As the year draws to a close, high-net-worth individuals who are business owners have a unique opportunity to strategically manage their tax liability and optimize their financial position. Year-end tax planning is a crucial aspect of wealth management and for those with substantial assets, careful consideration can lead to significant savings.
Check out some key tax planning ideas and suggestions tailored to the needs of high-net-worth business owners.
1. QUALIFIED BUSINESS INCOME DEDUCTION (QBI)
The QBI deduction allows business owners to deduct up to 20 percent of qualified business income from their taxable income. However, certain limitations apply, and optimizing this deduction requires careful planning.
GHJ Observation: Review all business holdings to see if they can be aggregated for purposes of computing a QBI deduction. Doing so may result in a greater QBI deduction.
2. CAPITAL EXPENDITURES AND DEPRECIATION
Explore opportunities for capital expenditures and take advantage of bonus depreciation or Section 179 expensing. Investing in qualified business property before the end of the year can lead to significant tax deductions, which can help to offset income.
GHJ Observation: With the phasedown of bonus depreciation for qualifying assets from 80 percent in 2023 to 60 percent in 2024, consider purchasing and placing new or used equipment in service before the end of the year. Remember, not every state follows federal depreciation rules, so please consult a tax advisor.
3. TAX LOSS HARVESTING
This technique involves strategically selling investments that have experienced a loss to offset gains realized elsewhere in a portfolio. The sold investment can then be replaced with a similar one to maintain the desired asset allocation, or investors may want to wait for at least 31 days before repurchasing a similar investment to avoid the wash sale rule.
GHJ Observation: Anyone that does not have any meaningful losses to realize should consider investing in a Qualified Opportunity Fund (QOF). By reinvesting gains from the sale of assets in a QOF, one can receive a temporary deferral of gain recognition either from the sale of the QOF investment or Dec. 31, 2026 (whichever is earlier). Additionally, if the QOF investment is held for at least 10 years, any appreciation in the investment is tax-free when the QOF interest is sold.
When investing in a QOF, it is important to ensure the underlying investment is sound, regardless of the potential tax benefits. In addition, not every state follows federal QOF rules. An investment advisor should be consulted before deploying significant capital.
4. CHARITABLE GIVING STRATEGIES
High-net-worth individuals often engage in philanthropy. Consider establishing or contributing to a donor-advised fund (DAF) to maximize charitable deductions. This allows individuals to make a charitable contribution and receive an immediate tax benefit while maintaining flexibility in distributing funds to charitable organizations over time.
GHJ Observation: An effective tax-planning technique for high-net-worth individuals is converting some or all of a traditional IRA to a Roth IRA in the same year as a sizeable charitable contribution. Depending on the size of the charitable contribution, it can offset some or all of the current income tax associated with the IRA conversion. Further, individuals should consider funding the DAF with appreciated securities; they will receive a deduction for the FMV of the securities and no income tax will be due on the appreciation. Further, converting a traditional IRA to a Roth IRA can be an effective wealth-transfer strategy under the right circumstances.
5. ESTATE AND GIFT TAX PLANNING
For those with significant wealth, strategic estate and gift tax planning is crucial. Take advantage of the annual gift tax exclusion and consider more advanced strategies such as family limited partnerships, grantor-retained annuity trusts or generation-skipping transfer trusts.
GHJ Observation: Annual gifts are an easy way to start reducing an individual’s taxable estate. Consider front-loading 529 plans or paying tuition or medical expenses for loved ones. Remember, the large estate exemption that currently exists is set to expire at the end of 2025. If one has a taxable estate, now is a great time to start thinking about how or if the higher exemption should be used before it goes away.
Year-end tax planning for high-net-worth business owners involves a combination of strategic decisions to optimize income, deductions and wealth transfer. Given the complexity of tax laws and the unique circumstances of each individual, it is advisable to work closely with experienced tax professionals and financial advisors. By taking a proactive approach to year-end tax planning, high-net-worth individuals can maximize their financial position and set the stage for continued success in the coming year.
To learn more about planning for success, contact GHJ’s Tax Services Practice.