From Real Estate to Startups: 5 Tax Strategies Your Business Needs to Know

Building on the foundational strategies from part one of our tax planning strategies series, let’s explore five additional tax planning strategies that can impact your bottom line. These strategies encompass a range of approaches, from real estate optimization to startup incentives and entity selection.

Cost Segregation Study: Accelerating Real Estate Deductions

If you own commercial real estate, a cost segregation study could unlock significant tax savings. Standard depreciation on commercial buildings spans 39 years, but as CJG partner Hank Boone illustrates with an example: “If you buy a building for $390,000, that’s $10,000 of depreciation every year for 39 years. That’s not a very big deduction.”

However, engineering firms can identify building components related to your business operations that qualify for accelerated depreciation. “Instead of 39 years, now that property is a five or seven-year property, maybe a 15-year property,” Hank explains. This acceleration also opens opportunities for bonus depreciation and Section 179 deductions.

CJG Partner Ken Orth emphasizes the cash flow benefit: “You’re not really going to end up with extra deductions from it, but you get to hang on to your cash longer.” As Hank puts it, “It’s a faster return on your investment.”

Depreciation Beyond Real Estate

Depreciation strategies aren’t limited to buildings. Depreciation applies to equipment, trucks, or any asset that’s used in a trade or business. Whether you’re purchasing manufacturing equipment, company vehicles, or technology infrastructure, proper depreciation planning can significantly impact your cash flow.

Key depreciation methods include bonus depreciation, Section 179, and MACRS (the default depreciation methodology). These strategies change the cash situation by allowing you to accelerate deductions rather than spreading them over many years.

Nexus Study: Multi-State Tax Optimization

For businesses operating across state lines, a nexus study can identify opportunities to reduce state tax obligations. Hank explains, “If you’re selling goods or services in multiple states, you have the opportunity to get sales out of a state that taxes them and into a state that doesn’t tax.”

This also applies to service-based businesses. Ken shares an example: “We have a client who does interview practice and interrogation techniques. They travel to other states and teach those techniques to others. So when they go to that state, it usually opens them up to nexus in that state.”

Beyond tax savings, nexus studies ensure compliance with state laws and help you understand where filing obligations exist, protecting you from future compliance issues.

IRS Code Section 1202: The Startup Advantage

Section 1202, known as the “Partial Exclusion for Gain from Certain Small Business Stock,” offers significant benefits for qualifying startups. The gain exclusion applies to the greater of $15 million or 10 times the aggregate adjusted basis of the stock at the time of the issuance.

The requirements include holding the stock for over three years and being an original shareholder of the company. The entity must be a C corporation, use at least 80% of its assets in the active conduct of a qualified trade or business, and maintain less than $75 million in gross assets at all times between the date of business formation and immediately after the stock issuance. The intention is to attract investors to a startup by eliminating potential capital gains taxes on successful exits.

This strategy requires careful planning from the outset, as the benefits only apply to qualified small business stock acquired during the company’s early stages of operation.

Choosing the Right Entity: Foundation for Tax Success

The most fundamental decision affecting your tax burden is the selection of an entity. Selecting the correct entity for your business can lead to substantial tax savings.

Different business types favor different structures. Ken explains, “Service-based industries tend to be LLCs, and real estate tends to be LLCs. But S-Corp also can be a good option because you get to control your employer taxes or self-employment taxes versus an LLC.”

The choice between LLC, S-Corp, C-Corp, or other structures affects everything from self-employment taxes to retirement plan options to exit strategies. It’s highly recommended that you consult with a tax professional and an attorney to determine what entity is right for you.

These strategies illustrate how proactive tax planning can save thousands of dollars annually. However, each business situation is unique, and timing matters significantly. The key is working with qualified professionals who can evaluate your specific circumstances and implement the strategies that offer the greatest benefit. 

CJG is here to help. Reach out to us today to talk about the best tax strategies for your business.

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