PDF Summary:The Tax and Legal Playbook, by Mark J. Kohler

Choosing the right legal structure for your business can be as important as laying the foundation for your home. In The Tax and Legal Playbook, Mark J. Kohler outlines how different structures like LLCs, S corporations, and C corporations offer various benefits and drawbacks regarding personal liability protection and tax obligations. Kohler provides guidance on leveraging every possible deduction and exploring tax-deferral strategies for appreciated assets.

The book also delves into more advanced asset protection techniques, the importance of adhering to proper business formation procedures, and safeguarding your assets within marital agreements. With Kohler's expertise, learn comprehensive strategies for minimizing taxes, mitigating risks, and maximizing the growth potential of your business ventures.

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Kohler explains that vehicles weighing over 6,000 pounds now qualify for an unbounded accelerated depreciation deduction. Purchasing an SUV exclusively for business use could allow you to deduct the entire cost of the vehicle in its first year of use, in addition to other legitimate expenses like fuel and upkeep. Choosing this strategy can lead to significant cost reductions, especially if your vehicles are infrequently utilized for business purposes.

Utilizing health savings accounts in a strategic manner, in conjunction with different insurance plans and methods of reimbursement.

Kohler points out that small-business owners frequently struggle with navigating the intricacies of the Affordable Care Act and effectively handling health-care costs. Not only do you have to pay your own health insurance, you also face penalties if you don’t provide insurance for your employees, and there are net investment taxes and additional Medicare taxes based on your net income.

In his "KohlerCare" strategy, he recommends choosing a health coverage option that matches your present health condition, deductibles, and family needs, and also taking into account the potential for tax deductions on the premium payments. To minimize ACA tax burdens, he advises keeping your salary level low while coordinating your income through other strategies, like an S corp or rental property.

Kohler presents two primary tactics for individuals to handle out-of-pocket medical costs: Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs). He recommends pairing high-deductible insurance with an HSA to cover healthcare expenses, which allows for the reduction of taxable income and the accumulation of funds in the account. He argues that for those who are healthy and expect few medical needs, this strategy may suffice to manage their medical expenses throughout their lifetime.

To anticipate rising costs in healthcare, Kohler recommends establishing a mechanism to handle medical spending through the creation of a C corporation or by establishing a separate entity focused on family management oversight. This approach allows for the full write-off of your healthcare expenses. When setting up health reimbursement arrangements, it's crucial to seek guidance from a specialist well-versed in the complex aspects of tax and legal matters.

Taking advantage of the recent tax reduction provisions for businesses that are structured to allow income to flow directly to owners.

Grasping the essential regulations and constraints associated with eligibility for the deduction.

The 2018 TCJA brought about substantial changes to tax regulations, including the introduction of an important deduction for pass-through entities, referred to as the 199A. Kohler explains that the rule permitting a 20% deduction on net business income is designed to stimulate economic growth and motivate business founders, potentially leading to significant reductions in their tax liabilities.

However, he argues that to fully benefit from this significant tax deduction, it's essential to grasp the various qualifications and limitations that establish whether you and your enterprise are eligible, along with the specific calculations that vary based on your income level.

Mark J. Kohler explains that individuals filing singly with an income under $207,500 and married couples with earnings below $315,000 can easily calculate and take advantage of the deduction. However, once your income exceeds this limit, there is a sliding scale to determine how much of the deduction you will receive. Furthermore, individuals engaged in professions such as law, medicine, accounting, financial advising, consulting, or sports—where the enterprise is significantly reliant on the individual expertise, reputation, and skills of the proprietor—will not be eligible for any deduction if their taxable income surpasses $207,500 for single filers or $415,000 for joint filers.

Kohler underscores the importance of understanding IRS terminology such as "revenue subject to tax," "modified taxable revenue," "eligible business earnings," and "remuneration distributed by the company," as well as "certified assets," which are crucial in assessing eligibility for and the size of the 199A deduction.

Strategically adjusting compensation and company expenses to fully leverage the advantages of the 199A deduction.

Kohler emphasizes the necessity of adopting creative strategies to reduce tax obligations and maximize the advantages of the 199A Deduction. The importance of this approach is essential for people across all levels of income, especially when their earnings exceed certain limits, initiating the subsequent phase for determining the deductions.

For those employed in less advantaged service industries, Kohler recommends strategies such as increasing the amount put into pension funds, altering the way salaries are paid out, or channeling some of the company's profits into a separate legal entity while considering future tax legislation. Furthermore, he underscores that the importance of payroll costs and the worth of qualifying property play a pivotal role in calculating the 199A deduction.

Ensuring that your business structure is in compliance with the stipulations of the 199A Deduction is crucial.

Mark J. Kohler stresses the significance of focusing on the overarching objective of lessening the tax load for self-employed individuals, despite the availability of the 199A deduction applicable to business entities such as sole proprietorships, LLCs, and S corporations. He warns of the risks of heeding advice from those who vigorously tout the benefits of the 199A Deduction without considering the corresponding rise in self-employment tax responsibilities.

Kohler makes a persuasive argument in favor of adopting an S corporation framework to reduce self-employment tax obligations and lessen the effects of the Net Investment Tax and the additional Medicare Tax, while also capitalizing on the 199A deduction that is accessible to pass-through entities.

Exploring methods to delay or avoid financial obligations to the government related to the sale of appreciated assets.

Employing strategies such as trusts with retained earnings for charity and investigating alternative options that provide tax advantages can lead to significant economic gains.

Kohler elucidates that when one opts to sell property, there are various tactics to consider that extend beyond merely reconciling capital gains tax obligations with the IRS. He argues that business operators and investors have access to a variety of tactics that can diminish or defer their tax liabilities, potentially resulting in significant financial benefits.

Mark J. Kohler advises that employing a strategy known as a 1031 or "like-kind" exchange can be highly effective, allowing for the indefinite deferral of taxes when selling a property and subsequently purchasing another of similar or greater value. Mark J. Kohler highlights the absence of restrictions on the quantity of properties eligible for exchange, and notes that the properties involved do not need to be similar in kind. For instance, a farm may be traded for a commercial building or several residential rental units.

If you've recently benefited from an increase in asset value and are thinking about redirecting your investments to areas facing economic difficulties, Kohler recommends investigating the prospects of areas identified in tax laws as "Opportunity Zones." Investors can defer their tax liabilities, reduce the amount they owe on profits from investments, and sometimes even avoid paying taxes on capital gains altogether by committing their resources to these government-approved zones for a set period.

Individuals looking to maximize their deductions on taxes while simultaneously contributing to philanthropic endeavors may consider using a Charitable Remainder Trust to smartly allocate appreciated assets, as suggested by Kohler. This advanced strategy provides multiple benefits: it facilitates a transaction exempt from tax obligations, permits the gradual deduction of taxes, and guarantees the seller a consistent revenue stream until the asset's ultimate conveyance to the charity following their demise.

Evaluating the decision between settling capital gains tax immediately or exploring possibilities for postponement.

Kohler acknowledges that deferring taxes related to real estate dealings may not always be the most prudent approach, yet he underscores the importance of considering the various options available. To make an informed decision, it's crucial to calculate the precise amount of tax on capital gains you'd incur and weigh that against the advantages of postponement tactics.

Other Perspectives

• While maximizing allowable deductions is beneficial, it can sometimes lead to aggressive tax strategies that may be scrutinized by tax authorities.
• Classifying personal journeys as business-related expenses could be seen as pushing the boundaries of tax law and may not always be justifiable.
• The home office deduction is valuable, but it has strict requirements that not all business owners may meet, potentially leading to disallowed deductions if audited.
• The "Actual Method" for vehicle expense deductions requires meticulous record-keeping, which may be burdensome for some business owners compared to the simplicity of the standard mileage deduction.
• HSAs and HRAs can be effective, but they also require careful planning and understanding of the rules, which may be complex for the average taxpayer.
• The 199A deduction is beneficial but has been criticized for being overly complex and potentially favoring certain types of businesses over others.
• Adjusting compensation to maximize the 199A deduction could potentially lead to questions of reasonable compensation in the eyes of the IRS.
• The emphasis on compliance with the 199A deduction may overlook the fact that not all businesses will benefit equally from this deduction.
• Strategies to delay or avoid taxes on the sale of appreciated assets, while legal, may be viewed as contributing to wealth inequality.
• The use of trusts and Opportunity Zones may be criticized for allowing deferral or avoidance of taxes that could otherwise contribute to public funds.
• Charitable Remainder Trusts, while philanthropic, may be inaccessible to average taxpayers due to their complexity and the resources required to set them up.
• The decision to defer capital gains taxes is not always straightforward and may not be the best financial decision depending on future tax law changes or personal circumstances.

Protecting your assets and reducing vulnerability to potential risks.

Establishing cost-effective measures for safeguarding assets

Mark J. Kohler underscores the significance of safeguarding assets and minimizing liabilities as crucial components in the wealth-building strategies of successful entrepreneurs and investors. He cautions that one should act proactively, prior to amassing significant assets, because owning even a small share in properties like your home or car could attract the attention of individuals who may seek to start legal action against you.

Maintaining the corporation's protective shield necessitates the diligent upkeep of precise records and adherence to the proper entity structure.

Mark J. Kohler underscores the necessity of maintaining a separate legal persona for an LLC or corporation to take full advantage of their features that protect assets and restrict liability. It is crucial to follow certain protocols that uphold a distinct separation between your personal affairs and your business activities to ensure that the legal system recognizes your business entities. He argues that meticulously setting up the framework of your business, which involves drafting comprehensive foundational records such as corporate minutes and resolutions, as well as operating agreements, is an essential aspect of the procedure. He recommends consulting with a legal expert to ensure compliance with the appropriate procedures, especially when setting up a company via an internet-based platform.

Utilizing protections for primary residences, joint ownership with spouse, and careful property naming strategies

In Chapters 17, 19, and 20, Kohler outlines methods for protecting one's homes from legal actions. He understands that our main home is often our largest financial investment, yet if not titled and financed correctly, it could be exposed to legal challenges and creditor assertions. Additionally, he points out that the inclination to rapidly pay off one's mortgage to reduce interest expenses can, in a twist of fate, increase the likelihood of losing one's home in legal battles, as the complete equity in the property turns into a major target for litigation.

Kohler advises couples in 26 states to explore state legal protections, including the "homestead exemption" which often shields some of your home's equity from creditors, and the concept of "joint ownership with right of survivorship" which protects the home in cases where a single spouse is subject to legal action. He also outlines a strategy that utilizes a line of credit secured by home equity to decrease the property's value in terms of its equity, effectively eliminating it. For example, money acquired from borrowing can be invested in initiatives that strengthen the protective measures of your asset preservation approach.

Furthermore, Kohler advises that for the protection of assets against possible legal disputes or claims, it could be advantageous to register them in the name of the spouse who is less prone to legal confrontations. Incorporating this strategy with your flexible trust designed for safeguarding assets enhances your estate planning, making it easier to allocate assets to the spouse with lower risk exposure and ensuring a smooth allocation of your estate following your demise.

Ensuring you have a robust insurance plan, complemented by additional umbrella coverage, is crucial.

Kohler recommends employing more than just insurance to protect your assets. Nevertheless, he underscores the necessity of obtaining sufficient insurance for residences, vehicles, rental properties, and business ventures to strengthen the protection of your entities and diminish the likelihood of financial setbacks stemming from lawsuits.

Furthermore, he stresses the importance of regularly reviewing your insurance policies with an agent and considering umbrella insurance for an extra layer of protection. Insurance acts as a protective measure for personal and business assets, providing extensive umbrella coverage that shields assets with policies valued in the millions, yet is available at a surprisingly economical cost.

Utilizing sophisticated strategies for safeguarding assets.

Utilizing legal entities that offer protection through charging order mechanisms and establishing series LLCs can safeguard an individual's investments.

In Chapter 21, Kohler presents some more aggressive and complex options for protecting assets, noting that these strategies are best for individuals or couples with high net worth and a significant amount of financial risk exposure. Mark Kohler underscores the significance of using entities that benefit from the strategic defense provided by charging orders. Structures like LLCs and limited partnerships are established to safeguard the assets within from your personal financial liabilities.

In such instances, it is typical for courts to issue a directive termed a "charging order" in response to a creditor's legal action. The regulation requires the asset holder to make payments to the lender, but it prohibits the lender from breaking up the entity to seize control of the assets. Kohler emphasizes that the degree of security afforded by COPE laws varies widely across states, with certain states offering limited safeguards while others ensure a strong level of protection. Seeking the expertise of a proficient lawyer is crucial for devising a strategy that is specifically designed for your individual circumstances and related to the appropriate area of legal practice.

Mark J. Kohler explores the strategy of employing Series LLCs to efficiently and potentially reduce expenses when segregating assets that carry different levels or types of liability exposure. By organizing your assets into separate "series" under a single parent LLC, you can safeguard them, ensuring that legal challenges directed at a particular series or asset do not impact the others.

Utilizing Domestic Asset Protection Trusts to shield your main residence.

Kohler has observed a growing tendency to create Trusts for the purpose of protecting assets domestically, thereby enhancing the protection of individual property, and he considers these Trusts advantageous for securing personal homes. In seventeen states, you can establish self-settled, irrevocable trusts that act as additional protection for your home's equity.

Kohler argues that, unlike the complex and expensive arrangements of irrevocable trusts typically used for asset protection, DAPTs provide a simpler and more economical alternative. As the investment trustee, you are empowered to manage the acquisition and administration of the trust's assets, and it is crucial to choose a dependable and impartial person to assume the responsibilities of the distribution trustee. The trustee is pivotal in evaluating the validity of claims to ensure your assets are protected from creditors, all the while maintaining your authority over the investment choices for those assets.

Protecting your nest egg from possible financial responsibilities and legal claims.

Kohler underscores the unparalleled protection for assets provided by retirement plans like 401(k)s and IRAs. Funds held in these accounts are typically safeguarded from creditors by federal laws and can grow with tax liabilities deferred or inapplicable, even in cases of bankruptcy.

Mark J. Kohler elucidates that the Employer Retirement Income Security Act of 1974, commonly known as ERISA, provides protection for assets contained within retirement plans against claims from creditors. Additionally, the level of protection and the specific rules applicable to non-ERISA plans like IRAs vary across different states.

Mark J. Kohler explores the risks associated with retirement accounts, such as the possibility of incurring liabilities, like those arising from a tenant's injury on a property managed by an individual's self-directed retirement account. In the event of property damage due to negligence on the part of the IRA or its owner, the individual who owns the account may be held personally responsible. Kohler recommends setting up a self-directed IRA that includes the formation of an LLC to hold the assets, which provides a safeguard against personal liability.

Safeguarding your economic well-being throughout the marriage and in case the marriage comes to an end.

Creating contracts among married couples to safeguard personal assets.

Kohler uses the cases of famous individuals such as Mel Gibson and Tiger Woods to demonstrate that asset protection is essential not only for defense against outside creditors but also due to the fact that divorce can present the greatest threat to the assets of a married couple, especially when there are no precautions to prevent the division of personal assets in case the marriage ends.

Kohler argues that agreements made before or after marriage are important for more than just protecting the substantial assets of famous individuals. He recommends that individuals who are planning to marry, as well as those who are already wed, should discuss this decision with their significant other and seek advice from a legal professional. He underscores the importance of meticulously drafting agreements to protect the assets of one partner from becoming entangled with the financial responsibilities of the other. For example, in the case where one partner runs a business, these arrangements can safeguard the financial interests and possessions of the other partner from any debts linked to the business.

Combining strategies for safeguarding assets with those for planning one's estate can help bypass probate and reduce the likelihood of disputes among family members.

Kohler emphasizes the importance of a meticulously devised and executed strategy to protect assets within the realm of marriage. He advises that individuals involved in estate planning should meticulously delineate both their separate and joint holdings, along with any specific conditions that may be relevant if the marriage were to end, in order to minimize potential disputes. To guarantee that your assets are allocated according to your desires posthumously, it is crucial to synchronize any marital agreements made before or after the wedding with your estate planning tools, such as wills or revocable living trusts.

Kohler emphasizes the importance of selecting a trustee for your trust with the ability to collaborate efficiently with both partners in case of a separation or passing.

Other Perspectives

• While proactive asset protection is wise, it can sometimes be perceived as overly cautious or even paranoid, especially if one does not yet have significant assets to protect.
• Maintaining a separate legal persona for an LLC or corporation can be complex and costly, and for some small businesses, the benefits may not justify the administrative burden.
• The effectiveness of protections for primary residences can vary significantly by state, and in some cases, these strategies may not offer as much protection as suggested.
• Utilizing joint ownership and property naming strategies can complicate estate planning and may have unintended tax implications.
• While insurance is important, it can also be expensive, and the coverage may not be as comprehensive as one believes, leaving gaps in protection.
• Legal entities like LLCs and charging order protections are not foolproof and can sometimes be pierced by creditors under certain circumstances.
• Domestic Asset Protection Trusts (DAPTs) are not recognized in all states, and their effectiveness can be uncertain, especially when challenged in out-of-state courts.
• Retirement plans are generally protected from creditors, but there can be exceptions, and other risks such as market volatility can still affect these assets.
• Pre- and post-nuptial agreements can be a sensitive topic and may introduce trust issues within a marriage if not handled with care.
• Combining asset protection with estate planning is complex and requires regular updating to reflect changes in laws and personal circumstances, which can be a significant ongoing effort.
• Some asset protection strategies may be viewed unfavorably by courts if they are perceived as attempts to defraud creditors or avoid legitimate debts.