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Bursts of Color - Tax Planning for Founders

Bursts of Color - Tax Planning for Founders
By Geoff Donaker • Issue #61 • View online
Most start-up leaders I’ve known are focused on their company’s mission much more than on their personal wealth. That said, most also hope that if things work out well for the company, their personal stake might be worth a lot too.
I believe that all successful Americans should pay their share of taxes to support our system and society. However, our wacky tax system means that some wealthy folks pay much lower tax rates than others… all by using a few perfectly legal techniques. You may have seen this informative-but-whiny piece from ProPublica, or Congress’s proposed new tax plan as described by The NYT:
The House Ways and Means Committee’s proposal to pay for trillions in social spending leaves wealth gains and inheritances largely alone. It focuses instead on a more traditional target: income.

from the ProPublica article
from the ProPublica article
Find A Tax Advisor
So if you’re a start-up leader, I encourage you to get input from an experienced tax advisor as early in your journey as possible to improve your wealth-to-taxable-income ratio. Ask around for someone who has advised lots of other startup folks, as this is a different world from what H&R Block may be used to. And then check in annually, or as things change, to refresh your approach.
A Few Popular Techniques
Here are some common approaches that are relevant for different times and situations:
  • Self-Directed IRA (or Roth IRA). As ProPublica vividly illustrates, equity held by a Roth IRA may be sold, traded and borrowed against, tax-free, for decades or longer.
  • Low-Tax States. I believe there are still 7 US states with no state income tax. If you (or at least your equity) are domiciled there at the time of liquidity… well, zero is less than 13%.
  • Irrevocable Trusts. You may be able to give some or all of your equity to a trust that supports you and your family without ever triggering gift tax. Oh, and if this trust happens to be managed in a no-tax state… see the point above.
  • QSBS (Qualified Small Business Stock). If you hold early stock for at least five years and keep good records, some of those gains may qualify for a 0% federal tax rate.
  • Early Exercising. If you have any ISO stock options, you may wish to exercise them all as early as possible to ensure that the share price is low, and any cap gains are long-term.
  • Donor Advise Funds. If you plan to donate to charities and have some appreciated stock, creating a DAF may allow you to recognize a large deduction in a single year.
  • Exchange Funds. There are some exchange funds out there for tech folks that may enable you to diversify tax-free, by trading a single appreciated stock for a basket of other stocks.
Two Big Caveats
  1. I am not a tax pro, lawyer or accountant. I am not advising any specific approach here, other than to go do your own homework and get some expert advice.
  2. Most of these techniques will involve some level of effort and expense. Thus, many of them will have the effect of “doubling down” – if your equity becomes valuable, you’ll be happy to have made the investment. Otherwise, not so much.
Did you enjoy this issue?
Geoff Donaker

Bursts of Color is a newsletter for start-up leaders who work with Burst Capital. It's meant to include products, people and ideas that I think are interesting and maybe relevant for you.

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