You’ve likely put in long hours to build a business and grow wealth. You may have also realized that the more you earn, the more challenges you can face. This is especially true for tax exposure. Your business gains, portfolio income, and investment exits can all lead to complex tax bills.
For this reason, you’ll want to work with someone who is familiar with investment strategies for business owners. You’ll want to be aware of the tax exposure which could impact your earnings. There are tools like Private Placement Life Insurance (PPLI), Qualified Small Business Stock (QSBS), and tax-deferred real estate structures which can help you mitigate taxes and build wealth more efficiently.
Private Placement Life Insurance (PPLI)
PPLI is a sophisticated tax-sheltering vehicle that allows you to invest in a custom-built insurance policy. When you put cash into it, your money grows tax-deferred. With the right setup, you could ultimately access your funds tax-free, too.
For PPLI, you contribute after-tax dollars to the policy, but that is not your only option. In some scenarios, you can contribute business interest or private stock in kind and pay taxes on their value now while moving their potential future appreciation into a tax-deferred environment.
Those funds are then invested in a variety of alternative assets which fit with your investment goals. As the value grows inside the policy, it’s not subject to capital gains or income tax. Later, you can borrow against the policy tax-free or pass the death benefit to heirs with no income tax liabilities.
For high-net-worth individuals, PPLI offers the following benefits:
- Tax-deferred growth on alternative investments like hedge funds, private equity, or credit strategies.
- Asset protection and estate planning advantages.
- Access to returns without triggering taxable events.
You’ll need to be an accredited investor and making minimum contributions often starting at $1 million for a PPLI policy.
Qualified Small Business Stock (QSBS)
If you’ve built or invested in an early-stage company structured as a C-corp, QSBS may be an option for you.
Under Section 1202 of the Internal Revenue Code, if you hold QSBS for at least five years, you may be able to exclude up to 100% of the capital gain (up to $10 million or 10x your investment, whichever is greater) when you sell the stock.
To qualify you’ll need to meet the following criteria:
- The stock must be acquired at original issue.
- The company must be a domestic C-corp with less than $50 million in assets at the time of issuance.
- At least 80% of its assets must be used in an active business (not passive investing or professional services).
For make the most of QSBS, you’ll want to plan early. If you’re starting a new venture, you can work with a professional to make sure the structure meets QSBS requirements.
Tax-Deferred Real Estate Structures
If you have appreciated property, you can use tools such as 1031 exchanges, IRC 453 Dealer Managed Installment Sales, and Opportunity Zones to defer or eliminate capital gains. With these strategies, you could sell properties that have appreciated in value and not have immediate tax consequences. You can also reinvest the proceeds into new assets with the potential for further growth. There may also be ways to smooth out your income to avoid high spikes in a single year.
If you’re a business owner who is shifting into real estate or exiting company-owned properties, tax-deferred real estate structures can help you keep more of your gains. It’s important to know your options and see what best fits your situation. You’ll want to work with a tax professional who can give you options so