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Lets say I have a small company and I pay myself a salary of 200k / year. I'm in the 33% tax bracket. I've thought about a strategy to lower my taxes to about 20%, but not sure if it's viable. Would love some input.

I've thought about taking the company public (just OTC pink slips, not listed in the NYSE or anything prestigious like that). Then I could pay myself $35,000 / year (15% tax bracket) plus $165,000/ year in stock options. The stock options would be set at a low strike price with say a one month expiration, pretty much guaranteeing I get the stock.

I would keep the stock for one year and then sell it back to the company. Now my compensation would fall under the long term capital gains tax which I believe would come to 15%.

Is there anything wrong or potentially illegal with this strategy? Or any way to improve it? I wouldn't mind writing annual reports and waiting a year for the long term capital gains tax rate to kick in order to keep an extra 30k+ year.

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You're talking about NQO - non-qualified stock options.

Even assuming the whole scheme is going to work, the way NQO are taxed is that the difference between the fair market value and the strike price is considered income to you and is taxed as salary.

You'll save nothing, and will add a huge headache and additional costs of IPO and SEC regulations.

  • Thanks! You gave me some things to look up and I understand this a lot better now :) Since you seem to know a lot more about about this than I do, I've got a follow up question. If my company granted me Qualified Stock options and set the strike price at 110% of the market value of the shares, then I waited a year to exercise and a year to sell, the scheme would then work, right? My overall taxes on the 200k (provided the stock appreciated by more than 10%) would effectively be 15%. Or am I missing something? – newUserNameHere Mar 27 '15 at 0:17
  • @newUserNameHere Options always have value. If you receive them as compensation you will be taxed. – Matthew Mar 27 '15 at 3:18
  • @newUserNameHere strike price is the money you pay when you exercise the option. So you'll pay your company 110% of what the company pays you - essentially you'll be putting ~10% of the whole compensation back into the company. I don't see what you've achieved here. – littleadv Mar 27 '15 at 4:46
  • The idea is that the company would grow at least 10% a year (otherwise the options would be worthless), and in order to for an owner to pay himself in Quliaified Options, he must set the strike price at 110% of the current market value (per the law). So if the business does grow 10% a year, the money would then transfer to the employee at only 15% taxes. – newUserNameHere Mar 27 '15 at 13:48
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    @newUserNameHere what money? You're describing a wash. Strike price is the price you pay when you exercise the option. – littleadv Mar 27 '15 at 22:09

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