“Top 10 Ways to Avoid Taxes” – Chapter 2 – Business Ownership!

hardheadedly Tax Avoidance Strategy #1:  Business Ownership

Before we cover how business ownership can help you avoid taxes, I think it is important that you learn where tax rates have been, and more importantly, where they may go in the future.

I also think it is important to learn how the government has built a system where many unsuspecting Americans will get hammered in taxes in the future. Of course, we will also cover how you can avoid many of these taxes—with business ownership being the most important of all the tax avoidance strategies.

Benjamin Franklin is quoted as saying, “The only thing certain is ‘death’ and ‘taxes’.”

That is true. Well, sort of.

Death is 100% certain for us all, but how certain are taxes?

Let’s first simplify taxes:

“When you earn it… they tax it.”

“When you save it… they tax it.”

“When you spend it… they tax it.”

“And when you die… guess what happens. Yup, they tax that too!”

If you have read Rich Man Poor Bank, you learned that the banking cartels keep the general population ignorant of how money actually works. Today, everyone, regardless of income, is taught: “Saving money and getting good credit will lead to your financial freedom.” Nothing is further fromthe truth. Saving money in a bank, and getting good credit, only makes bankers wealthy.

The entirety of this book could be summarized in the following:

The poor and middle class teach their kids:

»  How to get a job

»  How to save money

»  How to get good credit

»  And… “Pay your taxes”

The rich teach their kids:

» How to run a business

» How to invest

» And… How to avoid taxes

I believe the above statements are what separate the rich from the poor, and why the rich continue to get richer and the poor continue to get poorer.

Just like the biggest banks, big government will increase their tax revenue if the masses don’t understand the many ways to reduce and avoid taxes. As long as our schools are funded by debt and taxes, there will never be a class called “How to Avoid Debt & Taxes – 101.”

The good news is, that when you raise your financial IQ , the amount you would pay in interest to the banks, and the amount you would pay in taxes can be dramatically reduced.

Your goal should be to obtain what I call a “Rich Man Education.” A “Rich Man Education” is learning how running a business can help you avoid taxes.

You should also learn tax reduction strategies when investing in all different types of investments—including stocks and bonds, mutual funds, Exchange Traded Funds (ETF’s),and real estate. Lastly, you should learn how and why the rich, and the banks, invest inside life insurance policies to avoid taxes. We will cover that later in Chapter 6.

With a Rich Man Education you will understand the risks and rewards of each type of investment, and whenever possible, how to reduce taxes. In some cases, we can show you how to not pay any taxes on all your profit.

To understand tax avoidance, you must first learn the different types of taxes.

But before we go through a few of the most common types, I want you to ask yourself a question:

“Do I think it is possible, that in the future, the government will tax my income at 60%-70%?”

Did you answer yes? Or no? Seriously…stop, and think about this.

If your answer is no, then I would encourage you to open the history book of tax rates. After the Great Depression, in the 1940’s, you will find that the highest federal tax rate for those with a “high income,” was 94%!

Yes, 94%!

Then you still had to pay taxes to the state you lived in. If your state taxes were 2%, the government was taking 96% of your income.

This is the reason why actor-soon-turned politician, and eventually President of the United States, Ronald Reagan only made two movies a year. For any additional movies made that year, all of his income would go to taxes.

Once he became President, he realized that when taxes were too high, many of the most productive people were deterred from working harder to earn more money. In 1981, Reagan significantly reduced the maximum tax rate, which affected the highest income earners and lowered the top marginal tax rate from 70% to 50%; in 1986 he further reduced the tax rate to 28%.

It should be noted that back in the 70’s the government had fewer types of taxes than today—however, the tax rates were higher.

Today, we have both high taxes and hundreds of different types of taxes—yet a limited number of ways to avoid them.

And when the government can’t raise taxes, they employ a new strategy: Theft!

That being such a controversial statement, I’m assuming you would like me to provide an example of how the government steals from the American people.

Okay, here you go:

I think you would find it interesting that social security—specifically the payments that would be sent to you in retirement—used to always arrive in your account tax-free.

The crafty politicians, always looking for ways to create more tax revenue, decided that the Social Security Trust Fund would be an easy target. And because reducing social security payments would be unpopular for voters, they decided to take another approach.

In 1983, rather than reduce social security payments, they began taxing those payments; the same result as reducing them. Aka “theft.”

If a private company employed this type of strategy, someone would end up in jail. But when you are the government—and you make the rules—you can change them anytime you want!

“Do these taxes apply to everyone?” you ask. Nope!

They only apply to those that earn income in retirementjust above “middle class.” They also don’t apply to those that know how to avoid all the taxes on social security payments—regardless of the amount of income they receive.

The formula is simple: It is understanding what types of income will cause taxation of your social security, and avoid those types of income. This is called “Provisional Income,” which is the formula the IRS uses to determine what types of income will cause your social security benefits to be taxed.We will also cover this later in Chapter 6.

Now, let’s cover the most common types of taxes, and more importantly, how to avoid paying the highest rates.

There are:

Federal income taxes, state income taxes, city taxes, capital gains taxes, property taxes, self-employment taxes, alternativeminimum taxes (AMTs), sales taxes, gasoline taxes, hotel taxes, auto registration taxes, water taxes, electricity taxes, cell phone taxes, and the list goes on and on.

There is even a “sin tax,” taxing things such as alcohol and cigarettes. And, in the coming years, the government will continue to create more taxes—taxes when you earn, save, invest, and spend your money. And yes, more taxes when you die.

The rich understand that income taxes, both federal and state, are the highest forms of all taxes. So rather than focus on making more money from a job, they focus on earning more money from sources other than a job.

The first and most important step to avoiding taxes is:

Step 1: Business Ownership

If you study taxes, as I have done for over a decade, you will learn that the government taxes heavily those things it does not want us to do. For example, the “sin tax” is applied to tobacco and alcohol to raise the price, in the hopes it will deter teens from smoking and drinking.

Conversely, the government rewards, with reduced taxes, the things it wants to see more of. For example: When you donate money to charity, that helps the charity. And, in turn, hopefully helps those in poverty—thus reducing the burden to the government to take care of them.

Another example: When you invest in stocks or bonds, it helps businesses expand, helps the economy, and in turn creates more jobs—again, providing more tax revenue for the government.

The government also wants to reward business ownership: When businesses grow, they provide more jobs, expand the economy, and again, raise more tax revenue.

If you already own a business, you likely know the basics for maximizing your tax deductions, and you already have a tax professional to help guide you.

If you don’t have a business, then you will need to find a way to start one, either part time or full time.

There was a time that I did not own a business. I had never sold anything. I didn’t know what the phrase “tax deduction” meant. But I chose to invest heavily in my financial education, reading books and going to seminars to learn everything I could. I continue to do so to this day to raise my financial IQ, gain financial and business skills, improve and change my habits, and yes, become a master at legally avoiding taxes.

Now, there are many types of businesses to own. But since this is not a book on “The advantages of different business models,” I would rather focus on the skills needed to own any successful business.

The most valuable skills are:

» People skills

» Salesskills

» Money skills

» Moneyhabits

As you decide to start a business, start investing in yourself to improve your people skills, sales skills, and money skills.

And when you make more money, you will want to improve your money habits.

It is unfortunate we don’t teach “How to Start a Business” in school.

People Skills

I would recommend a book called “How to Win Friends and Influence People” by Dale Carnegie. Once you read this book, practice using your newfound “people skills” with your family, friends and coworkers. Watch the “magic” happens around you, as people begin to like and trust you even more, and will be more willing to help you.

Your people skills will be used every day regardless of the business you are in, and will be the key to your financial success. As I mentioned in the Introduction, just by being friendly and listening to My Hero Nurse, she risked losing her job to help me. I don’t think she would have done so without me studying people skills, and learning to be more likable by all types of people.

What you will learn is that people will only open doors for you if they like you, and trust you.

Over the years, many doors have been opened for me, and countless opportunities have been presented to me only because I’ve earned the trust of people.

I would go so far to say that, in the many years I have spent in business, the most valuable skill I have learned is working with and understanding people.

It is unfortunate we don’t teach “People Skills” in school.

Sales Skills

Learning to sell was scary and intimidating to me. I was the son of a bricklayer. I never had to sell anything before. But a mentor and wealthy friend of mine once told me, “Learning to sell can be challenging and uncomfortable. But not learning to sell may leave you struggling financially for the rest of your life—which is much more ‘challenging and uncomfortable’?”

Thirteen years ago, I sucked it up, entered the financial services industry and learned all I could. I eventually learned to sell, and with that came freedom, and yes, better choices. Fortunately, today, I don’t consider what I do as “sales,” as I would rather simply educate you—the reader. Then you can decide for yourself what tax avoidance strategies work best for you and make better-informed financial decisions.

My advice today is that before you start a business, go work for a company that will pay you a salary plus bonuses based on your sales. Many companies have great training programs on “how to sell,” and with that skill you are much more likely to become successful in any business.

It is unfortunate we don’t teach “Sales Skills” in school.

Money Skills

This is fully understanding the fundamentals of money, and all the ways that you can put money to work for you. This is also understanding all ten ways to avoid taxes, and how to move your money from one investment strategy to another—many times not paying any taxes at all.

For example: You will learn how to invest your after- tax money—made from your business, which reduced the amount of taxes you paid when earning it—and invest and grow it in one tax-free strategy, and then move it to another strategy…all without paying taxes.

The “Ultimate Money Skill” is this:

Reduce taxes when you earn your money,

Pay no taxes on the growth of your money,

Pay no taxes when you spend your money,

Pass that wealth to your heirs 100% tax-free.

Of course, this is all done using legal IRS tax codes that are all well known by the wealthiest people in America.

And with such a strong statement above on tax-avoidance,I think it is about time for another important disclosure:

Mark Quann and his books do not provide tax, legal oraccounting advice. This material has been prepared for informa- tional purposes only, and is not intended to provide, and shouldnot be relied on for, tax, legal or accounting advice. You shouldconsult with your own tax, legal and accounting advisors beforeengaging in the buying or selling of any investment.

It is unfortunate we don’t teach “Money Skills” in school.

Money Habits

Money Habits are simply the habits you have with your money, which will determine what you do with it after you have earned it.

This is controlling your emotions when it comes to your money—and making the best financial decisions, not emotional ones. This is also where having good advisors is priceless, as they can help you make non-emotional financial decisions.

This is also making a choice to surround yourself with other business owners and entrepreneurs, and to learn from each other at every opportunity.

Remember this:

Choosing who you spend your time with and guard- ing your associations is very important if you are serious about becoming wealthy. “Show me your friends and I’ll show you your future” has taughtme to hang around others that own businesses, have good money skills, good money habits, and who alsounderstand (and love) tax-avoidance.

It is unfortunate we don’t teach “The Money Habits Neededto get Wealthy” in school.

Business Owners Pay Less Tax

Let me quickly give you the basics of why business ownerspays less in taxes than employees. Once you own a business,a number of expenses can be deducted from your income,if the money is spent during the course of running your business.

Here are a few examples:

 » Computers

» The cost of Internet

» The cost of your cell phone, if used for your business

» A portion of your cell phone bill, the portion used for business

» A mileage deduction when driving your car

» The cost of health insurance

» Licensing costs

» Office rent

» If you’re using a portion of your home for business, you can take a business deduction, if it is used “regularly” and “exclusively” for business. This deduction could be significant, for example, if running a daycare out of your home.
» Paying the babysitter, but only when volunteering at a recognized charity or not-for-profit. (Volunteering is a great way to help others, while also making business contacts.)

» Buying books that teach business, sales, or other skills needed to run a business
» If inviting prospects clients and employees to a company BBQ , the food, alcohol and other costs can be a deduction from your income.

Even a trip to Hawaii can become a business deductionunder certain circumstances. Let me explain: If in the course of your business you ran a sales competition, and the top salespeople won a trip to Hawaii, the cost of that vacation for you and those employees can be a deduction.

Once your income rises, you won’t want to pay the high cost of self-employment taxes, about 13%. Your next step is to talk with your tax advisor who can advise you when it is time to set your business up as a corporation. An “S-Cor- poration” is the most common type of corporation used by small business owners. This can help you reduce taxes even further, as corporations don’t pay self-employment taxes.

Finally, a SEP IRA can be funded to reduce your taxes and save for retirement. But, I think it is important to note: I don’t use or generally suggest a SEP IRA, as I don’t believe in “saving money on the seed to pay taxes on the harvest.” (Covered in detail in the following chapters).

Those are only some of the most common ways to reduce your taxes when owning a business.

Your next step is to know how to keep and manage the money that you earn.

Step 2: Manage Your Money

I’ve seen dozens of businesses crash and burn because theowner was mismanaging their personal finances when timeswere good, but with one economic downturn, they lost all their “stuff”— their home, then came the divorce, and the loss of their business too.

Great investors are careful about their spending. They like to have lots of different types of investments for short, mid, and long-term investing, and they know how each are taxed (or not taxed).

The rich also like to keep lots of liquidity in order to move their money to other more profitable investments, wheneverthey see an opportunity.

The rich drive regular cars when building their wealth, and are not looking to impress anyone with a fancy car. They are not trying to “keep up with the Joneses” …buying fancy cars and watches before they are wealthy.

You must look at yourself: Are you a “spender”? Do you spend everything you earn?

What was your answer? Yes? Or no? It is important for you to recognize if you are, as the first step to recovery is to recognize you have a problem.

Or, are you an “investor”? Do you prioritize investing first, and then spend only after you have invested?

Invest!

Below is the order of how the most successful business ownersin the world prioritize their investing:

The best return on investment (ROI) will always be invest-ing into yourself—reading books and studying to upgrade your skills.

Your second best investment is to invest back into your business; whether it is getting another license, paying some-one to do part-time marketing for you, training an employee,or paying an accountant to help explain tax avoidance.

Depending on your business, you may even want to invest the time, energy, and money into writing a book. My first book took five years, but this book took only thirty days, writing just a few hours a day while recovering from heart surgery.

Your third investment should be investing a minimum of ten percent of your income back into the tax-advantaged investments covered in the following chapters.

Another very important aspect of becoming wealthy is “giving back.” If you study the richest men in history, they all made it a priority to donate ten percent of their income, giving to church or charity. In many ways they believed that this was the most important “investment.”

Step 3: Pay Yourself First

Step three is known as “Paying Yourself First.” But I believe that all four steps are equally important. You always invest first, and then you can spend whatever is left.

Whether you are an employee or a business owner, you will need to “Pay Yourself First,” and know how to shelter your after-tax money from further taxes. “After-tax money” is the money you have earned and paid your taxes on—and it likely sits lazy in your checking or savings account.

What the banks don’t want you to know about is what they do with your money while it sits lazy in your account. When you close your eyes at night to sleep, all the money in the mega-banks is “swept” somewhere else—where it earns money for the banks.

These mega-banks and corporations use these “sweepaccounts”—also called “Zero Balance Accounts” (ZBAs)—to put your money hard at work for them rather than you. We will cover in Chapter 12 how to use this “sweep” feature to help you rather than your bank.

Summary

To close out this chapter, let’s summarize:

You need to have some sort of business to reduce taxes when you earn your money.

You will need to learn people skills, sales skills and money skills to have a successful business, and develop good money habits.

Your business can also help reduce taxes when you spend your money.

Everyone, business owner or not, will have after-tax money sitting lazy in checking and savings accounts. Here is whatI have found after 19 years of studying money: It is important to put all your money, including your lazy money, hard at work for you. The right strategies can help you avoid taxes when you save and invest your money.

Lastly, not a topic covered in this chapter, but you also need to eliminate taxes when you die.

As we travel down the curvy and rugged road of wealth-accumulation, one day, with a great amount of persistence, you may join the ranks of “The Wealthy.”

Here is the secret that only the wealthy know: Tax avoidance becomes easier as your wealth increases.

Later in this book we will cover how to use “Other People’s Money” (OPM) to supercharge several wealth accumulation strategies.

The rest of this book will focus on investing and tax avoidance, using the after-tax money from your job or business.