Overview
When a skilled furniture restoration professional earning $160,000 annually came to me, they were operating as a sole proprietor. Through comprehensive tax advisory and strategic restructuring, I identified six powerful tax strategies that delivered more than $27,760 in savings during the first year alone—money that now stays in their pocket year after year.
Client Background
My client is a talented furniture restoration and upholstery expert who has built a successful practice through years of dedication. With a net income of $160,000 and filing as a single taxpayer, he faced a substantial tax burden that he worried was unavoidable.
Their Challenge
Self-employment taxes had become a significant burden.
Operating as a sole proprietorship meant my client was paying both the employer and employee portions of Social Security and Medicare taxes. His total federal and state tax liability reached $77,675.
He lacked a comprehensive approach to retirement planning and wasn’t taking advantage of California-specific tax strategies. His current tax preparer followed a compliance-only model, preparing returns without proactive planning.
My Solution
When I reviewed the business financial statements and tax documents, I quickly determined that my client could benefit from a well-implemented tax plan. Here’s the breakdown of strategies I implemented:
S-Corp Election
Restructuring as an S-Corporation unlocked $12,100 in savings and opened the door to additional strategies.
The Augusta Rule
This little-known provision allows business owners to rent their home to their business for up to 14 days per year without reporting the income, while the business takes a legitimate deduction. This saved $1,165.
Pass-Through Entity Tax (PTET)
California’s PTET allows S-Corps to pay state taxes at the entity level, creating a federal deduction that would otherwise be limited by the $10,000 SALT cap. This generated $1,975 in savings.
Retirement and Healthcare Savings
I set up a strategic combination of accounts:
- Retirement Plan Contributions: $11,140 in tax savings
- HSA Contributions: $1,385 saved
- Backdoor Roth IRA: $7,000 in strategic retirement savings
The Results
I reduced my client’s tax burden from $77,675 to $44,500—that’s more than $27,760 saved in the first year!
These aren’t one-time savings. Most of these strategies will continue to benefit them annually, establishing year-over-year efficiency that compounds over time.
