The U.S. tax code is complicated and now stands at a daunting 70,000 pages, giving some taxpayers pause, as they assume every section contains a landmine that is going to trigger audits, payments and penalties. Not true. A more accurate perspective to take about tax law is to instead view it as the bridge to a significant amount of tax relief. Congress through the years has created laws specifically to do just that.
Caution, of course, is always appropriate, but the code is packed with benefits to be captured. Thinking creatively about how you apply all the different pieces of the law allows a taxpayer to seize significant amounts is tax savings, while remaining completely within legal bounds.
John Eickhoff, a Missouri-based tax planner, has been working with owners of farms, ranches and other businesses for 33 years to solve their tax issues and maximize profit and income when these assets are sold. A former farmer himself, Eickhoff views the use of the tax codes in an interesting way:
“Think of a ballroom. If each chair is a section of the tax code, I cannot build any new chairs, nor can I bring extra chairs in from outside. But I am free to move the chairs around to form the most optimal seating arrangement for the benefit of my guests. That’s my task for each client.
Whatever the taxable event is triggered by one of their business moves, I have the opportunity to arrange and sometimes combine sections of the tax code to maximize the benefits that go to my clients. In most cases, with an asset sale, for example, the right combinations will minimize, defer or even eliminate the tax burden.”
Each law that is created by Congress is designed to apply to a particular situation or group of people. The real estate industry, for instance, has a number of laws and regulations that encourage home ownership and even enhance tax-free cash flow for rental property by tapping into specific types of tax benefits that are available only to owners of investment property. But, these laws cannot limit benefits to a particular person or entity. They are available to anyone who qualifies.
Capital Gains Taxes Forestalled
Let’s take, for example, the case of an owner of a depreciated asset, whether that is property, a large printing press or a combine harvester. The equipment or property is in good shape, and can command a good price when resold. If the original purchase price has been fully depreciated against income, though, the gain on sale of the asset is 100%. Depending on the asset being sold, it can be fully taxable as ordinary income, as high as 39.6% federally, in addition to state taxes. Without careful tax planning, that tax bill comes due immediately.
Eickhoff cites a typical case, where a farmer sold property for $1,000,000, with a net gain of $700,000, which would have triggered about $175,000 in taxes on the capital gain. He and the client’s CPA guided their client in structuring the deal so that all the taxes were eliminated completely.
“There are expenses involved in crafting this tax planning approach, but all-in the farmer ended up with $920,000 in his account rather than $825,000,” said Eichkoff.
Taxpayers with larger tax challenges can also benefit greatly from thoughtful tax planning. One recent case that John and I worked on together dealt with the sale of multiple numbers of businesses by the same seller for a combined selling price of nearly $60 million. Capital gains taxes totaled more than $23 million and an additional $25 million was due for taxes on depreciation recapture of capital equipment being sold.
Our results were dramatic: Without suitable planning the seller would have ended up with less than $10 million after costs of sale, debt and taxes being paid. Instead, by coupling just two tax planning strategies together, our client receives more than $30 million cash in-hand tax-free at close of escrow, with more than one-half the taxes eliminated entirely and the rest deferred for decades.
Our tax system is brutally complex, and has many working parts. But if approached properly, our tax laws can work for the benefit of us taxpayers—but only if we plan ahead. Proceed carefully and cross-check each step as you go through the process to ensure that you comply with the law and, in fact, reduce your risk.
“Saving $100,000 on the sale of an asset can be just as significant for one seller with less assets as compared for another with more to sell,” noted Eichkoff. “The key to gaining tax planning success is having a working knowledge of the tax codes, diligence in being sure that what is proposed is a right fit for the client’s situation and proper execution when that is confirmed. All we need to do is to follow what the law says can be done.”
Innovation and creativity in applying available tax benefits can unlock considerable value to people and businesses who own appreciated assets. Don’t miss your own opportunity to follow this proven path to save on taxes and use those tax savings to help achieve your dreams.