My software company has no employees but me, and makes a million dollars a year. I expect it will do so for about 3 more years and then close its doors.
I'm 30 years old. My family lives below our means: we spend $60,000 a year. Ignoring tax, the basic plan would be to save this ~$3 million windfall, and draw $60k/yr in "salary" for a long time.
If I worked for a company making $60k a year, our tax rate would be low. But because all the money comes in at once, I'm facing nearly 50% in federal and state taxes.
How can I avoid this, so we are taxed as if we are making the $60k/yr that we want to receive? Ideas that probably won't work:
- Create a pension fund in the corporation, feed it all profits, and pay out $60k/yr of "pension". I doubt that the corporation could deduct a million a year in pension funding.
- Buy a million dollars in "business equipment" of some sort each year to get a deduction, then sell it over time to fund a $60k/yr salary. I doubt such a vehicle exists.
- Do crazy Section 79 life insurance schemes to tax-defer the income. The law caps this so I can only deduct < $100k of the $1 million annually, and there are other problems with this approach.
- Do some tax avoidance like Facebook does with its Double Irish trick, storing the income in some foreign subsidiary and drawing $60k/yr in salary to be taxed at $60k/yr rates. This is probably cost-prohibitive for a $1MM/yr company.
The situation is actually a little more complicated -- after we make the nest egg, the company may continue to make money, and we'll give 100% to charity. So I'm viewing the potential 50% tax bill as "hundreds of thousands of charity dollars that I have to instead pay to the government." Yuck. Help me find a way around this :)