Not all interest an individual pays is deductible. With careful planning, however, you can help your clients free up some of their interest expense—and maximize the tax-efficiency of their investments. Here are a few things to consider.

Look to taxable investments.

Current tax rules allow individuals to deduct any interest associated with a loan—if they use the loan proceeds to purchase a taxable investment. So, before your client uses loan proceeds to buy tax-exempt bonds or move cash into their 401(k), make sure they consider taxable securities first.

Separate loan proceeds from other dollars.

For an individual to be able to deduct the loan interest, the loan proceeds must be traced to the purchase of a taxable investment. Best practice calls for opening a separate account for loan proceeds. This allows the client to explicitly show where those dollars went, making the interest deductible.

Be strategic.

The bottom line: When advising your clients, it’s important to consider all sources of funds. With careful planning and thought, your clients can be creative on the dollars they use to make certain interest expenses deductible.

Partner with a tax expert.

The ins and outs of investment interest are complicated, to say the least. At Elevate, we partner with you to advise your clients on these matters and more. If you’re ready to add more value to your client relationships, contact us today.

There are countless factors to consider when choosing a business structure for your RIA firm. At the top of the list: tax implications. These vary between each structure, so it’s important to understand them in full. Only then can you make a sound comparison—and choose wisely for your firm.  

For RIA firms, we typically recommend a multi-member limited liability company (LLC), partnership, or S corporation. To help you determine which is best for your RIA firm, here’s what you should know about tax implications. 

Tax implications of a multi-member LLC or partnership:

Structuring your RIA firm as a multi-member LLC or partnership, such as a limited liability partnership (LLP) or limited partnership (LP), gives you substantial tax advantages as well as flexibility. 

Each of these structures allows you to tax-efficiently convert to an S corp, making them a good starting place for your firm. (It’s not as seamless or tax efficient to go from an S corp to a different structure.) As we tell our clients: When in doubt, start with an LLC or partnership. 

Additional benefits of an LLC or partnership: 

• Allows you to give a key employee ownership in the entity (by issuing a profits interest) without causing an immediate tax to the employee.

• Offers flexibility in succession planning (more tax-efficient than an S corporation). 

• Gives you more flexibility in the structure of your RIA firm. The owners don’t have to be individuals—they can also be other entities. This enables you to tax-efficiently bring in non-individual investors. 

• Provides complexity and flexibility in ownership structure including distribution and profit allocations.

Tax implications of an S corporation

Because S corps aren’t as flexible as LLCs and partnerships, they’re simpler. The tax rules surrounding S corps are established and straightforward, making the cost of tax preparation less expensive. What’s more, tax planning for an S corp involves less uncertainty. 

Additional benefits of an S corporation: 

• Although owners of S corps must pay themselves a reasonable compensation, there isn’t a bright line on what is reasonable.

• Flow-through income from an S corp is not subject to self-employment tax, which can provide a 2.9% to 15.3% tax savings when compared to an LLC. However, the Build Back Better Act, if passed, may reduce or eliminate this advantage.

• Offers flexibility to use year-end bonuses to owners to pay for any tax due, allowing you to avoid the administrative hassle and need of quarterly estimated tax payments. 

What about C corporations and single-member LLCs?

We often steer RIA firms clear of C corps for two reasons: First, a great deal of uncertainty exists around the future of corporate tax rates. Second, it is expensive and often tax-inefficient to change from a C corp to another structure. In other words, you could be stuck in a tax-inefficient structure because the costs to convert are prohibitive. 

Single-member LLCs that are taxed as sole proprietors carry the highest audit risk, so we typically avoid this structure as well.  

Which business structure is best for your RIA firm? 

Looking at potential tax implications is a great place to start when choosing a structure for your RIA firm. What we’ve covered here is not an exhaustive list—it’s important to do your research and consider other factors as well. 

If you’d like to explore business structure options for your RIA firm, we can help. To learn more, contact us today.

When one of your clients receives a bonus, you may be among the first to know if they wish to invest it. Before you do, however, it’s important to make sure your client fully understands the tax obligations that come with it. 

Often, supplemental payments—such as bonuses, equity compensation, and even exercising non-qualified options—can leave the recipient with an unexpected tax bill. Here’s how you can help your clients avoid this rude awakening.  

How does a supplemental payment lead to a surprise tax bill?  

A supplemental payment is a one-time compensation that falls outside of an employee’s regular payroll. The federal withholding rate for supplemental payments under $1 million is 22%; the rate jumps to 37% for anything over $1 million. 

This is where things get complicated: The 22% federal income tax bracket is capped for individuals at $86,375 and for married couples filing jointly at $172,750. If your client were to fall in a higher income marginal tax bracket, this would create a withholding rate differential between the supplemental payment and their regular payroll.  

For instance, say your client is in the 22% tax bracket, but they receive a supplemental payment that bumps them into the 32% tax bracket. Now the 22% withholding on the supplemental payment is no longer adequate. Because the client was bumped into the 32% bracket, the supplemental payment they received was under withheld by 10%—which undoubtedly will show up on their tax bill. 

When can a surprise tax bill become a problem? 

Clients are often confused about this because they know withholding was on their supplemental payment—they just didn’t realize it wasn’t enough. 

Unfortunately, many individuals use supplemental payments for investments or luxury purchases. This means the money isn’t readily available to pay the additional, unforeseen tax. It can quickly become a cash-flow problem. 

This is largely a federal tax issue; most states keep their supplemental payment rates closer to or the same as the income tax rates. 

What should do you as an RIA? 

If your client comes to you and wants to invest their supplemental payment, consider pumping the brakes on their enthusiasm. Make sure your client understands their tax obligations, so they won’t be hit by unexpected tax due in April. 

Your job: Be the hero. 

As you know, expectations make all the difference. If you can step in early and say, “hey, let’s make sure you won’t owe anything else on this bonus,” you can be the hero who saves your client from a surprise tax bill.

If you think your clients could benefit from this type of tax advice, we’re here to help. We can work as your in-house tax advisor to make sure your clients aren’t left scrambling to deal with unexpected tax payments. To learn more, contact us today.