7 impactful tax strategies for HNW business clients

September 3, 2024 9:00 AM

As tax professionals, we need to see our role extending well beyond tax preparation. And for our high-net-worth clients, especially business owners, advanced tax strategies are crucial in managing wealth, reducing tax liabilities, and ensuring long-term financial stability.

The issue is that many tax advisors find it challenging to implement these kinds of strategies due to perceived complexity or general lack of familiarity. Below are seven high-impact tax strategies that are designed to save your clients money in taxes and better position you as a valued tax advisor.

By offering these advanced tax strategies, and using the ROI method of value pricing, tax professionals can significantly enhance their advisory services for HNW clients. Whether it's through wealth preservation, incentivizing innovation, maximizing charitable giving, or investing in renewable energy, these strategies offer substantial benefits that go beyond traditional tax planning. Implementing these approaches not only helps clients achieve their financial goals but also positions your firm as a leader in sophisticated tax advisory services.

1. FLPs for wealth preservation

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Family limited partnerships are a powerful structure for managing and transferring family wealth across generations. By consolidating assets into an FLP, clients can take advantage of valuation discounts for lack of marketability and minority interests, significantly reducing estate and gift tax liabilities.

FLPs also offer robust asset protection, as creditors find it difficult to access assets held by limited partners. However, setting up an FLP requires careful planning, including selecting a favorable jurisdiction, drafting a comprehensive partnership agreement, and navigating family dynamics to ensure the partnership operates smoothly.

Key benefits:

Estate and gift tax savings through valuation discounts;
Protection of family assets from creditors; and,
Control over the management of family wealth and seamless succession planning.

2. R&D credits for incentivizing innovation

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Research and development tax credits provide substantial tax relief for businesses investing in innovation. These credits are designed to offset the costs of developing new products, processes or services, making them particularly attractive to HNW business owners in sectors where innovation is key.

Your clients need to be aware of recent changes to R&D tax credits, effective from April 2024 that include the merging of R&D Expenditure Credit and SME R&D schemes into a unified system. The credit rate is set at 20%, with expanded qualifying expenditures to include data and cloud computing costs, reflecting the growing importance of digital technology.

Key benefits:

Reduction in tax liability through credits on qualifying R&D activities;
Encouragement of investment in innovation and technology; and,
Simplified claiming process through a unified credit scheme.

3. Charitable tax strategies

Charitable giving offers significant tax advantages, and for HNW individuals, the right strategy can maximize both the impact of their philanthropy and their tax savings. Charitable limited liability companies provide flexibility by allowing donors to engage in both charitable activities and profit-generating ventures.

Charitable remainder trusts offer income streams to donors while deferring capital gains taxes on appreciated assets. Donor-advised funds provide an immediate tax deduction and flexibility in managing charitable contributions over time.

Key benefits:

Immediate tax deductions and deferred capital gains taxes;
Flexibility in philanthropic activities through charitable LLCs and DAFs; and,
Continued income through CRTs while supporting charitable causes.

4. DBPs for enhancing retirement planning

Defined-benefit plans are a cornerstone of retirement planning for many businesses, offering guaranteed monthly benefits upon retirement. For HNW business owners, DBPs allow for higher contribution limits compared to defined-contribution plans, providing significant tax deductions. However, DBPs require consistent funding and careful management to ensure compliance with regulatory requirements and to meet promised benefits.

Key benefits:

Significant tax deductions through higher contribution limits;
Guaranteed retirement benefits, offering financial security for employees; and,
Enhanced employee retention and satisfaction.

5. Captive insurance for risk management

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Captive insurance involves creating a subsidiary insurance company to cover the risks of its parent company, offering greater control over insurance programs and potential cost savings. For HNW business owners, captives provide significant tax advantages, as premiums paid to the captive can be deducted as business expenses. Additionally, the income earned by the captive can be tax-deferred, enhancing the company's overall financial strategy.

However, setting up a captive requires careful consideration of regulatory requirements and the selection of an appropriate domicile.

Key benefits:

Tailored risk management and cost savings;
Tax deductions on insurance premiums; and,
Deferred taxes on captive income.

6. Investing in renewable energy

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Solar energy tax credits, also known as the Residential Clean Energy Credit, offer a 30% credit on the cost of installing solar photovoltaic systems, making them a lucrative incentive for HNW clients interested in renewable energy. This credit applies to various expenses related to the installation of solar systems on primary residences, vacation homes and some commercial properties. Combining federal credits with state incentives can further reduce the cost of solar installations, providing long-term savings and environmental benefits.

Key benefits:

Significant tax credits on solar installations;
Long-term savings through reduced energy costs; and,
Contribution to environmental sustainability.

7. IRTCs for supporting economic development

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Indian Reservation Tax Credits encourage investments in Native American communities by offering tax incentives to businesses operating on reservations. The Indian Employment Credit, for instance, provides a 20% credit on the first $20,000 of qualified wages paid to enrolled members of Indian tribes.

Additionally, the Inflation Reduction Act of 2022 has expanded clean energy tax credits to include tribal lands, offering direct payments in lieu of tax credits, which is particularly beneficial for non-taxable entities like tribes.

Key benefits:

Tax incentives for businesses hiring Native American employees;
Enhanced support for clean energy projects on tribal lands; and,
Economic development and job creation in Native American communities.