Using stock options to lower income tax?

[jseamore]

Lets say I have a small company and I pay myself a salary of 200k / year. I'm in the 33% tax bracket. I've thought about a strategy to lower my taxes to about 20%, but not sure if it's viable. Would love some input.

The key here is that I don't mind waiting for a few years to get my money.

I've thought about taking the company public (just OTC pink slips, not listed in the NYSE or anything prestigious like that). Then I could pay myself $35,000 / year (15% tax bracket) plus $165,000/ year in stock options. The stock options would be set at a low strike price with say a one month expiration, pretty much guaranteeing I get the stock.

I would keep the stock for one year and then sell it back to the company. Now my compensation would fall under the long term capital gains tax which I believe would come to 15%.

Is there anything wrong or potentially illegal with this strategy? Or any way to improve it? I wouldn't mind writing annual reports and doing some accounting for the OTC statements in order to keep an extra 30k+ year.

[Harold Mansfield]

Lets say I have a small company and I pay myself a salary of 200k / year. I'm in the 33% tax bracket. I've thought about a strategy to lower my taxes to about 20%, but not sure if it's viable. Would love some input.

The key here is that I don't mind waiting for a few years to get my money.

I've thought about taking the company public (just OTC pink slips, not listed in the NYSE or anything prestigious like that). Then I could pay myself $35,000 / year (15% tax bracket) plus $165,000/ year in stock options. The stock options would be set at a low strike price with say a one month expiration, pretty much guaranteeing I get the stock.

I would keep the stock for one year and then sell it back to the company. Now my compensation would fall under the long term capital gains tax which I believe would come to 15%.

Is there anything wrong or potentially illegal with this strategy? Or any way to improve it? I wouldn't mind writing annual reports and doing some accounting for the OTC statements in order to keep an extra 30k+ year.

Talk to a tax attorney. People have been trying to come up with cute ways to pay less taxes for 200 years. More times than not, the ones with absolutely no legal knowledge who think they're going to out smart the IRS all on their own, end up in deeper trouble that costs them much more than just paying their tax rate.

In short, the tax code is too big and too complicated for you to try and devise diabolical tax schemes on your own, or with the advice of strangers on a public forum. Seek the advice of a credible and licensed expert so that you don't end up in jail.

If Mitt Romney can get his tax rate down to 13%, I'm sure there's a way. But you know he didn't just come up with it. You know he has a team of tax lawyers. Follow his lead. Hire professionals.

[Freelancier]

You don't have to go public to use your corporation to lower your tax rate. Dividends are taxed at a lower rate than salary and there's no SS/Medicare tax on it. So... reduce your salary to below $100K per year and take quarterly dividends to make up the difference. Only works if you're the sole shareholder, but it does work... provided the salary you take is a fair salary for your job.

As Harold said: talk with a tax attorney to make sure you comply with the rules.

[turboguy]

Have you seen what kind of financial shape our country is in. They need all the tax money they can collect so we should not come up with schemes to avoid taxes and should all call our representatives and tell them we want out taxes increased. :cool::cool::cool:

Along those lines I think you are thinking too hard. In the first place the Income tax is graduated so even if your income is 200k and you are in the 33 percent tax bracket you are not paying 33 percent of your income in taxes. You are only paying 10% on part of your income 15% on another part, 20 percent on the next stage, 25% on the income in the next bracket range and so on. You are probably more likely to end up paying about 22-24% of your income in taxes.

It takes filing a form 221 to be listed on the pink sheets but only a market maker can do that and that will set you back 100 grand. If the IRS determined your stock transactions were for the intent of avoiding taxes they could probably penalize you, fine you, charge you interest and maybe put you in prison.

If you channel all that creative thinking into your business you can probably increase sales and profits by more than enough to pay any extra taxes. Forget the pink sheet idea.

[Paul]

I agree with all above comments. “Going Public”, even on the pink sheets, is a serious undertaking that requires a good understanding of the legalities involved.

You should go public if it makes business sense for your company, not as a tax strategy. Your “options” future cash out may be theoretically viable, however, if the company has the cash to buy back stock then that would have come from profits that would have been taxed at a corporate rate. If you had just paid yourself in the first place the corporation wouldn’t pay the taxes on that, just you would. Not sure there would be the savings you expect.

Going public can be a great opportunity for some companies. It can sometimes result in a good exit for potential investors and significant liquidity and personal wealth for the founders/insiders. On the other hand it can also be a disaster if not done properly.

I won’t go into tedious detail but there are a few ways to go public.

1) You can file straight up with the SEC and Finra, assuming you have enough shareholders. That’s about $ 60,0000 +. Takes a few months.
2) You can BUY a trading shell that already has the shareholders. Cost varies depending on condition.
3) Now, if you don’t really care about the stock trading initially and just want to be “technically” public you can buy a “gray sheet” shell. That is a public shell that once traded and has shareholders. It’s not a terrible option because you can eventually file to get it trading again. This is the least expensive way. You can get into one of these for less than $ 20,000, sometimes as little as $ 10,000. But then it can cost another $50,000 to get it trading again.

There are other ways, but generally speaking it’s not worth doing if the company doesn’t have the ability to generate shareholder interest and maintain a reasonable share value.

Taking small companies public is what I do if you have any questions.

Paul

[Harold Mansfield]

I have to agree that it seems like a lot of work for someone in the $200k a year bracket. Also, I don't know anyone who is actually paying 33% except for people who make considerably less by paycheck, and don't have tax people...and even then they get a refund check.

If you are paying your full 33%, then you must not be taking ANY deductions, credits, or other deferments or rebates and I just find that hard to believe.

[tallen]

I don't think the OP ever suggested that he is paying 33% of his full income in federal income taxes, just that he is in the 33% bracket. But because he is in that bracket, another way to think about that is that he does have to pay federal income taxes of 33 cents out of each additional dollar he earns. Note that that is not the same thing as saying he has to pay federal income taxes of 33 cents out of every dollar that he earns.

[turboguy]

If he is married and making 200,000 a year his taxes according the the IRS site would be just over 43 grand so his effective rate is more like 21.5% even though any additional income might be taxed at the higher rate. It is just not worth fooling with.

[Brian Altenhofel]

I don't think the OP ever suggested that he is paying 33% of his full income in federal income taxes, just that he is in the 33% bracket. But because he is in that bracket, another way to think about that is that he does have to pay federal income taxes of 33 cents out of each additional dollar he earns. Note that that is not the same thing as saying he has to pay federal income taxes of 33 cents out of every dollar that he earns.

This.

And definitely talk to a tax attorney, especially since in some jurisdictions and in some industries a "reasonable salary" must be paid, and in others you can pay a salary of $1 with the rest in stock options or other alternative compensation or even no alternative compensation at all. The $1 is generally necessary to establish a legal relationship as an employee.