Growing your wealth is the name of the game. Many business owners only focus on top line revenue, which isn’t a bad thing. However, often it is easier to simply keep more of the money you’ve already earned and optimize your overall cash flow to live a wealthier life. Growing cash and wealth usually go hand in hand.
Here are 5 ways to grow your cash to live a wealthier life:
#1: Set Your Business Up with The Right Structure
Frequently business owners don’t have the correct structure setup for their business to save on taxes and minimize liability. Below are three common structures that can help you free up more cash.
- S-Corp – This allows you to put your income into two different buckets. You must pay yourself a reasonable salary to perform your role, which is subject to ordinary income tax rates. Then you can take a portion in distributions. Think of distributions like profit sharing since you are the one taking the risk in setting up the business. You can distribute company money to yourself that won’t be subject to the self-employment tax of 15.3% up to about $285,000 for folks who are married filing jointly.
- C-Corp – These used to only be used for large companies. The tax laws recently adjusted the Corporate Rate down to 21%, for now (most likely this will be moved up to 28% in 2022 and future years). This allows business owners who are in the upper tax brackets to use a tax arbitrage and pay the lower corporate tax rates vs. higher ordinary income rates. There are numerous benefits and challenges around a C-Corp, so make sure you seek CPA/Attorney advice before setting these up.
- Partnership – Often 1 member LLCs commonly called a single member LLC (SMLLC) are utilized by business owners. These usually aren’t as tax efficient as having a partnership. The way income flows on your tax return can lead to a higher likelihood of being audited. A simple solution to protect yourself is to add your spouse as a 1% owner and it’s officially a partnership.
#2: Pay Down Your Debt Correctly
It’s pretty common when people are paying down debt to pay multiple balances at once. If they do focus on paying off one specific balance, it is often either the largest balance or the highest interest rate.
As a business owner, the goal is to just pay off a loan and get rid of that monthly payment. With one less monthly payment, you are freeing up some cash to either improve your business or to simply pay off other loans.
If you need help determining which loan to pay off first, we are happy to share our tried & true Upside methodology that defines the efficient loans vs. the inefficient ones.
#3 Crazy-Expensive Medical Costs
If you polled business owners a few years ago the biggest concern was taxes. Now they have two major obstacles: taxes and medical costs.
One strategy that can help offset this expensive cost is a Medical Expense Reimbursement Plan (MERP). They can be used if there is at least one employee. A MERP gives you the ability to reimburse your employees for their medical costs.
It may be easier to draw up an example. Let’s say a wife owns the business. She hires her husband as an employee and sets him up with a MERP. Any medical expense incurred by the husband (he is the employee in this case), the wife (spouse of the employee), or their children (dependents of the employee) are now 100% tax deductible.
You can pretty much deduct anything within reason on these plans.
- Medical Insurance
- Co-pays, deductibles, prescriptions
- Dental, vision, chiropractic care
- Lasik, fertility treatments, braces for your kids
- Over the counter medications, supplements, vitamins (if they are prescribed by a physician)
A MERP might not be ideal if you have multiple employees. You might consider setting up a QSEHRA, which has the same benefits as mentioned above, but has a monthly cap on the price you can reimburse. A standard HAS is also worth looking into.
#4 Have Your Annual Meeting in a Beautiful Location
Big companies frequently have various offsite and annual meetings in nice locations. By removing day-to-day distractions and truly ‘unplugging’, everyone thinks a little clearer and is a little more receptive. Disconnecting from the normal and reconnecting with real-world beauty is a great way to bring the team together and share ideas. At Upside, the last two annual meetings have been in Key Biscayne and Aspen.
Where would you like to go on a vacation? If you do this correctly, you can combine your annual meeting and a few days of vacation, all as a legitimate business expense. You can write off travel, lodging, meals, etc.
There are some documentation requirements and other nuisances, so make sure to talk to your accountants and clear the way for your trip.
#5 Donating to Charity (Trusts)
This isn’t the typical donation of taking stuff up to goodwill or participating in a charity fundraiser. The focus here is on higher dollar donations that can lead to a substantial write-off on your taxes.
Fast forward into the future and it is time to sell your business. Typically, business owners have worked their whole lives to get to this point, but then are forced to pay hundreds of thousands or even millions of dollars in taxes.
There are multiple Trust tools out there. By using a Charitable Remainder Trust, you can get a large tax deduction instead of a big tax bill and provide an income for the future. Upon your death, the charity will keep what is remaining, but you have secured a generous road ahead.
As you can see, there are multiple ways to generate more cash and build wealth. Some of these are small strategies and some of these can make a huge impact. Implementing even one of these will help set yourself up for a much brighter future.