LLC with $100K Profit - How to Reduce Taxable Income via Spending and Investments?

Question

I'm a US citizen with a US-based single-member LLC operating in the internet space that will have $100K of profit / taxable income this year. I'm looking for ways to creatively (and legally) spend/invest all or a portion of the $100K profit in order to reduce taxable income as much as possible.

The way I see it is that if I do nothing, I'm going to owe $40K in taxes this year, leaving me with only $60K cash. Alternatively, if I can find a way to spend/invest the $100K profit in a tax deductible manner, then I'd owe no taxes and have a $100K asset(s). If this line of thinking is flawed, please let me know!

Some things I'm considering:

1. Acquire other internet businesses and structure the transactions to take advantange of large step ups and accelerated depreciation

2. Retirement accounts (solo 401k, SEP IRA, etc.) - I'm leaning away from these as it's possible I'll need the cash over the next few years and would hence be hit with a 10% early withdrawal penalty (not to mention having to pay tax upon withdrawal)

Aside from the 2 things I'm considering above, what else should I consider?

Answer 1

Direct investment in oil and gas production has a lot of avenues for upfront tax deductions and can also produce an income stream over time. One downside, of course, is that you might invest in a venture which produces no oil and no gas, so you'd get some tax deductions but never see any profit or other return on your investment. This is certainly not the only risk, and based on my own experiences, I would say that it's not for the faint of heart, and you really have to do your due diligence (much more so than you would if just buying some stocks or bonds or whatnot) before you commit a single penny.

For reference, this is a good read: https://www.investopedia.com/articles/07/oil-tax-break.asp

Answer 2

This doesn't work.

If your LLC buys an asset for $10,000, writes it off over four years, and then sells it for $10,000 then your LLC got its $10,000 profit right back.

If your LLC buys an asset for $10,000, writes it off over four years, gives you personally the written off asset for $1, and you sell it for $10,000 then you will get into deep trouble for tax evasion, because the LLC sold you an asset worth $10,000 for $1.

(In the UK, you can pay up to £25,000 a year tax free into a director's pension fund. Also, the company pays 20% on the profits, and you pay tax on dividends being paid, but you don't have to pay yourself dividends - you can leave the money in the company until you need it and then pay the dividends).

Answer 3

Perhaps it is better to purchase services from an other LLC which terms and conditions are stipulated in an agreement. Such as you could become a branch or a subsidiary of the service provider and hence gain assets. AFAIK management and license fees are also deductible therefore I would seek something immaterial like consulting, which is difficult to decipher what it in fact comprises.

Answer 4

It doesn't work the way that you think it does. Spending does not necessarily reduce your taxable income. When you earn money and retain something of value, whether money or something else, you owe taxes on it.

Expenses that you can write off are only those things that are truly gone. Gas for you car, internet service, an insurance payment, etc.

If you buy a computer for $5k - technically that is NOT an expense, it's an asset and not immediately deductible.

As your assets lose value over time (depreciate), you are allowed to deduct that as an expense because the value really does disappear. if you bought a laptop for $5k and you expect it to last 5 years and then be worthless, then you can accordingly deduct $1k per year for 5 years. (this is true but more complicated for real state).