For business owners seeking to boost net profits, taking advantage of all possible opportunities for tax savings offers a powerful solution. As they build their businesses, however, it is also crucial that owners plan for retirement and ensure that their tax and financial strategies are designed to support them in their later years. Fortunately, with some strategic planning, tax savings available to business owners may enable them to build future wealth, create comfortable lifestyles in retirement, or leave legacies for their families.
At Capital Review Group, our team of tax experts has helped business clients in a variety of industries maximize savings through often-overlooked incentives and strategies found in the tax code. The following examples represent real tax savings achieved by our clients, as well as demonstrations of how the amounts saved may be invested in order to generate future tax-free income—helping business owners reach their financial goals for retirement and beyond.
Hotel Owners Save $700,000 through Cost Segregation and Transform it into a Legacy for Their Children
A family-owned hotel on the East Coast was thriving, generating considerable income for the aging owners. However, a significant burden was growing along with the hotel’s success: taxes. The owners sought to minimize their tax liability as a way to ensure continued success for the hotel and financial well-being for their family. Fortunately, they were able to use the IRS-approved strategy of cost segregation to unlock substantial tax savings by simply changing the classification of certain assets in the hotel building.
Typically, real property is depreciated over 39 years for tax purposes, while personal property is depreciated over five, seven, or fifteen years. A cost segregation study uses engineering principles to reclassify certain real property assets as personal property—allowing commercial building owners to seize more substantial and immediate deductions. As a result of a cost segregation study performed by CRG, 29 percent of the hotel’s assets were reclassified as personal property, saving the hotel owners approximately $700,000 in taxes over a five-year period.
Since the hotel owners were beginning to plan for retirement, they decided to invest their six-figure savings in a tax-efficient estate plan that included life insurance. Due to strategic use of their tax savings, the estate plan is projected to yield a $2,241,265 tax-free death benefit guaranteed for 43 years—an amount that will help the owners fulfill their goal of ensuring that the hotel will have enough liquidity to stay in the family for generations.
Cost Segregation Saves Building Owners $300,000, Yielding a Potential $3.3 Million of Tax-Free Retirement Income
A married couple in the Phoenix area owned two successful medical practices: the husband was a renowned veterinarian, while the wife was a trusted OB/GYN. The couple also owned the buildings in which they had their offices. As their practices grew and prospered, the couple faced mounting tax liabilities every quarter. They knew that they had to cut costs in order to continue providing their patients with optimal care.
After consulting CRG, these ambitious medical professionals learned that as commercial building owners, they may be able to reduce their tax burdens through cost segregation. CRG performed a cost segregation study on their buildings, reclassifying several real property assets as personal property. As a result, the couple saved almost $300,000 in taxes, which allowed them to eliminate their tax liability for two full years and part of another.
The substantial tax savings helped the couple grow their businesses and inspired them to start planning for retirement. They met with their financial advisors and learned that if they were to apply the $300,000 savings toward a life insurance retirement plan (LIRP), they could receive an estimated $94,884 of tax-free income per year between the ages of 65 and 100—which would total over $3.3 million. By using their building assets to minimize their tax burden and applying those savings toward a retirement plan, the couple can be sure that they will enjoy a comfortable lifestyle long after their years of serving patients have ended.
R&D Credit Saves Architecture Firm $188,000—An Amount that Could Represent Over $14 Million of Tax-Free Retirement Income
The Research and Development (R&D) Tax Credit saves large corporations billions of dollars each year, but is often overlooked by eligible small and medium-sized businesses in a variety of industries. An architecture firm in Washington discovered the power of the R&D Credit when it claimed $188,000 in tax savings for designing a new, energy-efficient school building. By requiring the firm to evaluate and implement innovative design techniques, the project satisfied the R&D Credit’s four basic requirements:
- Intent to create new or improved functionality of a business component, such as a product, process, or software.
- Elimination of uncertainties regarding the activity’s design, process, method, or cost.
- A process of experimentation, such as modeling, testing, or informal trial and error, designed to resolve uncertainties.
- Reliance on the principles of engineering, biology, physics, or computer science.
The architecture firm worked with CRG to prepare the necessary documentation, such as project lists and payroll reports, and maximize tax savings under the R&D Credit. CRG also estimated that based on the firm’s routine activities, it may be able to repeat a tax savings of approximately $188,000 each year for seven years—resulting in a total savings of $1,316,000 through the R&D Credit alone.
However, the benefits of the credit may not end with the firm’s significantly reduced tax burden. After consulting a financial advisor, the owners of the firm learned that if they were to invest the $1.3 million of tax savings in a LIRP, they could receive over $406,000 of tax-free income per year between ages 65 and 100. This may result in a staggering $14 million or more in retirement income to support the architecture firm’s owners during their later years.
These case studies represent just a few examples of how business owners can use the tax code to generate wealth, boosting their net profits through tax savings and applying those savings to high-growth, tax-efficient retirement plans. To learn more about the lucrative opportunities for tax savings that may be available to your business or your clients’ businesses, contact CRG today!