• Home
  • Physicians Start Here
  • Business Owners Start Here
  • About
    • About
    • Who We Serve
    • Rx Wealth Plan
    • How We Do It
    • Physician Wealth Management Framework
  • Insights
  • Clients
  • Contact
  • Skip to main content
  • Skip to footer
Rx Wealth Advisors

Rx Wealth Advisors

Physician-Focused Firm

Physicians Start Here   Business Owners Start Here

  • Home
  • About
    • Who We Serve
    • Rx Wealth Plan
    • How We Do It
    • Physician Wealth Management Framework
  • Insights
  • Clients
  • Contact

Business Owner

Preparing Your Business or Medical Practice for a Successful Sale

June 1, 2023 by crystal

Are you considering selling your business or medical practice? If so, you’ll need to take specific steps to prepare and maximize its value. Proper planning can make a huge difference in the selling process and help you keep more money in your pocket post-tax. 

  • Consider your exit strategy: Plan in advance what you want when you exit your business. Are you open to retaining an ownership stake or staying on as management? Think about how your ongoing compensation will be structured. 
  • Set realistic expectations: Many business owners just make up a value they want for their business. While this value does not just appear from thin air, it is usually the amount needed to retire and maintain their same lifestyle. This number is rarely accurate. Get a third-party opinion on your business’s worth. This information will help you decide if selling now is the right move.
  • Increase trailing 12-month earnings: Buyers often focus on this metric and will also look to your last three years to evaluate the consistency of earnings. Evaluate your operating income and expenses, and find ways to boost revenue while cutting unnecessary costs. 
  • Get your financials reviewed: Most buyers will request at least two, if not three, years of reviewed financials. This takes time and money, so plan ahead. The buyer will also usually do their own quality of earnings report, so you should consider obtaining one as well to prevent any unwelcome surprises. 
  • Address potential pitfalls: Proactively identify any issues in your business and either find a solution or be prepared to explain why they’re inherent to your operations. This foresight will help you during negotiations with potential buyers. If you hide issues from the buyer, they will discover them sooner or later, which may bring about lawsuits down the road.
  • Organize a due diligence data room: Collect and store your business data as if you were the buyer. This exercise provides insights into your business and demonstrates professionalism and organization, instilling confidence in potential buyers. You may also learn a few things about your business that you did not know. 
  • Assemble an advisory team: Don’t try to negotiate the business sale alone. Build a team of experts, including an investment banker, attorney, CPA, and financial advisor, to help you navigate the complex selling process. Rx Wealth works with business owners to help them build a competent team to manage their specific situation.  
  • Stay focused on daily tasks: Sellers commonly get wrapped up emotionally in the sales process. Instead, keep your attention on running your business. Delegate negotiation responsibilities to your team while you ensure that your earnings and financial projections remain on track.  
  • Maintain perspective and stay grounded: The selling process can be an emotional rollercoaster with highs and lows. Trust your team to help you through it, and avoid getting greedy or making excessive demands, as this can drive buyers away. Sellers have been known to continually request additional perks as part of the deal, such as ongoing health insurance coverage, payment of their cell phone and automobile expenses, and other similar benefits. Keep your eye on the prize, and don’t sweat the small stuff. 
  • Be aware of required third-party approvals: Familiarize yourself with any necessary approvals from vendors, property owners, minority shareholders, or governmental entities, as these factors can potentially delay the deal. 
  • Implement strategic estate and income tax planning: Ideally, tax planning should begin two to three years before a deal. Work with your team, well in advance, to position your business for sale from a tax perspective and maximize your after-tax profits. 

Selling your business or medical practice is a significant milestone allowing you to realize the wealth you’ve built over time. By staying focused and relying on your team of advisors, you’ll be well-positioned for a successful sale.

If you’re unsure how to build a team of advisors, maintain your lifestyle post-sale, or navigate the many decisions involved in selling your business, we’re here to help. With our extensive experience, we can support you by leading your team and guiding you through the process. Don’t hesitate to reach out and schedule a free initial consultation if you’re interested.

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

8 Strategies to Sidestep Capital Gains Tax

April 17, 2023 by crystal

As many high-net-worth professionals are aware, the US Government taxes long-term capital gains (gains on capital assets held for over a year) at a lower income tax rate (0-20%) compared to other income sources such as wages, business income, or interest. However, the complexities of capital gains taxation and their interplay with ordinary income are often misunderstood.

The Impact of Capital Gains on Ordinary Income

Recognizing capital gains in any tax year may result in a higher overall income tax on ordinary income. In other words, your wages, IRA distributions, Social Security, or interest income could be subject to a higher tax rate if you have capital gains. When considering the sale of a business, real estate holdings, or realizing stock incentives, it is crucial to plan ahead and account for the effect that capital gains will have on your income taxes.

The interaction of capital gains with ordinary income in determining your tax rate can be intricate and requires proactive management. Fortunately, numerous planning opportunities are available, but preparation and foresight are essential to maximizing their effectiveness. Realized capital gains increase your adjusted gross income (AGI), which may affect your ability to make Roth IRA or tax-deductible contributions, reduce available tax credits, and increase the hurdle for claiming medical expenses, among other consequences.

While capital gains influence certain tax benefits, long-term gains are taxed at a lower rate than ordinary income and do not push you into a higher marginal tax bracket. However, it is essential to remember that short-term gains are taxed at ordinary rates. Realized long-term capital gains do not force your ordinary income into a higher marginal tax bracket. Still, they may result in higher taxes due to reductions in available tax deductions and tax credits.

However, if you know how to navigate the numerous capital gains deferral or elimination opportunities, you can save a lot of dough. 

Planning Opportunities for Capital Gains

Paying a 0% or 15% Capital Gains Rate

In 2018, the tax code was updated to introduce a 0% tax rate on long-term capital gains for taxpayers in the 12-22% tax bracket. In our experience advising clients, individuals who typically fall within this bracket are either less wealthy parents or adult children beginning their careers. It is important to note that dependent children are generally excluded from this provision, as they are typically required to pay taxes at their parents’ rate.

When planning for a significant capital gain event, it could be strategically advantageous to gift an interest in the asset to your parents or adult children, as this may result in an overall lower capital gains tax liability. 

Stepping Up Your Income Tax Basis Before a Sale

If you anticipate a substantial capital gain event and have aging parents or grandparents who may pass away before the event occurs, it is possible to strategically achieve a step-up in basis on the asset. One approach is establishing a trust for your spouse, children, and aging family members.

By setting up the trust and granting your aging relatives a general power of appointment within the trust to allocate assets to the creditors of their estate, you cause the assets to be included in the elder’s taxable estate. As a result, these assets qualify for a fair market value step-up on basis upon their passing.

Consider this example: Sammy Business Owner establishes a trust for his wife, children, and 98-year-old grandmother and gives $5 million worth of company stock with a $100,000 basis to the trust. The trust provides Sammy’s grandmother with a general power of appointment to allocate assets upon her death to the creditors of her estate. Upon her passing, the company stock’s basis increases to $5 million, up from $100,000. This strategic move saves Sammy and his family a cool $1.1 million in taxes.

Moreover, Sammy retains access to the funds in the trust, as his wife is a beneficiary. 

Deferring the Capital Gains through an Installment Sale

It’s still possible to sell your stock or other assets to a trust for your family’s benefit and receive a promissory note in return. The note may require principal and interest payments over an extended period, such as 10, 20, or 30 years. With each installment payment you receive, you’ll recognize a partial capital gain.

Selling the asset is considered a taxable transaction, so the trust purchasing the asset receives a stepped-up basis. Consequently, when the trust sells the asset, it generally experiences little to no gain. As you might imagine, the IRS wasn’t fond of this transaction and attempted to eliminate it. However, they only partially succeeded.

These transactions remain viable, but they do require advanced planning. If an installment sale occurs between related parties and the related party sells the asset it purchased within two years, the transaction is unwound and deemed to have occurred on the date of the initial installment sale.

As you can see, to make this strategy viable, you must plan more than two years in advance. In our experience, the more time you have to plan, the better the outcome.

Using a Like-Kind Exchange

If you’re selling investment real estate, you can exchange it for like-kind property of generally greater value and defer the gain. Keep in mind, however, that the exchanged property must be like-kind and held for investment purposes, not a personal residence such as a beach house or ski lodge.

For example, Johnny Real Estate owns an apartment building he built 30 years ago with a $0 basis. He wants to sell it because he has an opportunity to purchase another apartment building he believes will appreciate faster. By performing an exchange, Johnny can defer the capital gains tax. This transaction is subject to a complex set of rules and requirements, so it’s essential to consult with professionals before proceeding.

It’s worth mentioning that the Biden Administration has proposed eliminating the like-kind exchange from the tax code in their recent budget proposal.

Using Charitable Trusts to Create Installment Sale Treatment

Similar to deferring gains through an installment sale, you can establish a charitable trust that makes lifetime payments to you and your spouse.

When you give appreciated assets to the trust, you’ll be entitled to an income tax deduction for the portion considered a charitable contribution. Then, on an annual basis, you’ll receive income from the trust, a portion of which will be taxed as a capital gain.

The downside of this strategy is that if you and your spouse pass away early, any remaining assets in the trust will go to a charity of your choice instead of your heirs. To address this concern, consider supplementing the trust with 10-20 year term life insurance. In the event of an early death, your family will receive life insurance proceeds to replace the assets given to charity, ensuring their financial well-being.

Opportunity Zone Investing

In 2018, Congress passed legislation enabling the investment of capital gains into Opportunity Zones (i.e., real estate). By investing your capital gains in these zones, you can defer gain recognition until 2026. Moreover, if you hold the asset or fund for 10 years, your gains from the fund are taxed at 0%.

Opportunity Zones offer a straightforward method for capital gain deferral, but we advise against allocating a large portion of a family’s wealth to these investments solely for deferral purposes. Your money will be locked up, concentrated in real estate, and exposed to operator risk.

Active Tax Loss Harvesting

Actively harvesting tax losses in your liquid investment portfolio can help offset gains realized from a significant sale. Your investment advisor should proactively build up a tax loss reserve in preparation for when large gains are recognized.

Furthermore, when a sizable sale occurs and funds invested, short-term losses may arise. These losses can also be harvested, provided they occur within the same tax year.

Using Tax-Deferred Accounts for Gains

If you plan to invest in certain assets expected to appreciate rapidly, consider doing so within your Traditional or Roth IRA. For instance, if you’re investing in a startup company that you expect to soar, you can purchase their common shares within your IRA.

A Forbes article recently highlighted how Peter Thiel, PayPal co-founder, grew his Roth IRA to $5 billion using this technique to invest in startups.

However, be cautious, as these transactions have many rules, and the last thing you want is for the IRS to say you entered into a prohibited transaction, disqualifying your IRA. This can be a significant tax trap for the unwary.

It’s worth noting that the Biden Administration has proposed mandatory large distributions for what they consider “Large IRAs.”

Plan Ahead and Consult with Professionals

Whether you plan to sell this year or are contemplating the sale of a substantial asset in the future, it’s crucial to consult with professionals and develop a strategic plan as far in advance as possible.

If you’re interested in a free initial consultation and considering selling a business or large asset, please don’t hesitate to reach out and schedule a time.

 

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

Tax Strategies High Earners Can Use to Combat Proposed Tax Hikes

March 29, 2023 by crystal

One of the biggest concerns we hear from our high-net-worth clients is how they can lower their tax burden. Those concerns are only growing with the release of the Biden Administration’s tax proposals that look to raise income taxes on high-earning business owners, professionals, and the wealthy.

Their proposal includes:

  1. Increasing ordinary income tax rates at the highest level from 37% to 39.6%, 
  2. Increasing dividend and capital gains rates to the top rate of 39.6% for taxpayers making over $1 million,
  3. Charging the 3.8% net investment income surcharge on S-Corp distributions, 
  4. Eliminating valuation discounts on the transfers of interest where the family owns at least a 25% stake in the business,
  5. Treating the grantor’s payment of income tax on a trust as a gift,
  6. Treating transfer of appreciated property by gift or death as a taxable event,
  7. Limiting the benefits of certain estate planning techniques, such as grantor-retained annuity trusts and taxing sales to grantor trusts, or
  8. Limiting an exclusion of certain gifts to a total of $50,000 per year, not the $17,000 per donee exclusion. 

If you take action now, it is possible to sidestep the above proposals should they become law. So, what are we thinking about and advising our wealthy clients to do? Here are a few suggestions:

  • Use your annual exclusion gift amounts to transfer appreciated investments to children. If your child is independent and in a lower tax bracket, it may make sense to transfer appreciated investments you are going to sell to your child and allow them to sell and recognize the gain. 
  • Give your less wealthy parent assets. This is the same as giving to your child. Additionally, if your less wealthy parents do not sell the investment but pass away, you will get a step up in basis and avoid the tax. Your parents can even leave the money to their grandchildren or great-grandchildren, preserving your lifetime exemption.
  • Donate appreciated stock to a charity. Always use appreciated investments to give to charity. You get a tax deduction for the fair value of the donation and avoid tax on the appreciation. Make sure you’ve held the investment for greater than one year. Also, lump your gifts into a single year using a donor-advised fund to ensure you maximize your itemized deductions.
  • Set up a charitable trust. If selling appreciated assets, consider setting up a charitable trust to defer the gain over many years while still getting an income stream.
  • Set up a Roth IRA for your child. If your minor child has earned income, you can contribute to a Roth IRA on their behalf – growing tax-free during the child’s lifetime. 
  • Create a trust for your spouse and make gifts and sales of assets. Your spouse may serve as trustee and make distributions to themselves and your children. Also, it is a grantor trust, so you can pay the income tax and make sales before any proposals of taxation pass.
  • Set up a trust for your children. There is a way to establish a trust for your independent children that will tax them on the income the trust earns, not you. Consider gifting some of your business interests to the trust so the children can pay the tax at a lower rate than you – enhancing the overall family wealth.
  • Consider using life insurance and annuities to shelter taxable income. Should the capital gains rates change on high-income earnings, you may consider using certain life insurance contracts and annuities to shelter investment earnings from current tax. It may be possible to kick the can down the road to a lower tax environment. Be cautious—the contracts need to be specifically designed and not just bought from any insurance agent touting the tax benefits of a contract.
  • Utilize Roth IRAs. When high tax environments exist, Roth IRAs become important to have and grow for potential future use when you need funds but do not want to pay tax to access them.
  • Utilize tax-deferred retirement plans. Look at your retirement plan’s design. When you are in the highest bracket, it makes sense to maximize tax-deductible contributions.
  • Utilize 529 plans. While these are primarily meant to fund college, you may use them for other purposes if you are wealthy. These are generally protected assets from creditors, and investment earnings are not taxable annually. If you hold the funds long enough to get significant tax deferral and allow your children to possibly use them as a retirement vehicle, the overall tax deferral will more than makeup for the extra 10% tax, if a withdrawal is taken. By the way, it is possible your grandchildren or great-grandchildren can use them for education or their lifestyle spending. Think about the earnings compounding over, say, a 50-100 year period.
  • Make a sale of assets to a grantor trust. Before any proposal becomes law, make a sale of assets to a grantor trust to provide the flexibility of forgiving the note or just taking back the asset to settle the note should the laws change. It gives flexibility. This should be done with care and proper counsel.
  • Establish a grantor trust. While you may not want to transfer assets in trust currently, you may want to set up a trust now to give you flexibility in the future. The Administration’s proposal calls for the taxation of sales to the trust and taxes paid on behalf of the trust to be treated as a gift for trusts created after the new law is passed, not before. 
  • Limit the duration of the GST Exemption. Many wealthy families use what is referred to as a Dynasty Trust. It is a trust meant to be exempt from estate tax for many generations. The proposal wants to limit the time of the exemption. So to ensure you beat any law change, set up a dynasty now in a state that allows the trust to go on for a long time. Fund with a few small assets and allow it to be grandfathered under any law change. This will give flexibility if you want to gift assets to your children and grandchildren in the future.
  • Use second-to-die life insurance to create a legacy. Should the step-up in basis be repealed, leveraging tax-free life insurance on you and your spouse to benefit children and grandchildren becomes much more attractive. When evaluating if a client should do this, we always analyze it from a return to life expectancy. Remember, life insurance is an asset that needs to be reviewed and managed. If it does not provide an attractive return. However, if structured properly, we believe every wealthy family should have some life insurance as part of the family’s diversified assets. This also leverages wealth that can pass in a dynasty trust should the law change.
  • Using life insurance to achieve a step-up in basis. Life insurance is tax-free when received, and its earnings inside of a policy grow tax-deferred during its lifetime. Consider using it inside of a dynasty trustto grow assets for your grandchildren. When you die, they receive the benefits tax-free effectively, giving them a step-up in basis even if the law eliminates step-ups.
  • Basis step-up using parents or grandparents. If your grandparents or parents are older and have no estate tax issues, consider setting up a trust for your spouse, children, and parents/grandparents. When your grandparents or parents pass, there is a way to make the trust includable in their estate and to achieve a step-up in basis, thus, avoiding income tax on all appreciation of the assets in the trust. This may change if no step-up becomes law but may be grandfathered if done before any law change.

As always, you should seek professional counsel before implementing any strategy, which should work within the context of your family’s overall financial plan. While saving taxes is important, it is not the end goal – it is part of a thoughtful, coordinated plan to manage and grow a family’s wealth over time. Should you need advice on your personal situation or want to discuss a strategy you believe will work for you, please feel free to reach out for a free consultation.

 

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

While we are providing this as general advice, you should always consult your financial advisor,  tax advisor, or attorney before implementing any of these strategies.

11 Recommendations to Position Your Business or Practice for a Successful Sale

February 28, 2023 by crystal

By Chris J. Roe, CPA, PFS

Many private businesses and physician-owned practices face challenges when the owner decides it is time to make a transition. Whether an external sale or an internal succession, the process can be difficult and time-consuming. Many businesses fail to have a succession plan in place, whether it’s because they weren’t sure how to start creating one or just didn’t have a defined internal successor. This leads the business owner to seek an external sale. 

As a third-party sale is sought, the business owner, more often than not, realizes his mental business value is far different than the actual value third-party buyers are willing to pay. Given the goal is to maximize the value received, how do owners best position their business for sale? Here are several recommendations to consider:

Get Your Accounting Records in Order

Make sure your bookkeeping and financial statements are up-to-date and professional. If you are planning to head to market with the business, you will want to get at least the last two year’s financial statements reviewed by an external CPA Firm. This will give some assurance to the buyer that your books are in order.

Have Your Business or Practice Appraised

Hire a third-party appraiser to perform an outside business valuation. This will give you a good benchmark of what a third-party buyer may offer you.

Increase Your EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

Many buyers will value your business based on a trailing 12 months of earnings. You want your profit margins to be at or slightly above the industry average, so as you move forward, it is appropriate to review your earnings, profit margins, and expenses to ensure you are pricing your product or services appropriately, given the market, and have eliminated any unnecessary expenses. 

Ensure Consist Earnings and Cash Flow 

Buyers like to see strong cash flow and consistency of earnings. Wide fluctuations in cash flow and earnings tend to scare buyers and lower business values. 

Develop Your Add-Backs List

As business owners, we tend to live our lives through our business. When you are negotiating a sale, there will be expenses you are incurring, such as company-provided automobile, discretionary travel, meals and entertainment, and professional fees, that will not be considered as part of the sale and will increase the sale price when added back. The new owners will not incur these expenses. You should evaluate your expenses and develop a list of these add-backs.

Be Prepared to Either Be a Minority Owner or Carry a Promissory Note

Depending on the buyer, you may be required to roll over some of your sale price into the equity of the new company. Also, depending on your business size and buyer, you may be required to carry a promissory note to help the buyer purchase your business. Either way, you need to understand you are no longer in control of the business you sell.

Helping with the Transition

Be prepared to continue to work in the business to help transition it or to help grow it. This will serve to ensure your carried ownership in the new business will be maximized upon a future transaction. Also, develop your ongoing salary expectations for your continued work in the business. Keep in mind that if your salary expectations are much greater than you are currently making, it will reduce the purchase price of your business. 

Evaluating Your Staff & Staffing 

Evaluate the strength of your staff and whether or not you are understaffed. Keep in mind that if a buyer has to add staff to operate the business, they will lower your purchase price. Make sure your staff is adequate to run the business in its current state.

Do Pre-Transaction Tax Planning 

The value of your business is not what you get for it but what you keep after taxes. Take the time to sit down with the proper professionals to do tax planning that will increase the amount you get to keep from the sale. Bear in mind these things take time, and the more in advance you decide you want to sell, the better the planning opportunities will be.

Assemble Your Team 

You will need a team of people to help you sell your business and to manage the family’s wealth post-sale. We normally serve as a team lead and help business owners assemble and coordinate amongst all team members. It will be difficult for you to be the coordinator, given the stress and emotions you will be going through when the sale process begins. You will need a team of attorneys, your CPA, an investment banker, and other professionals. 

Mental State 

Begin to prepare yourself mentally for the emotional roller coaster you will go through when selling your business. Additionally, prepare yourself for the post-closing regret that so many business owners experience.

While succession in a private business, family-owned enterprise, or physician-owned practice can be problematic and time-consuming, a sale can be a wonderful thing. If you take the time to prepare for the exit, your sale will turn out to be a wonderful event in your life.

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

What Is the Best Entity to Run My Business?

February 1, 2023 by crystal

Creating a new business is exciting. Yet, knowing which legal business entity to operate under can be difficult since there are several options, each with its benefits and concerns. [1]

When choosing a business entity, you must consider the legal aspects, such as asset protection, who owns the entity, and how it will be taxed. Moreover, consideration needs to be given to the amount of annual administration needed to maintain the business entity. For example, corporations need to hold annual meetings and maintain minutes, or else there is a possibility that if sued, the liability protection afforded by the corporate structure may be lost. 

It is extremely important in operating a business entity to respect the formalities. Many business owners operate the business like their personal piggy bank, which could bring about unwanted legal and tax issues.

There is always a need to save money during the initial setup of starting a business, but you shouldn’t skimp on forming the business entity. You should always consult a qualified attorney and a CPA before making any decisions on the business structure. Do your research and understand the pros and cons of each business entity and how it protects your personal assets. 

While not a replacement for professional advice, this overview of the common business entities can help you choose the right one for your situation.

Sole Proprietorship

Sole proprietorships are businesses owned by just one person and easily established. A sole proprietorship provides no personal asset protection to the business owner. 

Forming and maintaining a sole proprietorship is easy, and no separate income tax return is needed. The business income must be reported on the Schedule C of the owner’s income tax return. [2]

With no protection between personal and business assets, owners become personally liable for their business’s financial obligations. However, it is recommended the business owner maintain a separate checking account for the business and keep appropriate accounting records.

This entity is generally best suited for businesses such as consulting, retail, freelance work, or other services provided directly by the owner and with no employees other than the owner. Since the owner is the sole employee and provides all services, other business entities may offer little asset protection.

Partnership

These are business entities owned by at least two people. Partnerships are not taxed at the partnership level but pass through their taxable income and losses to each partner based on their ownership percentage. The partners report the income or loss on their personal income tax return. [3]

If you are a general partner in a partnership, you will have exposure to the partnership’s liabilities. However, if you serve as a limited partner, your liability is generally limited to the money invested.

As for business control, general partners usually run the business. The operations are defined by a partnership agreement. As a limited partner, you have by definition, a “limited” say in the business operations. 

Additionally, partnerships cost more to form than sole proprietorships due to the fact an attorney will need to draft the partnership agreement.

Finally, smaller groups of similar or complementary professionals, such as medical professionals, lawyers, and CPAs, generally operate as a partnership since they are looking to market their services under a single name and share business operations and control. 

Limited Liability Company (LLC)

An LLC is treated as a separate legal entity that is distinct from its owners. It provides a layer of asset protection for the owner’s personal assets. However, an LLC provides great flexibility on how it is taxed. Depending on the number of owners, it may be taxed as a sole proprietor, partnership, corporation, or S-Corporation. LLCs can provide great flexibility. [4]

There is a default tax treatment for an LLC based on the number of owners and whether it is foreign or domestic. However, owners may elect to be treated differently for tax purposes under certain circumstances. [4]

Also, certain states, such as Wyoming, Nevada, and Delaware, provide better laws for forming and operating an LLC. However, when forming an out-of-state LLC, there are additional costs. 

Businesses and their owners looking for the protection and separation of personal assets from the business while gaining ultimate flexibility with the corporate formalities may consider forming an LLC.

C-Corporation

A C-Corporation, also commonly known as a C-Corp, operates as its own distinct entity and offers personal liability protection to its shareholders. However, C-Corps also require more annual administration, such as meetings and recording of meeting minutes. Moreover, the corporation files its own income tax return and pays its own taxes on profits. Additionally, it may pay a higher corporate income tax rate than an individual shareholder might pay if the income were taxed on their personal tax return. 

Full personal protection, the ability to generate funds through the sale of stocks, and potential tax advantages give C-Corps the support to operate for years to come. Additionally, the Federal tax code provides for gain exclusion in certain circumstances on the sale of corporate stock. [5]

The inherent disadvantage to operating a C-Corp is double taxation. C-Corps are taxed on their profits, and shareholders are taxed when they receive their dividends. This can result in a Federal tax as high as 39.8%.

With the introduction of the Qualified Business Income Deduction on pass-through entities, operating as a C-Corp may just be too costly. [6]

On the other hand, for businesses that will earn little money in the start-up phase but provide a large gain on a future sale, C-Corps may be a good operating structure.

S-Corporation

S-Corporations, also commonly known as an S-Corp, provide the same personal liability protection as a C-Corp while eliminating double taxation. However, S-Corps have their own restrictions on who can be a shareholder. [7]

S-Corps cannot tap into some of the tax advantages of a C-Corp and are required to have no more than 100 shareholders, all of whom must be U.S. citizens. [1] 

Businesses and owners may gain advantages from the C-Corp structure while avoiding double taxation. Additionally, business owners who meet certain requirements may qualify for the Qualified Business Income Deduction, thus lowering the effective Federal income tax rate on taxable income. [6]

Consult a Tax or Legal Professional

Keep this information in mind as you go through the process of establishing your business entity, but remember that this is only a general overview and should not replace professional, personalized advice and recommendations you may receive when collaborating with a lawyer or CPA. Make sure to consult an expert and do not be penny wise, pound foolish when starting a new venture. 

If you are considering starting a new business and need a complimentary consultation, please reach out to Rx Wealth.

Sources: 

  1. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
  2. https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships
  3. https://www.irs.gov/businesses/partnerships
  4. https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
  5. https://www.law.cornell.edu/uscode/text/26/1202
  6. https://www.law.cornell.edu/uscode/text/26/199A
  7. https://www.law.cornell.edu/uscode/text/26/1361

 

This content is developed from sources believed to be providing accurate information, and provided by Rx Wealth Advisors, in conjunction with Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

The Numbers to Know to Maximize Your 2023 Retirement Contributions

January 5, 2023 by crystal

The inflation we saw in 2022, along with the steps the Fed has taken to curb it, has put a strain on everyone’s wallets. But a silver lining we can look forward to in 2023 is higher contribution limits for our retirement accounts. 

The IRS recently released 2023’s contribution limits, so you can begin incorporating the changes in your financial plan to make the most of your savings opportunities. Here’s a rundown of the updated figures.

Employer-Sponsored Plans

401(a), 401(k), and 403(b) Employee and Total Contribution Limits

The employee contribution limit for 401(a), 401(k), and 403(b) retirement plans is $22,500 in 2023. If you are over 50 years of age, you can contribute an additional $7,500, an increase of $1,000 over 2022. Thus, total contributions for individuals over age 50 are $30,000.

For 2023, all employee/employer contributions will increase to $66,000, and for individuals over age 50, $73,500.

If you are lucky to participate in both a 401(a) and 403(b) plan, a maximum of $66,000 can go into each plan—a nice tax loophole.

The 401(a) compensation limit (the amount of earned income that can be used to calculate retirement account contributions) will increase to $330,000 in 2023. 

457(b) Contribution Limit

The 457(b) contribution limit for 2023 is $22,500. These plans have unique catch-up contribution rules, so consult with your plan administrator if you want to put more in yours.

Employer-Sponsored Plan Contribution Limits

Individual Plans

Traditional & Roth IRA Contribution Limits

For 2023, the IRA contribution limit will increase to $6,500 ($7,500 if age 50 or older).

The IRA deductibility phaseout for those with a retirement plan at work is:  

  • For single taxpayers: $73,000-$83,000
  • For married filing jointly taxpayers: $116,000-$136,000
  • For taxpayers not participating in a plan but with a spouse who is: $218,000 to $228,000

Roth IRA contributions are available to single taxpayers with a modified adjusted gross income (MAGI) between $138,000-$153,000 and married filing jointly taxpayers between $218,000-$228,000. If your MAGI exceeds these limits, you will need to contribute indirectly via a backdoor Roth Ira. 

Traditional & Roth IRA Contribution Limits

Self-Employed or Small Business Plans

SEP IRA Contribution Limit

SEP contribution limits increase to the lesser of 25% of employee’s compensation, or $66,000 for 2023. SEP IRAs do not have an over-age-50 catch-up contribution. If you are looking to contribute over $66,000 and are over 50, you should consider alternative retirement plans. 

SIMPLE IRA & SIMPLE 401(k) Contribution Limits

The SIMPLE IRA and SIMPLE 401(k) contribution limits will increase to $15,500. Taxpayers over age 50 can contribute an additional $3,500, for a total of $19,000 for this group.

Defined Benefit Plans

The defined benefit plan limit will increase to the lesser of 100% of your average compensation for the highest three consecutive years or $265,000.

Self-Employed or Small Business Plans

Medical Benefit Plans

Health Savings Account (HSA) Contribution Limit 

In Revenue Procedure 2022-24, the IRS confirmed that for 2023, the health savings account (HSA) contribution will increase to $3,850 for single people and $7,750 for families. If you are over age 55, you can contribute an extra $1,000. 

HSAs are an underutilized strategy for long-term wealth building that allows taxpayers to receive a tax deduction upfront, tax-deferred growth, and tax-free withdrawals in the future when medical expenses are incurred. This year’s increase is generous, so take advantage of it to the fullest.

Flexible Spending Accounts (FSA) Contribution Limit

For 2023, you can contribute $3,050 to a flexible spending account (FSA), an increase of $200 over 2022. 

Medical Benefit Plans

It is important to know the contribution limits for your retirement accounts and consult with a financial advisor or tax advisor, like Rx Wealth,  to make the most of your savings opportunities. By taking advantage of the contribution limits and planning carefully, you can ensure that you are making the most of your retirement savings and working towards a financially secure future.

Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at croe@rxwealthadvisors.com, or on the web at rxwealthadvisors.com.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

  • Go to page 1
  • Go to page 2
  • Go to Next Page »

Footer

Sign up to receive insights, resources, and tips straight to your inbox!

Name(Required)

Contact Us

5020 Carnoustie Drive
Presto, PA 15142

Email Us
412-227-9007
855-824-7471

Schedule a Complimentary Consult

Rx Wealth Advisors, LLC’s (“Rx Wealth”) website, including downloading, printing or storing any website content, is exclusively for Rx Wealth Advisors, LLC’s clients and potential clients. Any reproducing or editing by any means, mechanical or electronic, in whole or in part, without the express written permission of Rx Wealth is strictly prohibited and subject to prosecution under U.S. and International copyright and trademark laws.

As a preceding condition to accessing Rx Wealth’s website, each client, prospective client or unaffiliated third-party agrees to release and forever hold harmless Rx Wealth and its related persons, including its officers, directors, owner, employees and agents, from any and all adverse consequences resulting from any actions taken by the website user and/or omissions which are not related to receiving Rx Wealth’s individual counsel.

Copyright © 2023 RX Wealth Advisors

ADV | Terms of Use | Schedule a Meeting | Privacy Policy