Why should you consider a transactional approach to business and investment planning? What is the best strategy to protect your assets while structuring gains and losses to minimize tax exposure?
Key Takeaways Regarding a Transactional Approach to Business and Investment Planning:
- Most savvy business and investment professionals approach business and investment planning with two primary goals: protect and grow what you’ve built, and minimize tax impact.
- International business and investment opportunities often create highly profitable returns that must be balanced with PFIC exposures, significant differences between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), which are the primary accounting standards used internationally, and the impact these differences make upon the preparation of U.S. tax returns.
- Traditional business, investment, tax and estate planning should be expanded to include the concept of “transactional planning, “an integrative plan that organizes an individual’s tangible or intangible assets into a structure that mitigates risk, while working to manage when (in time), and where (geographically) gains and losses are realized to minimize tax exposure, and maximize portfolio growth and value.”
It’s an International Playing Field
Changes in almost every aspect of technology (including Artificial Intelligence), business, investment opportunities, digital currencies and assets, as well as tax laws and political realities, have expanded the playing field for even the smallest of portfolios over the past several years.
International business and investment opportunities often create highly profitable returns that must be balanced with PFIC exposures, significant differences between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), which are the primary accounting standards used internationally, and the impact these differences make upon required conversions of foreign financial data and reports, as well as the preparation of U.S. tax returns in terms of both time and expense.
How does one leverage the opportunities and complexities of offshore business and investment, while balancing the realities of entity structure(s), accounting, and compliance and reporting obligations of U.S. taxpayers? How might a transactional approach to business and investment planning help to take performance and gains to the next level?
Consider two elements that might be missing from your present strategy: timing and geography.
Let’s consider what may seem to be a simple question:
If Jane Taxpayer’s company wants to pay her a substantial year-end bonus of $50,000, what is the income tax impact to Jane if she receives that payment on December 30, 2025, versus January 2, 2026?
If Jane were paid on 12/30/25, the income would be realized in 2025, and taxes due on those earnings would (in most cases) be due to the IRS and state tax agencies no later than April 15, 2026. However, if the realization of that income could be shifted by only a few days, Jane would not experience the gain until calendar year 2026, and final tax accounting and payment would not be due to tax agencies until April of 2027. Timing.
The income of a smaller business entity in Ireland is presently taxed at 12.5% on active (trading) income and at 25% on passive income (such as royalties, interest, or rents). The present U.S. federal corporate tax rate is 21% for C Corporations. If your C Corporation had $500,000 in active income, would you pay less tax if your company were based in Ireland or the U.S.? The answer can become a bit complex, but the question’s point is about geography. It might be possible to structure the location of an entity or entities to leverage tax advantages and increase retained income.
It is truly an international playing field.
What is Transactional Planning, and Why Should One Consider a Transactional Approach to Business and Investment Planning?
Transactional planning is described by our partner, Janathan Allen, as an “integrative plan that organizes an individual’s tangible or intangible assets into a structure that mitigates risk, while working to manage when (in time), and where (geographically) gains and losses are realized to minimize tax exposure.”
The first step in the transactional planning process is to consider the assets you currently hold, your short- and long-term goals, and the nature of the income they generate. The next step is to consider how those assets are currently held. Are they creating income? Is the income investment income, passive income, or active income, and what are the tax ramifications of that income?
There are different IRS rules for taxing active income versus passive income. In some cases, you want to find a way to defer active income. In other cases, the objective is to offset passive income through an entity or strategy that generates passive losses. Depending on the nature of the assets involved and our clients’ goals, we can structure an entity or group of entities that not only provides additional protections for the asset(s) but also allows for the creation of offsetting losses to reduce overall tax exposure.
The “when and the ”where” of the transaction or entity also come into play. If all of our clients’ assets are in a single state, such as California, we would apply transactional planning in a completely different manner than if they held, for example, multiple pieces of real estate across several other states. The same issues apply to U.S. taxpayers with foreign assets and investments.
Transactional planning may suggest creating an entity with a different tax year-end, enabling the shifting of gains and losses from one tax year to the next. The result: a structure involving an entity or entities that protects everything you’ve worked so hard to build, and processes designed to accelerate or decelerate gains or losses as needed, while leveraging international tax regimes to minimize the impact of taxation and increased retained earnings.
There is a hidden bonus to this strategy: Those with international holdings and investments may be able to eliminate PFIC risks and reduce or eliminate the need to convert financial data and accounting for international assets from IFRS to GAAP to comply with IRS reporting requirements.
We invite you to listen to our recent podcast on transactional planning and learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
