trout or a podium spot at an OCR race.
