Tax - Free Wealth by Tom Wheelwright pt 1

LLC Flexibility & Entity Choice

• LLCs (Limited Liability Companies) deliver both asset-protection and tax-planning advantages.

• For U.S. tax purposes, a single LLC can elect to be treated as any of the following:

  • Sole proprietorship (default for a single-member LLC if no election is filed).

  • Partnership (default for a multi-member LLC if no election is filed).

  • C-Corporation.

  • S-Corporation.

• Comparable flexibility may exist in jurisdictions that use LLPs (Limited Liability Partnerships) rather than LLCs.

• Proper election = “check-the-box” on the IRS Entity Election Form; failure to do so lets the IRS decide for you.

• Corporations (C or S) must file tax returns separate from their owners.

Fundamental Rules Repeated Throughout

1. Rule 1 – “It’s your money, not the government’s.”

2. Rule 2 – “Tax laws were meant to reduce your taxes.”

3. Rule 3 – “A quick way to put money in your pocket is to reduce your taxes.”

4. Rule 4 – “Everything you do either increases or lowers your taxes.”

5. Rule 5 – “The tax law is a series of incentives for entrepreneurs and investors.”

6. Rule 6 – “You can deduct almost anything given the right facts.”

7. Rule 7 – “It’s not how much you own that matters; it’s how much you control.”

8. Rule 8 – “Treat your business as you would if it were a big public company.”

9. Rule 9 – “All tax planning must have a business purpose other than reducing taxes.”

10. Rule 10 – “When you want to reduce tax, reduce the base on which it is measured.”

Choosing & Working With Advisors

• Many tax advisors are afraid of the law and focus on self-protection; find one eager to use the law for you.

• Do not be cheap with professionals—"good members are worth their weight in gold."

• Consider appointing a “wealth strategist” to coordinate among CPA, attorney, banker, insurance agent, etc.

Amended Returns & Loss Carry-Backs

• In many countries (including the U.S.) you can amend returns for up to 3 prior years.

• Current-year losses may be carried back to offset prior-year income → immediate refund.

• Only you control your taxes—advisors supply tools; you take the actions.

Timing of Tax Planning

• Never wait until year-end; every day provides opportunities.

• Year-end planning is still critical, but “every-day” planning is better.

Turning Personal Expenses Into Business Deductions

• Meals with employees/clients become deductible when business is discussed before, during, or after eating.

• General savings = approximately 20\text{–}30\% (effective discount) when personal spending converts to deductible business spending.

• Example: Using a business credit card to buy gasoline for a vehicle used in business.

Three Legal Tests for a Business Deduction (U.S.)

1. Business Purpose – primary intent is business (e.g., discussing a contract over lunch).

2. Ordinary – customary in the industry in both amount and frequency.

3. Necessary – the expense helps make more money.

• Excessive, luxury meals taken regularly may fail these tests and be disallowed.

Make Your Business a Family Affair

• Hire family members → wages shift income from higher to lower tax brackets = permanent savings.

• Business travel: if family members are legitimate employees, their travel is deductible.

Documentation & Bookkeeping

• Maintain accurate books at least weekly.

• Scan receipts; electronic copies are acceptable to the IRS.

• “Pretend documentation = pretend deduction.”

• Tax collectors worldwide (IRS, CRA, HMRC, ATO, etc.) value meticulous records.

Depreciation, Amortization & Cost Segregation

• Buying income-producing assets creates annual write-offs:

  • Tangible assets → Depreciation.

  • Intangible assets → Amortization (must be elected on the first return after acquisition).

• Cost Segregation – reclassify components of real property into personal property for faster depreciation.

  • Legal, but must be executed by qualified engineers/tax pros.

  • Can be performed retroactively; catch-up depreciation is taken in the current year.

  • Most valuable when in a high tax bracket because deduction value scales with the marginal rate.

• In some jurisdictions depreciation = “Capital Cost Allowance.”

• Always archive detailed valuations; missing documentation lets the tax authority reverse benefits.

• amortization is the annual write-off for intangible assets. It must be elected on the first return after acquisition of the asset.

  • depreciation is the annual write-off for tangible assets.

Example – Reinvesting Profits to Cut Taxes

• Pierre earns 200{,}000.

  • Reinvests 80{,}000 into supplies/equipment + 20{,}000 into marketing.

  • Deducts 100{,}000 → remaining taxable income =200{,}000-100{,}000=100{,}000.

Alternative Investments With Built-In Tax Benefits

• Certain real estate deals and oil & gas partnerships allow up to 100\% first-year write-offs.

• Like-Kind Exchanges (U.S. §1031 for real estate):

  • Swap property for qualifying “like-kind” property → defer all capital-gain tax.

  • Repeat until death → heirs receive step-up basis; tax may never be paid.

  • Refinancing extracted equity is tax-free.

  • Must follow every procedural rule exactly (timelines, qualified intermediary, identification rules).

Ownership, Control & Entity Layering

• Income earned by a corporation is taxed to the company; owners pay tax only on amounts withdrawn.

• Partnering with parents: Form an LLC, gift/transfer membership interests → income shifts to their lower brackets.

• Intercompany payments (loans, management fees) demand formal notes and agreements to prove economic substance.

Economic Substance & Profit Motive

• Every strategy must advance profitability, operations, or risk reduction—not just tax savings.

• Tax credits, cost segregation, family wages, etc. must fit within a real, profit-oriented plan.

Tax Credits – Immediate Dollar-for-Dollar Reductions

• Credits differ from deductions (which reduce taxable income only).

• 1{,}000 credit lowers tax by 1{,}000 regardless of bracket.

Primary Categories

1. Family Credits – based on number/age of children.

2. Education Credits – offset tuition, fees, sometimes books; watch for restrictive savings plans limiting investment choices.

3. Working-Poor Credits – earned-income credit; often refundable; high deductions can qualify a high-earner.

4. Charity Credits – certain jurisdictions offer credits (in addition to deductions) for donations to schools, the poor, etc.; combined benefits can exceed out-of-pocket gift.

5. Investment Credits – for investors/entrepreneurs: low-income housing, R&D, equipment purchases.

Credit Mechanics

• Refundable Credit – paid even with zero tax liability.

• Non-Refundable Credit – usable only against existing tax; unused amounts may expire.

• Beware promoters “selling” tax credits without economic substance; credits may be lost.

Government Insurance Taxes by Cash-Flow Quadrant (Rich Dad context)

• E (Employee) & S (Self-Employed) = high payroll/government-insurance taxes.

• I (Investor) & B (Business Owner) = can legally avoid most payroll taxes.

Reducing the Tax Base (Rule 10)

• Focus on lowering the taxable base before rate manipulation:

  • Increase deductions (e.g., depreciation, wages to family).

  • Shift income to lower brackets/entities.

  • Defer recognition (e.g., like-kind exchanges).

Summary Reminders & Practical Steps

• Choose the right entity and file elections on time.

• Engage in continuous, proactive tax planning—daily rather than annual.

• Convert personal spending to legitimate business deductions wherever possible.

• Hire family, document everything, and use technology (scanning).

• Exploit depreciation/amortization with professional support.

• Evaluate investments first for profit, second for tax benefits.

• Ensure every transaction has economic substance and is properly papered.

• Credits are powerful but come with limitations—verify eligibility and carry-forward rules.

Always remember: "Paying some tax is cheaper than failing at a business started solely for tax reasons."