TAX PLANNING Archives - Centura Wealth Advisory

Advanced Gifting Strategies: Reducing Tax Burdens with Appreciated Assets

Wealth management isn’t just about accumulating assets; it’s also about ensuring they are used effectively to benefit you, your loved ones, and the causes you care about. Advanced gifting strategies, such as donating appreciated assets, offer a powerful way to reduce your tax burden while making a meaningful impact.

By gifting assets like stocks, real estate, or other investments that have grown in value, you can bypass the capital gains taxes you’d owe if you sold them. This strategy also allows you to lower your taxable estate and maximize the value of your wealth transfer. Whether your goal is to support family members, fund a charity, or enhance your estate planning, understanding how to use appreciated assets as part of a gifting strategy can provide significant financial and tax benefits.

Understanding Appreciated Assets

Appreciated assets are investments that have increased in value since their purchase. Instead of selling these assets and incurring capital gains taxes, you can gift them directly to others.

Examples include:

Stocks and Mutual Funds: These are among the most common types of appreciated assets. Transferring ownership can be done quickly and efficiently.
Real Estate: Gifting property that has appreciated over time can significantly reduce your taxable estate.
Collectibles and Art: Items such as antiques, rare coins, or artwork that have increased in value are also viable options for gifting.
Business Interests: For business owners, gifting a portion of business equity can serve as a strategic method for transferring wealth while maintaining operational control.

Who benefits? Both individuals (e.g., family members) and charitable organizations can gain from these gifts.

Tax Advantages for the Giver

The primary benefit of gifting appreciated assets lies in the significant tax advantages for the giver. These include:

Avoiding capital gains tax: By gifting an appreciated asset instead of selling it, you sidestep the capital gains tax that would otherwise be due.
Reducing taxable estate: For high-net-worth individuals, gifting can help reduce the value of your estate, potentially lowering estate tax liabilities.
Maximizing annual gift exclusions: Each year, you can give up to $19,000 (as of 2025) per recipient without triggering gift tax filing requirements. This amount is adjusted periodically for inflation, so it’s essential to check current IRS limits.

Tax Advantages for the Recipient

Recipients of appreciated assets also benefit, but it’s essential to understand the nuances:

Stepped-Up Basis for Inheritances: While gifts do not receive a step-up in basis, inherited assets often do. Understanding the differences between gifting and inheritance is crucial for long-term tax planning.
Lower Capital Gains Tax Rate: If the recipient is in a lower tax bracket, their tax liability when selling the asset may be much less than yours.
Charitable Organizations: Nonprofits are exempt from paying capital gains taxes. This means they can sell gifted assets and use 100% of the proceeds for their mission.

Charitable Giving with Appreciated Assets

For philanthropically inclined individuals, gifting appreciated assets to charitable organizations provides a unique opportunity to maximize your impact while reducing your tax liability.

Benefits for the Donor:

Fair Market Value Deduction: When donating appreciated assets to a qualified nonprofit, you can deduct the fair market value of the asset from your taxable income, subject to IRS limits (typically 30% of your adjusted gross income for appreciated assets).
No Capital Gains Tax: You avoid paying taxes on the appreciation, which increases the overall value of your donation.

Benefits for the Charity:

Full Use of Proceeds: Charities can liquidate the asset without incurring taxes, ensuring they can use the full amount to further their mission.

Best Practices for Gifting Appreciated Assets

To maximize the benefits of gifting appreciated assets:

Consult Financial and Tax Advisors: Ensure your gifting strategy aligns with your overall financial goals and complies with current tax laws.
Select Appropriate Assets: Choose assets that have appreciated significantly and consider the recipient’s tax situation.
Understand IRS Limits: Be aware of annual and lifetime gift tax exclusions to avoid unintended tax consequences.
Maintain Proper Documentation: Keep detailed records of the gifted assets, including their fair market value and date of transfer, to substantiate tax deductions.

Common Pitfalls and How to Avoid Them

Despite its advantages, gifting appreciated assets can come with challenges. Avoid these pitfalls to ensure a smooth process:

Overlooking Recipient Tax Implications: Recipients may be subject to capital gains taxes when they sell the asset. Discuss this aspect beforehand to prevent surprises.
Exceeding Gift Tax Limits: Gifts exceeding the annual exclusion limit may require filing a gift tax return and could reduce your lifetime exemption.
Neglecting to Update Your Estate Plan: Ensure your gifting strategy aligns with your overall estate and wealth management plans.
Failing to Consult Advisors: Without professional guidance, you may inadvertently create tax complications for yourself or the recipient.

Final Notes

Gifting appreciated assets is an advanced strategy that combines financial savvy with generosity. By understanding the tax advantages, planning carefully, and seeking expert advice, you can reduce your tax burden, benefit loved ones or charitable causes, and maximize the impact of your wealth.

Whether you’re looking to support your family or make a meaningful difference in your community, appreciated assets are a powerful tool for reducing taxes while preserving your legacy.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

March 23, 2025

NEWS, PODCASTS, TAX PLANNING

Ep. 105: Are You Leaving Money on the Table? Unlock Wealth You Didn’t Know You Had

If you’re a high-net-worth individual or a business owner, there’s a good chance you might be missing out on significant tax savings. These opportunities, often hidden within the complexities of tax codes and financial strategies, could add up to millions—especially if you own real estate or operate a thriving business.

So, how can you uncover these hidden savings?

This week’s episode of Live Life Liberated dives into the strategies you need to know. Derek Myron, Managing Director at Centura Wealth Advisory, sits down with Eric P. Wallace, a seasoned CPA and tax specialist, to discuss actionable methods that unlock substantial financial opportunities.

Here’s a closer look at the key strategies they explore and how they can help maximize your wealth.

Cost Segregation: Unlocking Immediate Deductions in Real Estate

If you own investment properties or commercial real estate, you’re likely aware of depreciation. However, traditional depreciation schedules often fail to maximize the tax benefits available to you. Cost segregation offers a powerful alternative.

By identifying and reclassifying components of your property—such as lighting, flooring, and HVAC systems—you can accelerate depreciation and unlock significant tax deductions. This strategy allows property owners to realize six- or even seven-figure deductions in the current tax year.

Example: A real estate investor who owns multiple apartment complexes was able to use cost segregation to increase cash flow, reinvest in new properties, and reduce taxable income by millions.

Whether you’re building wealth through real estate or optimizing your current portfolio, cost segregation is a strategy worth exploring.

Tangible Property Regulations (TPRs): Reclaim Missed Deductions

Have you ever wondered if you’re properly accounting for past business expenses? Tangible Property Regulations (TPRs) provide a framework for revisiting and correcting the treatment of expenses that may have been improperly capitalized. By “scrubbing” your depreciation schedule, you can identify and reclaim missed deductions retroactively.

This strategy is particularly effective for business owners who have made significant capital improvements or repairs over the years. By aligning your records with TPR guidelines, you can potentially unlock tens or hundreds of thousands in tax savings.

Why It Matters: The IRS allows you to go back and fix these errors, ensuring you aren’t leaving money on the table.

Change in Accounting Methods & Private Letter Rulings (PLRs)

Another overlooked area of tax strategy involves changes in accounting methods. If your business generates $50 million or more in revenue, these changes can help you achieve substantial tax deferrals.

The IRS provides a formal process for implementing these changes through Private Letter Rulings (PLRs). These rulings allow businesses to make IRS-approved adjustments to their accounting methods, creating opportunities to defer income and minimize taxes.

Real-World Impact: Companies in industries ranging from construction to fast food have successfully leveraged this strategy to defer taxes and improve cash flow.

If your business operates at scale, consulting a tax professional about PLRs could provide a significant financial advantage.

Why Collaboration with CPAs Matters

Many high-net-worth families and business owners already have trusted CPAs who help manage their finances. However, niche tax strategies like cost segregation, TPRs, and PLRs often fall outside the expertise of a generalist CPA. That’s where specialists like Eric P. Wallace come in.

By collaborating with niche professionals, you can complement the work of your existing CPA and uncover opportunities that might otherwise go unnoticed. This collaborative approach ensures that every aspect of your financial plan is optimized.

Tip: When working with specialists, look for professionals who prioritize communication and integration with your existing team to create seamless and effective strategies.

Why It’s Time to Revisit Your Tax Strategy

Tax laws are constantly evolving, and strategies that worked well in the past may no longer be sufficient to maximize your financial outcomes. Whether you’re a business owner, real estate investor, or high-net-worth family, it’s essential to periodically review your tax strategy and explore opportunities to enhance it.

By leveraging advanced strategies like cost segregation, TPRs, and accounting method changes, you can ensure you’re not leaving money on the table. More importantly, these strategies free up resources that can be reinvested into growing your business or portfolio, ensuring long-term financial success.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Connect with our team today to learn how we can help you navigate complex financial decisions and secure your financial future with confidence.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

January 6, 2025

NEWS, PODCASTS, TAX PLANNING

Ep. 104: How to Protect Wealth & Maximize Tax Efficiency for High-Net-Worth Families & Business Owners

In today’s unpredictable financial environment, high-net-worth families and business owners face unique challenges when it comes to protecting their wealth and maximizing tax efficiency. As markets fluctuate and tax laws evolve, finding strategies that both safeguard assets and optimize returns is paramount.

This week on Live Life Liberated, Sean Clark, Partner at Centura Wealth Advisory, and Chris Osmond, Chief Investment Officer, dive into a transformative approach: direct indexing. This personalized investment strategy not only provides flexibility and alignment with your financial goals but also unlocks the potential for significant tax advantages.

In this blog, we’ll explore the key insights from Sean and Chris on how direct indexing can help you navigate today’s markets while maximizing your portfolio’s efficiency.

What Is Direct Indexing?

Direct indexing is an innovative investment approach that allows investors to directly own individual stocks that replicate the performance of a specific market index, such as the S&P 500. Unlike traditional mutual funds or exchange-traded funds (ETFs), direct indexing uses Separately Managed Accounts (SMAs), which provide greater customization, control, and tax advantages.

In a typical mutual fund or ETF, an investor buys shares of a pooled portfolio of stocks. The downside of this approach is the lack of flexibility—it’s difficult to exclude stocks from specific sectors or adjust for personal values. However, with direct indexing, investors hold individual stocks within their portfolios. This offers several key benefits:

Tax Loss Harvesting: Direct indexing allows for efficient tax loss harvesting, which can offset capital gains and reduce taxable income.
Customizations for Values and Financial Goals: Investors can exclude industries or companies they don’t want to invest in (e.g., tobacco or fossil fuels) and tailor sector exposures to match their financial outlook.
Flexibility: Direct indexing allows for greater control over investment decisions, as investors can add or remove individual stocks at their discretion.

Let’s take a closer look at some of the primary benefits of direct indexing.

The Power of Tax Alpha

One of the key reasons that direct indexing stands out as a wealth management tool is its ability to generate tax alpha. Tax alpha refers to the incremental value that is added to an investment portfolio through strategic tax-efficient strategies, such as tax loss harvesting.

Tax loss harvesting is particularly beneficial in volatile markets, where the value of individual stocks can fluctuate dramatically. In these circumstances, investors can sell underperforming stocks at a loss, which can be used to offset other gains or income within their portfolio. This strategy can potentially add 0.5% to 2% to your annual returns.

Here’s a breakdown of how tax loss harvesting works in the context of direct indexing:

Identify Losses: The first step is to sell underperforming stocks to realize a loss. While it’s not ideal to sell stocks at a loss, this can be a beneficial move when it helps to offset taxable gains.
Offset Gains: The loss from the sale can be used to offset capital gains or reduce taxable income, lowering your overall tax liability.
Reinvest Strategically: To maintain exposure to the same sectors or industries, investors can replace the sold positions with similar securities (often referred to as “tax-efficient replacements”). This allows them to preserve their portfolio’s overall strategy without triggering the wash-sale rule, which prevents investors from claiming tax losses on positions they repurchase within 30 days.

For high-net-worth individuals, tax loss harvesting can provide a significant advantage, especially during periods of market turbulence. This proactive strategy helps investors reduce their tax burden and optimize long-term growth.

Personalized Portfolios for Unique Goals

Direct indexing isn’t just about tax optimization—it also offers exceptional customization options, allowing families and business owners to align their investment portfolios with their unique goals, values, and financial objectives.

Align with Your Values: Many investors want to ensure that their portfolios reflect their personal values. With direct indexing, you have the ability to exclude industries or specific companies that don’t align with your ethical or social principles. For example, if you prefer not to invest in tobacco or fossil fuels, direct indexing allows you to tailor your holdings accordingly.
Tailor Exposures to Your Financial Goals: High-net-worth families and business owners often have specific financial objectives—whether that’s prioritizing growth, minimizing risk, or investing in specific sectors. With direct indexing, you can fine-tune your portfolio to emphasize the sectors or companies that align with your investment strategy and outlook for the future.

Direct indexing enables a level of portfolio customization that traditional index funds and ETFs simply cannot match. Whether you’re focused on long-term growth or specific sector exposure, this strategy offers the flexibility to build a portfolio that is perfectly aligned with your financial goals.

Best Use Cases for Direct Indexing

Direct indexing has several key advantages, but it is particularly effective in certain scenarios. Here are the best use cases for this approach:

Maximizing Tax Benefits in Taxable Accounts: For high-net-worth individuals with taxable accounts, direct indexing is a powerful tool for maximizing tax benefits. The ability to conduct tax loss harvesting and strategically offset capital gains can have a significant impact on long-term portfolio growth. This is especially important for families and business owners who may face higher tax liabilities due to significant income or capital gains.
Preparing for Liquidity Events: Business owners who are approaching a sale or other liquidity events, such as an acquisition or IPO, can greatly benefit from direct indexing. The strategy can help optimize the management of newfound wealth after these events by offering greater tax efficiency and diversification. It also provides the flexibility to adjust exposures based on changing financial circumstances and goals.
Managing Concentrated Stock Positions: Many executives and business owners hold significant amounts of stock in their own company. Direct indexing offers a tax-efficient way to diversify these concentrated positions without triggering massive tax bills. By strategically selling portions of the company stock and reinvesting in a diversified portfolio, business owners can reduce risk and maintain tax efficiency.

Why Now?

In today’s volatile markets, wealth preservation and tax efficiency are more critical than ever. Global economic uncertainty, fluctuating interest rates, and ongoing market disruptions demand proactive and flexible wealth management strategies. Direct indexing offers a unique combination of personalization, tax optimization, and customization that traditional investment vehicles simply can’t provide.

For high-net-worth families and business owners, direct indexing is more than just a tool for tax efficiency—it’s an investment strategy that provides control, flexibility, and growth potential. By partnering with wealth management experts who specialize in direct indexing, you can take a hands-on approach to safeguard your wealth, manage risk, and optimize returns.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Connect with our team today to learn how we can help you navigate complex financial decisions and secure your financial future with confidence.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

December 4, 2024

Grantor vs. Non-Grantor Trusts: Tax Strategies for Wealth Preservation in wealth management office

NEWS, PODCASTS, TAX PLANNING

Ep. 103: Grantor vs. Non-Grantor Trusts: Tax Strategies for Wealth Preservation

Trust planning can be overwhelming, especially with tax laws that seem to change constantly. But understanding the ins and outs of grantor and non-grantor trusts is key to making smart decisions about your wealth and legacy.

In this episode of the Live Life Liberated podcast, Kyle Malmstrom from Centura Wealth Advisory and Adam Buchwalter from Wilson Elser break down the differences between grantor and non-grantor trusts, and how they can be used to optimize your income and estate tax strategies.

What Are Grantor and Non-Grantor Trusts?

At the most basic level, trusts fall into two categories when it comes to taxes: grantor trusts and non-grantor trusts. Both types of trusts are designed to move assets out of your taxable estate, but they handle taxes in very different ways.

A grantor trust is treated as if the grantor (the person who creates the trust) still owns the trust’s assets for tax purposes. This means that all the income generated by the trust is reported on the grantor’s personal tax return.

“A grantor trust is, in essence, invisible to the grantor. All income is reported on the grantor’s personal tax return, while the trust grows tax-free.” – Adam Buchwalter, Wilson Elser

While the grantor pays taxes on the income generated by the trust, the trust itself is not taxed on the money it earns. The key benefit here is that the trust can grow without being burdened by taxes, helping assets compound over time.

In contrast, a non-grantor trust is a separate tax entity. It gets its own tax identification number and must file its own tax returns. Non-grantor trusts are taxed at their own rates, which are generally higher than individual rates, and any income the trust generates is taxed within the trust.

The Upside of Grantor Trusts

Grantor trusts can be a great way to accelerate wealth growth, especially for those looking to pass wealth on to future generations without the drag of taxes.

“Because the grantor pays the taxes, the trust can grow faster without the drag of taxes. This payment is not considered an additional gift to the trust.” – Adam Buchwalter

By paying the taxes on the trust’s income, the assets in the trust are free to grow without being diminished. This can be especially helpful when you’re looking to pass down wealth to heirs, as it allows the trust to accumulate more value over time. It’s also a powerful tool in estate and asset protection planning.

That said, there are some things to keep in mind. Legislative proposals, like those in Senator Elizabeth Warren’s bill and President Biden’s Green Book, could change how grantor trusts are taxed. These changes might limit the benefits of grantor trusts, particularly for future contributions.

Why Go With Non-Grantor Trusts?

Non-grantor trusts offer a different set of benefits that can be especially helpful for individuals in high-tax states or those looking to maximize their tax efficiency.

“By domiciling the trust in a state like Nevada, where there’s no state income tax, you can save millions on transactions like the sale of a business or stock.” – Adam Buchwalter

For example, if you live in a high-income tax state like California, a non-grantor trust can help you avoid those state taxes by setting up the trust in a state with no income tax, such as Nevada or Delaware. This can lead to significant savings, particularly when selling assets like a business or stocks.

Non-grantor trusts also tend to be more insulated from changes in tax laws. While grantor trusts are more directly affected by tax law changes, non-grantor trusts are taxed as separate entities, which can provide more stability in the face of potential legislative shifts.

Why the Time to Act Is Now

Given the potential changes in tax regulations, now is the perfect time to consider your trust planning options. With proposals that could impact the tax treatment of grantor trusts, it may be wise to set up or fund your trust before any new legislation is passed.

“This may be your last planning opportunity. Talk to your advisors now to ensure your trust is set up properly and aligns with your goals.” – Kyle Malmstrom, Centura Wealth Advisory

Talking to your financial and legal advisors now can help ensure that your trust is set up in a way that takes full advantage of current tax rules. Whether you’re setting up a new trust or making changes to an existing one, getting proactive now can protect the benefits you currently enjoy.

Trust Strategies Tailored to Your Family

No two families are the same, and your trust planning should reflect your unique financial situation. Whether your focus is on minimizing taxes, preserving your wealth, or supporting charitable causes, it’s important to have the right strategy in place.

A custom trust strategy can help optimize your income tax savings, minimize estate taxes, and support your philanthropic goals. The right advisors will help you navigate the complexities of trust planning and ensure that your strategy fits your family’s needs.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

November 13, 2024

NEWS, PODCASTS, TAX PLANNING

Ep 100: How a Fractional CFO Can Elevate Your Wealth Strategy

Managing a successful business requires more than just revenue growth—it demands strategic financial oversight, tax optimization, and precise estate planning. If you are not fully capitalizing on your business’s financial strategy, you could be missing out on significant opportunities.

That is why Live Life Liberated is celebrating its 100th episode with a value-packed discussion.

In this episode, host Derek Myron interviews Jonny Borok, a highly experienced fractional CFO, about how these financial experts help business owners achieve investment and estate planning goals with greater precision.

Now, let’s explore what a fractional CFO is, why business owners should consider hiring one, and how they play a critical role in wealth management.

What Is a Fractional CFO?

A fractional CFO is a highly skilled financial executive who works with companies on a part-time or contract basis. Unlike a full-time CFO, who is a permanent employee, fractional CFOs provide strategic financial oversight without the cost of a full-time salary.

They help businesses with:

Financial planning and forecasting
Cash flow management
Tax strategy and reporting
Investment and estate planning
Cross-disciplinary collaboration with wealth managers and tax strategists

For businesses with $5 million or more in revenue, a fractional CFO can bring the expertise needed to optimize financial strategy while freeing up leadership to focus on growth.

Why Business Owners Should Consider a Fractional CFO

Many business owners struggle with financial complexity, whether it is managing cash flow, reducing tax burdens, or planning for long-term wealth preservation.

A fractional CFO provides:

Strategic oversight – Aligns business goals with smart financial planning.
Cross-industry expertise – Brings best practices from various industries.
Tax efficiency – Works with tax strategists to minimize liabilities.
Estate planning insights – Ensures business assets transition smoothly to the next generation.

By working alongside wealth managers, accountants, and legal experts, a fractional CFO helps ensure that every aspect of your financial life is coordinated.

How Fractional CFOs Support Investment and Estate Planning

Estate planning and investment strategies go hand in hand. Business owners often accumulate substantial assets, but without proper planning, much of that wealth could be lost to taxes, legal fees, and inefficient structuring.

Here is how a fractional CFO can help:

1. Optimizing Tax Strategies

Identify tax-saving opportunities through entity structuring.
Implement deductions and deferrals to reduce taxable income.
Work with estate planners to minimize estate and gift taxes.

2. Improving Financial Reporting for Smarter Decisions

Establish reliable financial systems to track assets and liabilities.
Provide transparency for investors, partners, and future heirs.
Ensure accurate reporting for tax compliance and wealth preservation.

3. Enhancing Liquidity and Cash Flow Management

Find ways to unlock capital without disrupting operations.
Manage debt and financing strategies for long-term sustainability.
Ensure cash reserves align with business growth and personal wealth goals.

4. Coordinating with Wealth Managers and Legal Teams

Align investment decisions with estate planning goals.
Structure business ownership for smooth succession planning.
Protect business and personal assets from legal risks.

Who Benefits Most from a Fractional CFO?

This strategy is ideal for:

Business owners who need financial leadership but do not want to hire a full-time CFO.
Entrepreneurs with complex tax and estate planning needs.
Companies preparing for a sale, merger, or transition.
Families looking to structure multi-generational wealth.

Whether you are looking to scale your business, optimize taxes, or safeguard your legacy, a fractional CFO can provide the expertise to make smarter financial decisions.

Final Thoughts: The Power of a Unified Financial Strategy

A fractional CFO is more than just a financial consultant—they are a key partner in your overall wealth strategy. By collaborating with wealth managers, tax strategists, and estate planners, they ensure that every financial decision aligns with your long-term goals.

To explore how a fractional CFO could help elevate your business strategy, tune in to the latest episode of Live Life Liberated.Listen now: Elevate Your Business Strategy: The Strategic Value of a Fractional CFO (Ep. 100)

September 24, 2024

NEWS, PODCASTS, TAX PLANNING

Ep 99: Is Your Business Missing Out on Thousands in Tax Savings?

Many small business owners miss out on significant tax savings each year simply because they’re unaware of certain deductions. One of the most overlooked opportunities is the Qualified Business Income (QBI) deduction. This powerful tax break, introduced in the 2017 Tax Cuts and Jobs Act, allows eligible business owners to deduct up to 20% of their qualified business income—but many fail to claim it due to poor planning or lack of proper advisory support.

In a recent episode of Live Life Liberated, hosts Greg Klipstein and Samantha Lawrence break down the QBI deduction, explain why it’s often missed, and discuss how business owners can maximize their tax savings.

Read on to learn more.

What Is the QBI Deduction?

The QBI deduction was created as a response to corporate tax cuts that primarily benefited large businesses. The goal was to ensure small business owners—who employ over 75% of the U.S. workforce—could also receive tax relief.

Eligible business owners can deduct up to 20% of their qualified business income, significantly lowering their taxable income. However, not all businesses qualify, and certain income limitations and restrictions apply.

Who Qualifies?

Sole proprietorships
Partnerships
S corporations
Some real estate investors

Who Doesn’t Qualify?

C corporations
High-income earners in specified service trades (lawyers, doctors, consultants) above income thresholds

Despite its potential, many businesses fail to claim this deduction. Why? Let’s explore the most common reasons.

Why Do Business Owners Miss the QBI Deduction?

Many small business owners either don’t know about the deduction or assume it doesn’t apply to them. Here are the biggest reasons why it’s often overlooked:

1. Incorrect Business Structure

One of the main reasons businesses miss out on the QBI deduction is because their entity type doesn’t qualify. C corporations, for example, are not eligible. Some S corporations may also miss out if they don’t allocate income correctly between salaries and distributions.

2. Poor Tax Planning

Many business owners focus only on year-end tax preparation rather than proactive tax planning throughout the year. Without a strategy, they may exceed income limits that phase out the deduction.

3. Lack of Proper Advisory Support

If your accountant or tax advisor isn’t actively looking for ways to minimize your tax burden, you could be losing money. Some advisory teams don’t fully understand how to structure businesses to maximize deductions like QBI.

4. Failure to Amend Past Tax Returns

Did you miss the deduction in prior years? You may still have time to correct it. Businesses can amend previous tax returns and claim unclaimed deductions, putting real money back in their pockets.

How to Ensure You Maximize Your QBI Deduction

To take full advantage of the QBI deduction, business owners need a proactive approach. Here’s how you can ensure you’re getting the most out of this tax break:

1. Work with a Knowledgeable Tax Advisor

A tax professional who specializes in small business taxation can help identify whether you qualify and how to structure your income to maximize the deduction.

2. Review Your Business Structure

If your current structure isn’t allowing you to claim the deduction, it may be time to restructure your business entity. Switching from a C corporation to an S corporation or partnership might make sense.

3. Monitor Income Levels

Since the QBI deduction phases out at higher income levels, keeping taxable income below the threshold is key. Tax-efficient strategies, such as retirement contributions or reinvesting in the business, can help manage taxable income.

4. Correct Missed Deductions

If you didn’t claim the QBI deduction in previous years, it may not be too late. Talk to your tax professional about amending past returns to recover lost savings.

5. Consider the Bigger Picture

Missing the QBI deduction could be a sign that you’re also missing other tax-saving opportunities, such as retirement plan contributions, business expense deductions, and depreciation benefits. A holistic tax strategy is essential.

Should You Reevaluate Your Advisory Team?

If your current CPA or financial advisor hasn’t discussed the QBI deduction with you, it might be time to find a better advisory team. Many business owners don’t realize they’re overpaying in taxes simply because their advisory team isn’t proactive enough.

A strong tax and financial team should:

Regularly review tax-saving opportunities with you
Help you structure your business for maximum deductions
Advise you on income thresholds and tax-efficient strategies
Ensure you don’t leave money on the table

Take Action Today

The complexity of tax laws often leads to missed opportunities, but the QBI deduction is too valuable to ignore. Don’t let poor planning or lack of advisory support cost you thousands in unnecessary taxes.

To learn more about optimizing your tax strategy, tune in to Live Life Liberated with Centura Wealth Advisory. Listen to the full episode here.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Connect with our team today to learn how we can help you navigate complex financial decisions and secure your financial future with confidence.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

September 5, 2024

Insurance agent lawyer financial advisor broker discussing consulting mature middle-aged couple signing contract documents, buying property, investments at home

CHARITABLE GIVING, INVESTING, NEWS, TAX PLANNING

2023 Updates to Gift Tax and Other Estate Limitations

Our tax system has two critical components that impact the transfer of wealth from one generation to the next: gift tax and estate tax.

The gift tax applies to the transfer of property from one individual to another during their lifetime, while the estate tax is levied on the transfer of property at death.

The IRS adjusts the federal estate and gift tax exemption amounts for inflation each year and has announced the exemption amounts for 2023. Let’s take a closer look.

What Are Gift and Estate Tax Exemptions and Why Are They Important?

Gift and estate tax exemptions are the amounts that individuals can give away during their lifetime or pass on to their heirs at death without incurring any federal taxes. The federal government imposes these taxes on the transfer of property or money.

Understanding these exemptions is crucial for tax planning and managing one’s assets to minimize tax liabilities. Knowing the exemption amounts and how they work can help individuals make informed decisions about their wealth transfer strategies.

The Federal Gift and Estate Tax Exemption

The federal gift and estate tax exemption has increased from $12,060,000 to $12,920,000. This means that married couples can gift up to more than $25 million in assets without incurring federal estate and gift taxes. However, this exemption is set to expire in 2026 and will revert back to the prior exemption amount of $5 million.

For surviving spouses, the unlimited marital deduction for gift and estate taxes remains, except for those who are not U.S. citizens. Non-citizen spouses have a marital deduction of $175,000 for 2023.

Annual Exemption

The annual gift tax exemption, in addition to the lifetime exemption, will increase from $16,000 to $17,000 in 2023 for each person you gift to in 2023.

If you have not yet utilized your 2022 annual or lifetime exemption, now is a good opportunity to do so. Many investment assets have experienced a decline in value of 25%-35% since the beginning of the year, but are expected to recover in the medium to long term. Gifting investments now to your beneficiaries will allow you to do so at a discounted rate.

When the exemption reverts in 2026, it will be crucial to understand how it will be applied. If you gift an amount less than the current exemption amount of $12,920,000 by 2025, you will be limited to the lower exemption amount, which is currently set at $7 million for gifts made after 2025.

Planning Opportunities

Clients can make lifetime gifts outright to an individual or in a trust to take advantage of the increased exemption amounts. It is crucial to consider making gifts to reduce estate tax before the exemptions decrease at the end of 2025. For those who have already used their gift and estate tax exemption in prior years, the increase from 2022 to 2023 provides an opportunity to avoid or reduce estate tax by making additional lifetime gifts.

Americans increasingly favor a wealth tax on the ultra-wealthy, but despite an uptick in proposals, these policies have struggled to gain traction.

You never know what may happen in the future, so it’s important to consider taking advantage of the current higher exemption amounts while they are still available. There are various planning strategies that can be implemented to make the most of these higher exemption amounts before they potentially revert to lower amounts in the future.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

May 4, 2023

Telling about project. Curly stylish young assistant of interior designer telling him about the project

NEWS, TAX PLANNING

Cut Your Tax Bill: How to Navigate the Cap on SALT Deductions

The Tax Cuts and Jobs Act of 2017 brought significant changes to the US tax code, including a cap on state and local tax (SALT) deductions. This cap, also known as the SALT deduction limitation, has left many taxpayers looking for ways to reduce their tax bills.

So, how can SALT reduce your tax bill this year?

What is the SALT Deduction Cap?

The SALT deduction cap refers to the limitation on the amount of state and local taxes that can be deducted from federal income tax. Prior to the 2017 Tax Cuts and Jobs Act, taxpayers could deduct the full amount of their state and local income, sales, and property taxes from their federal tax bill. However, the new law introduced a $10,000 cap on these deductions, a significant impact for taxpayers in states with high taxes.

Taxpayers are now paying more in federal income tax than they ever did before. Understanding the SALT deduction cap and how it works can help taxpayers navigate their tax bills more effectively.

Talk To An Expert

Strategies for Navigating the SALT Deduction Cap:

Navigating the cap on SALT deductions requires careful planning and consideration of your financial situation. Here are five strategies to help you cut your tax bill:

Bundling Deductions:

Increase your itemized deductions by bundling expenses together. This means you can make multiple years worth of charitable donations in a single year, prepay your property taxes for the upcoming year, or bundle other deductible expenses in the same tax year. This can help you exceed the SALT deduction cap and maximize your tax savings.

Utilizing Charitable Donations:

Charitable donations reduce your tax liability while supporting a good cause. Consider donating appreciated assets such as stocks, mutual funds, or real estate. This avoids capital gains taxes and increases your itemized deductions.

To learn more about charitable gifting strategies, check out our blog, here.

Paying State and Local Taxes Early:

If you owe state or local taxes in the upcoming year, consider paying them early. By prepaying, you can increase your SALT deduction for the current tax year.

Contributing to Retirement Accounts:

Lower your tax bill by contributing to a retirement account such as a 401(k) or IRA. These contributions are tax-deductible and can help reduce your taxable income.

Taking Advantage of Business Deductions:

For business owners, there are several deductions that can reduce tax liability. Some examples include deducting expenses related to your home office, business travel, or equipment purchases.

There are also more specific deductions available to business owners:

Section 199A Deduction

Business owners can deduct up to 20% of their qualified business income, which can result in savings of tens or even hundreds of thousands of dollars. Working with a firm that specializes in tax planning ensures that business owners are aware of all available tax planning opportunities. Tax planning firms also provide project management services to help keep track of necessary tasks and deadlines.

Qualified Business Income (QBI) Deduction

A Qualified Business Income (QBI) deduction allows partners of certain types of businesses, including partnerships, S corporations, and sole proprietorships, to deduct up to 20% of their qualified business income on their personal tax returns.

For instance, if the business generates $4 million in profit and an individual holds a 25% ownership stake, they may have a qualified net income of $1 million.

It is important to note that the mandatory tax rate subscribed to by the business entity is 9.3%, and the business entity is responsible for paying taxes on behalf of the partners, who must individually opt-in to accept this treatment.

The entity also has to pay a tax of $93,000 for one partner, which is deductible at the entity level. The the partner can use this tax to reduce their total income. If an individual is in a 37% bracket, they could potentially save close to $34,000 through this method.

The QBI deduction is subject to income limits. Married couples with joint income above $329,800 or individuals making above $164,900.. Additionally, the deduction may be limited or reduced based on the type of business, the amount of W-2 wages paid by the business, and the value of the business’s assets.

AB 150 Small Business Relief Act

The AB 150 Small Business Relief Act in California is another strategy that businesses can use to navigate the SALT deduction cap. By making a voluntary tax payment at the entity level, businesses can receive a credit on their personal tax returns.. This strategy is particularly beneficial for partnerships, S corps, and LLCs that generate significant profits.

However, there are strict timelines and requirements for participation in the program, including making an irrevocable election by June 15th of the tax year and a minimum payment of $1,000 or 50% of last year’s tax liability (whichever is greater).

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

April 3, 2023

Group of people having meeting and disscusing at the office

NEWS, TAX PLANNING

2023 Tax Updates and Deadlines You Need to Know

Tracking tax deadlines is essential to healthy financial management. A missed deadline can result in penalties, interest charges, or even legal action. To avoid these consequences, you need to be aware of the deadlines for the upcoming tax year.

Let’s take a look at every deadline you need to know in 2023, including due dates for filing returns, making payments, and requesting extensions. By staying informed and organized, you will stay ahead of the curve and ensure a stress-free tax season.

Key Takeaways

Individual income tax returns and extensions are due April 18th, 2023. Some people affected by natural disasters including those in California, Georgia, and Alabama have been given an extension to October 16, 2023 for filing both Federal and State tax returns as well as estimated tax
Independent contractors, gig workers, and self-employed people usually have to make quarterly estimated tax payments at pre-set dates throughout the year.
Partnerships (including multi-member LLCs) and S-Corps filing deadlines are typically either March 15 unless they operate on a fiscal year. A six-month extension to September 15 (or five months after the original deadline) can be requested.

When Are 2022 Taxes Due?

For most individuals who are calendar year filers, tax returns and extensions, will be due on April 18th instead of April 15. This is due to April 15th falling on a weekend and a Washington D.C. holiday (Emancipation Day) which will be observed on April 17th.

Important Updates for Taxpayers in California

California has extended the tax filing and payment deadlines to October 16, 2023 for residents affected by the winter storms in December and January. This move, which is in line with the Biden Administration’s decision to extend various due dates until the same date, comes in addition to the tax relief measures announced by Governor Gavin Newsom in January.

“As communities across the state continue recovering from the damage caused by the winter storms, California is working swiftly to help recovering Californians get back on their feet,” said Governor Newsom. “The state is aligning with the Biden Administration and extending the tax filing deadline in addition to the tax relief announced earlier this year.”

The following counties are eligible for this extended tax relief, per the IRS announcements here and here:

Residents and businesses in Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Inyo, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Nevada, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Ventura, Yolo, and Yuba counties who have been affected by severe winter storms, flooding, landslides, and mudslides are eligible for tax relief.

Important Tax Deadlines and Dates

Individual Filers

For individual filers, such as employees, retirees, self-employed individuals, independent contractors, and gig workers, it’s crucial to keep track of important tax deadlines and dates. Failing to meet these deadlines could result in penalties and interest charges, so it’s essential to stay informed and stay on top of your tax obligations.

January 16, 2023 – Final quarter 2022 estimated tax payment due for self-employed individuals or those without tax withholding.

January 23, 2023 – IRS begins accepting and processing 2022 federal tax returns.

January 31, 2023 – Deadline for employers to send W-2 forms. The IRS requires employers to send these forms no later than January 31 following the end of the tax year to ensure timely completion of tax returns.

January 31, 2023 – Deadline for sending certain 1099 forms, including 1099-NEC, 1099-MISC, and 1099-K, used to report non-employee income sources such as interest, dividends, or payments for independent contracting.

February 15, 2023 – Re-file Form W-4 by this date if you claimed exemption from employer tax withholding in the previous year and anticipate having no tax liability in the current year.

April 3, 2023 – Deadline for taking 2022 required minimum distribution (RMD) from retirement account if you turned 72 in 2022.

April 18, 2023 – Tax day . Deadline for filing individual income tax returns and filing extensions (Form 4868). Any taxes owed must still be paid by April 18, 2023.

April 18, 2023 – Last day to make IRA and HSA contributions for 2022 tax year.

April 18, 2023 – First quarter 2023 estimated tax payment due. Use IRS Form 1040-ES to calculate estimated tax liability and IRS Publication 505 for detailed rules and information.

June 15, 2023 – Second quarter 2023 estimated tax payment due.

September 15, 2023 – Third quarter 2023 estimated tax payment due.

October 16, 2023 – Deadline for filing individual extended 2022 tax returns.

December 31, 2023 – Deadline for taking 2023 RMD for individuals age 73 or older, after taking the first RMD by April 1, 2023 if you turned 72 in 2022.

January 15, 2024 – Final quarter 2023 estimated tax payment due. Option to pay 100% of previous year’s tax or 90% of current year’s estimated tax liability.

Businesses

If you own a business, there are important tax deadlines and dates you should be aware of to avoid penalties and interest charges. This includes partnerships (including LLCs), C Corporations (Form 1120), and S Corporations (Form 1120S).

January 16, 2023 – 4th Quarter 2022 estimated tax payment due

January 23, 2023 – 2022 Tax season begins

January 31, 2023 – Employers send W-2s forms to employees

January 31, 2023 – Send certain 1099 forms

March 15, 2023 – Taxes are due for some business types (partnerships, multi-member LLCs, and S-Corporations). Businesses organized as partnerships, including multi-member LLCs, and S-Corporations need to file Form 1065, or 1120S by March 15, 2023, if they are a calendar year business. If your business uses a fiscal year, you need to file your tax return by the 15th day of the third month following the close of your tax year. For example, if your business uses an April 1 – March 31 tax year, your business tax return would be due June 15 instead of March 15.

April 18, 2023 – Taxes for C-Corporations are due. Businesses organized as C-Corporations need to file form 1120 by April 18, 2023, if they are a calendar year business. If your business uses a fiscal year, you need to file your tax return by the 15th day of the third month following the close of your tax year. For example, if your business uses an April 1 – March 31 tax year, your business tax return would be due June 15 instead of in April.

September 15, 2023 – Deadline for extended partnership and S-corporation returns

October 16, 2023 – Deadline for extended C-corporation returns

January 15, 2024 – Fourth quarter 2023 estimated tax payment due

The above doesn’t cover every tax deadline, merely the most important ones broadly relevant to these groups of taxpayers. For a comprehensive view of all the important tax deadlines applicable to each taxpayer, please visit IRS Publication 509.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

March 31, 2023

Thoughtful Black Businessman in a Tailored Suit Using Laptop while Standing in Office Near Window on Big City. Successful Corporate Top Manager Doing Data Analysis for e-Commerce Startup

NEWS, TAX PLANNING

Section 1202: How Business Owners Can Save Millions of Dollars in Taxes

Section 1202 of the IRS code can potentially save eligible business owners millions of dollars in taxes. However, it is an underutilized section as few business owners know how to successfully implement this strategy.

Section 1202 of the Internal Revenue Code provides an opportunity for business owners to save millions of dollars in taxes by allowing them to exclude a portion of the gain from the sale of qualified small business stock (QSBS).

In this article, we will explore the requirements and benefits of this tax provision, as well as strategies for maximizing the tax savings available under Section 1202. Whether you are a small business owner looking to sell your company or an investor considering buying stock in a small business, understanding the potential tax benefits of Section 1202 can be critical to your financial success.

What is the Section 1202 Exclusion?

The Section 1202 exclusion, also known as the Qualified Small Business Stock (QSBS) tax exemption, is a powerful tool for business owners, investors, employees and others who receive stock in a qualifying company.

This provision in the Internal Revenue Code (IRS) allows individuals to exclude 100% of capital gains from the sale of qualifying stock, up to a maximum of $10 million or 10 times the initial investment, whichever is greater. This can translate to significant tax savings, potentially reaching millions of dollars. For those who qualify, QSBS can be a valuable asset in maximizing financial success.

How Much Can Taxpayers Save with the 1202 Exclusion?

The Section 1202 exclusion, also known as the Qualified Small Business Stock (QSBS) tax exemption, offers a significant opportunity for tax savings on capital gains. By excluding up to $10 million in capital gains, or sometimes more, from taxable income, individuals can potentially save millions of dollars in taxes. For example, at an estimated tax rate of 37%, a $10 million exclusion would result in a savings of $3.7 million. Even if the gains exceed the exclusion threshold, the qualifying amount can still offer significant tax savings.

Who Qualifies for Section 1202 Savings?

To qualify for QSBS treatment, shares must be received directly from a “qualified small business” in exchange for cash or services provided. This applies to both stock sold to early investors and stock given to early employees in exchange for services. A “qualified small business” is defined as a C-corporation engaged in an active trade or business with less than $50 million in gross assets at the time of the shares’ issuance.

Understanding the Qualifications of Section 1202

It is important to note that with such significant tax savings come specific qualifications to receive the benefit. Let’s discuss some of these qualifications.

Stock must be acquired directly from a domestic (US) C corporation.

Stock can only be considered Qualified Small Business Stock (QSBS) if it is acquired from a C corporation and sold while the issuer is also a C corporation. Additionally, the corporation must maintain its C corporation status from the date of issuance to the date of sale.

Section 1202’s gain exclusion cannot be claimed by a corporate stockholder.

Stockholders other than C corporations can qualify for the gain exclusion under Section 1202 of the tax code, but foreign stockholders and tax-exempt stockholders may not be eligible.

QSBS must be acquired directly from the corporation for cash, property or services.

Cash consideration for Qualified Small Business Stock (QSBS) can include $0.001 per share of founder stock or $1,000 per share of convertible preferred stock. “Property” such as intellectual property contributed by founders can also be exchanged for QSBS. Stock issued as a grant to an employee or director can qualify as QSBS as long as it is vested or the recipient makes a timely Section 83(b) election. QSBS can also be transferred upon the death of the stockholder or as a gift and retain its status in the hands of the recipient. Tax partnerships can also distribute QSBS to its partners. It is important to keep full documentation of the consideration paid for QSBS.

QSBS must be “stock” for federal income tax purposes.

QSBS can be voting or non-voting common or preferred stock. Non-vested stock can be treated as “stock” if the recipient makes a timely Section 83(b) election. Stock options and warrants are not considered “stock” for federal income tax purposes. SAFE instruments may be considered “stock” but may be challenged by the IRS.

QSBS must be held for more than five years.

It is possible to reinvest the proceeds from the sale of QSBS in replacement of QSBS if sold before a five-year holding period under Section 1045. QSBS can also be exchanged for other QSBS or non-QSBS in a Section 351 nonrecognition exchange or in a Section 368 tax-free reorganization. The holding period for QSBS typically starts on the date of issuance. If stock is unvested under Section 83, the holding period starts when the stock vests or upon issuance if a Section 83(b) election is made.

The IRS does not make the qualification process easy, which is to be expected when significant tax savings are at stake.

Evaluating the Risks

One common mistake made by entrepreneurs is not considering the QSBS exemption until the time of sale, which can result in missing out on potential tax savings. To avoid this, it is important to plan ahead. Another potential issue is that many startups prioritize stimulating initial growth over tax optimization in the long term.

As more companies and business owners understand the potential impact of Section 1202 on a future liquidity event, we may see more pre-liquidity planning and companies organizing and capitalizing with a long-term mindset.

To Learn More, Tune into Our Podcast

In this episode, Roby Kotcamp and Kyle Malmstrom explain what Section 1202 entails, the primary eligibility criteria for QSBS (qualified small business stock) transactions, and the major tax benefits involved in the process.

Roby and Kyle discuss:

Three types of business owners that can benefit most from QSBS transactions
Important dates that affect the extent of your tax exemption
How to minimize your federal and state income tax as well as your estate tax
Why you should plan at least a year in advance for QSBS transactions
And more

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

March 16, 2023