Book summary “The tax and legal playbook”: summary

Introduction

You work hard to build wealth, but heavy taxes and unexpected lawsuits constantly threaten your financial independence. Without a proactive game plan, you end up paying far more to the government than necessary while leaving your personal assets exposed to risk.

Mark J. Kohler argues in The Tax and Legal Playbook that true financial freedom requires a strategic combination of a small business, smart tax strategies, proper legal entities, and robust asset protection. You can take control of your financial future by mastering the rules governing entity selection, deductions, real estate, and estate planning.

The book guides you through eight core areas to build your financial defense system. You will learn how to choose the right business structure, maximize tax deductions, hire family members, and secure your long-term legacy.

Are you currently using the correct legal entity for your business operations? Do you know which everyday expenses qualify for tax write-offs? Are your personal assets fully protected from potential lawsuits?

1. Your Game Plan for Success

Success Characteristics

Financial independence and the American Dream for small-business owners rely on six foundational characteristics and habits.

A young couple walked into the author's office asking for a practical game plan to save taxes and build wealth instead of relying solely on an employer retirement plan and Social Security.

You must adopt specific habits to secure your future. The essential practices include:

• embrace entrepreneurship;
• live within your means;
• buy real estate;
• engage with your retirement plan;
• continue to learn tax and legal strategies;
• hire competent professionals.

According to a Morgan Stanley report cited in a February 2014 Bloomberg article, 77 percent of investors with at least $1 million in assets own some type of investment real estate.

Entrepreneurship Foundation

Starting a small business on the side is the primary mechanism for building wealth and legally converting personal expenses into business write-offs.

Even for those with a primary career, maintaining a small business allows entrepreneurs to generate additional income and legitimately write off everyday expenses such as travel, home office costs, dining, automobiles, mobile phones, and computers. You can use this side project to transform ordinary lifestyle costs into deductible business expenses.

2. Entity Selection and Formation

Choosing the correct business structure balances simplicity, self-employment tax liabilities, and asset protection.

Tom started an internet-based side business that he could run from home with minimal startup capital, and after evaluating his lack of liability and partners, he initially chose a sole proprietorship. A sole proprietorship reports all income and expenses on Form 1040 Schedule C. However, ordinary net income generated from products, services, or commissions triggers a 15.3 percent self-employment tax comprising Social Security and Medicare taxes, which applies up to statutory wage bases.

An LLC provides personal liability protection and serves as an excellent vehicle for partnerships and rental property holding. However, forming an LLC does not automatically save taxes or bypass self-employment tax on ordinary active income unless elected to be taxed as an S corporation. Approximately 20 states have enacted legislation for Charging Order Protection Entities. Two best friends starting a cleaning business went online and formed an LLC with a few mouse clicks without understanding the tax ramifications or how to set it up correctly.

Sole Proprietorships and LLCs

Relying on cheap online DIY incorporation sites or out-of-state entity scams creates severe legal vulnerabilities and administrative headaches. Promoters frequently market Nevada, Delaware, Wyoming, or New Mexico entities using scare tactics and false promises of tax savings. If a business operates in another state, it must still register locally and pay local taxes. Furthermore, DIY online setups often lack supporting operational documents, resulting in a pierced corporate veil.

The author frequently encounters clients with DIY online formations that consist of only a single sheet of paper, are registered in the wrong state, or have expired because they were not renewed properly.

Corporations and Formation Pitfalls

Operating as an S corporation allows business owners to split their earnings into a reasonable salary subject to self-employment tax and pass-through income exempt from it. Unlike sole proprietorships or LLCs where all net income is subject to the 15.3 percent self-employment tax, an S corp owner takes a W-2 salary and pulls the rest as K-1 net income, avoiding FICA on the distribution portion. Cynthia, a marriage and family therapist nearing $100,000 in net income, was paying far too much in self-employment taxes until her situation was evaluated for an S corporation transition.

C corporations are designed for large public companies and create a harmful double-taxation trap for average small-business owners. Promoters sell C corps using myths about extra deductions, lower corporate tax rates, or avoiding double taxation through higher salaries, but corporate tax on profits combined with dividend taxes outweighs any benefits. A couple in Seattle with two rental properties and fix-and-flip activities was oversold an elaborate and expensive multi-entity plan featuring an unnecessary C corporation.

3. Pass-Through Deductions and Credit

Section 199A Strategies

The Section 199A pass-through deduction grants eligible small-business owners a 20 percent deduction off their business net profit. While straightforward for lower-income businesses, the deduction introduces complex calculations, phase-out cliffs for specified service businesses, and wage or property limitations at higher income levels.

Optimizing the 199A deduction and building business credit independently protect and advance your enterprise.

A single realtor making $150,000 through an S corp received the 199A deduction easily, while a manufacturing couple netting over $500,000 required elaborate equations involving payroll and equipment investments.

For business owners above income thresholds, the Phase 2 199A formula limits the deduction based on W-2 wages paid and the unadjusted basis of qualified property. Susan, an online marketer with $300,000 in taxable income and an $80,000 salary, was limited to a $40,000 deduction because it capped at 50 percent of her W-2 wages. Rental real estate losses can negatively impact the 199A deduction by offsetting positive Qualified Business Income from operational businesses. An investor with $50,000 in rental losses and $50,000 in S corp profit found their combined QBI reduced to zero, eliminating the 199A deduction.

• Calculate the basic deduction as the lesser of 20 percent of Qualified Business Income or 20 percent of Adjusted Taxable Income if below threshold limits.
• Monitor taxable income to avoid falling off the phase-out cliff if operating an out-of-favor specified service business.
• Adjust personal salary levels to optimize the wage component in the Phase 2 formula.
• Purchase and depreciate business assets before year-end to boost the qualified property component.
• Combine positive and negative QBI streams when evaluating multiple ventures or real estate holdings.
• Utilize real estate professional status to apply losses against Adjusted Gross Income.

Personal and Corporate Credit

Understanding personal FICO scores and utilization ratios is the first critical step to building both personal and corporate credit. The FICO score ranges from 300 to 850 and is calculated based on five major components: payment history, amounts owed, length of credit history, types of credit used, and newly acquired credit. Maintaining a credit utilization ratio under 30 percent and never paying late are essential for preserving a high score.

Corporate credit allows a company to secure financing independently of the owner's personal credit, but it requires a legitimate business foundation and strict adherence to sequential steps. A young couple wanted to do real estate deals using corporate credit because they lacked personal credit, mistakenly believing they could immediately get large unsecured credit lines right after forming an LLC. Promoters often falsely promise instant unsecured corporate lines while charging $2,000 to $10,000 for shelf corporations.

• Employ a credit reporting service.
• Understand credit reporting.
• Manage your payments.
• Know how much you owe.
• Keep your accounts open and use them.
• Use good types of credit.
• Minimize new credit inquiries.
• Committing spouses' credit carefully.
• Start and legitimize a business.
• Form an entity.
• Get a D&B Number.
• Consider using a business credit coach and educate yourself.
• Open vendor and trade lines of credit.
• Apply for business credit cards.
• Ensure that your creditors are reporting to D&B Corporate Experian and Business Equifax.
• Practice good habits.

4. Asset Protection for Entities

Defending your business against inside and outside liabilities requires strict adherence to corporate formalities.

Inside vs Outside Liability

Business owners must protect themselves against both inside liabilities arising from company operations and outside liabilities originating from personal mishaps. Inside liability threatens personal assets due to incidents occurring within the business operations, such as a customer slipping on ice. Outside liability stems from personal accidents outside the business that could allow creditors to seize company assets.

A client faced potential claims in the hundreds of thousands or millions after causing a severe car accident, threatening his successful business and rental properties because he lacked outside liability planning.

Maintaining the Corporate Veil

Failure to respect corporate formalities and maintain proper documentation allows creditors to pierce the corporate veil and reach the personal assets of business owners. Courts evaluate whether an entity operates as a distinct legal person by reviewing four major factors: separate records and status, adequate capitalization, use of the company name, and avoidance of commingling funds.

Michael Kaplan operated a Polaris dealership through a Nevada corporation but maintained sole checkbook control, used corporate funds for personal expenses, and ignored corporate formalities, leading the Nevada Supreme Court to pierce the corporate veil.

Merely filing initial articles of organization is insufficient. You must complete proper formation parts and maintain them:

• Articles of Organization
• Operating Agreement
• Organizational Minutes
• Corporate Book
• Application for Employer Identification Number (EIN)

5. Underutilized Deductions and Health Care

Capturing everyday business write-offs and structuring health-care benefits dramatically reduces your taxable income.

Low-Hanging Fruit and Vehicles

You can save thousands of dollars over time by capturing basic, underutilized write-offs and low-hanging fruit while maintaining proper bookkeeping. Balance deductions with your actual income and profit to avoid looking too aggressive in an audit.

A husband and wife with a small business and day job faced a large tax bill until implementing a comprehensive approach of small changes rather than searching for one single big strategy.

• Review your tax return with your tax professional based on the ideas and deductions in this chapter.
• Get a second opinion if your CPA shoots down your ideas and won't come up with creative options to consider.
• Recognize that you will certainly file a tax return and pay taxes but you are entitled to write off every legitimate expense.
• Maintain good records and log any and all expenses so they can be considered during the tax-prep process.

Travel expenses for business are 100 percent deductible if justified by specific business purposes. You can include weekends sandwiched between work days. Meet with clients or vendors, attend conferences, check on rental properties, or hold official board meetings.

• Meet with a client during your travels.
• Meet with a vendor or support professional.
• Attend a conference or training event.
• Check on your rental property located in the destination area.
• Hold your annual board of directors, shareholder, or member meeting.

Choose between the mileage method and the Actual Method for vehicle deductions. The mileage rate was 58 cents per mile as of 2019, while charity mileage was 14 cents per mile, and medical and moving mileage was 20 cents per mile. Heavy vehicles weighing 6,000 pounds or more, including SUVs, trucks, and RVs, qualify for unlimited bonus depreciation and Section 179 write-offs in the first year.

John and Mary owned a craft business in northern California and used a 5th-wheel RV 90 percent of the time for business trips to pick up supplies and visit boutiques, allowing them to deduct 90 percent of the RV costs while generating a profit over $30,000 a year.

Dining deductions are restricted to 50 percent, and entertainment deductions are completely eliminated. Notice 2018-195 allows the food portion of an entertainment event to be deducted at 50 percent if a business discussion takes place. Claim the home office deduction using the Regular Method, the Simplified Option, or an S corporation reimbursement plan. The simplified option caps the write-off at $5 per square foot up to 300 square feet, for a maximum of $1,500 a year. Avoid hobby loss rules by showing a profit in three out of five consecutive years, or two out of seven years for horse breeding, training, showing, or racing.

KohlerCare and Health Savings

Health Savings Accounts and Health Reimbursement Arrangements lower your taxes while securing comprehensive medical coverage.

You can optimize health-care costs by pairing high-deductible insurance plans with Health Savings Accounts for tax-free growth. The KohlerCare strategy coordinates health benefits, tax deductions, and cost reductions. Income thresholds for single taxpayers regarding Net Investment Tax and additional Medicare Tax sat at $200,000, while married taxpayers faced a $250,000 threshold. The Net Investment Tax rate was 3.8 percent, and the additional Medicare Tax rate was 0.09 percent.

In 2019, the deductible contribution limit for an HSA was $3,500 for individuals and $7,000 for families. The minimum deductible for an HSA-qualifying health plan was $1,350 for single individuals and $2,700 for families.

A young internet marketing professional avoided penalties, lowered his premiums with high-deductible insurance, and built a tax-free health care fund using an HSA.

• Minimize or avoid ACA taxes.
• Choose the right type of insurance policy.
• Deduct your health insurance correctly.
• Use the Small Business Health Care Tax Credit.
• Deduct your medical expenses strategically.
• Start a Health Savings Account (HSA).
• Understand Health Reimbursement Arrangements (HRAs).

A Health Reimbursement Arrangement or Section 105 Plan allows you to deduct 100 percent of medical expenses by setting up internal benefit plans. Single owners must form a C corporation and lease themselves as employees, while married owners can hire their spouse through a sole proprietorship support company to provide family-wide medical coverage.

6. Hiring Family and Real Estate

Employing your children and purchasing rental real estate creates powerful income-shifting and wealth-building channels.

Hiring Family Members

Hiring your children who are under 18 allows you to shift income, generate tax deductions, and avoid payroll taxes while teaching them financial responsibility. Payments made to your minor children for legitimate services performed in your sole proprietorship or LLC owned solely by parents are exempt from income tax withholding, Social Security, Medicare, and unemployment taxes. The child can earn up to the standard deduction amount tax-free while the parents still claim them as dependents. In 2019, $12,200 is the standard deduction amount children can earn tax-free.

The author shares how his youngest daughter started helping in the office at age seven by cleaning, stuffing envelopes, and shredding paper, which taught her the value of a dollar and financial independence. You can organize this through a family management company. Adult children aged 18 and older or grandchildren can be hired in the business using specific legal structures such as independent contractors or support companies.

You must follow proper steps when employing family:

• Open bank accounts with and for your children.
• Talk about the service they can provide in the business.
• Create a job description and empower them to help you in your business.
• Discuss your tax and legal structure with your CPA to make sure you pay your children properly and in the correct amount.
• Keep good records on your children's and family members' employment and follow proper structure and procedures without cutting corners.

Buying Rental Properties

Purchasing rental real estate provides four major wealth-building benefits and acts as a forced retirement plan that often outperforms traditional stock market investments. Rental properties generate returns through property appreciation, mortgage principal reduction by tenants, powerful tax write-offs including depreciation, and positive cash flow. According to the National Association of Realtors, 6.74 percent is the average annual real estate appreciation rate nationwide over the past 50 years.

The author recalls older clients in their mid-60s with a meager retirement account who realized rental real estate was their best path forward, expressing deep regret that they did not start buying rental properties years earlier. Following a structured ten-step process ensures new investors approach purchasing rental real estate methodically and avoid costly emotional mistakes.

Take these actions to build your portfolio:

• Make a goal.
• Start shopping.
• Develop a spreadsheet.
• Look at lots of property.
• Make an offer and start due diligence.
• Do more due diligence.
• Open escrow.
• Close and deed the property to an LLC.
• Track expenses.
• Manage the property, tenant(s), and your property manager.

7. Asset Protection and Property Sales

Proactive asset protection and creative property sale strategies shield your wealth from lawsuits and excessive taxes.

When you sell appreciated property, proactive planning allows you to leverage several creative tax-saving strategies beyond simply paying standard capital gains tax. You can choose from capital gains, installment sales, 1031 like-kind exchanges, opportunity zone investments, and charitable remainder trusts. Capital gains tax rates range from 0 to 20 percent depending on income level over the past few years, while the highest marginal federal income tax rate reaches 37 percent. Married couples can exclude up to 500,000 dollars of profit when selling a personal residence.

A telephone consultation with a farm-family from Washington state combined the home sale tax exclusion, a 1031 exchange into commercial rental property, and a charitable remainder trust for a smaller land parcel to execute a completely tax-free transition.

Take these actions regarding property sales:

• Run the numbers on any property you own and determine the baseline of taxes owed if sold.
• Compare available selling options against the baseline of paying taxes.
• Get a second opinion if something sounds too good to be true.
• Always consider the time value of money and present value of saving taxes over time.
• Ensure you have lived in and owned the home for two out of the five years preceding the sale.
• Prorate the exemption amount if selling early due to job relocation over 50 miles, military active duty, or multiple children born closely together.
• Identify replacement properties within 45 days of the sale.
• Close on all purchases of replacement properties within 180 days of the sale.
• Identify up to three properties of any value, or multiple properties whose aggregate value does not exceed 200 percent of the exchange property value.
• Invest capital gains into an Opportunity Zone property within 180 days of recognizing the gain.
• Reinvest in a rental property new to you or an existing property that will undergo substantial rehabilitation.

Personal Asset Protection and Privacy

Effective asset protection does not require exotic or expensive offshore structures. You can start immediately using affordable, statutory methods and proper business habits. Attempting to move or hide assets after a cause of action arises can result in courts reversing the transfer under fraudulent transfer laws. Umbrella insurance costs between 300 to 500 dollars annually for 1 million to 2 million dollars in coverage.

Denny Hecker attempted to hide assets and lied to the court during bankruptcy proceedings involving massive inventory loan liabilities of 767 million dollars, leading to federal indictment, prison time, and conviction of his wife and father-in-law.

Take these protective steps:

• Set up an entity such as an S corporation or LLC if you have a business.
• Keep a separate checking account for your entity and do annual corporate maintenance.
• Use your company name on all agreements and title company assets in the company name.
• Carry appropriate insurance and consider umbrella insurance.
• Know your state rules for tenancy by the entirety and homestead exemption.
• Consider and build your asset protection strategy before a cause of action arises.
• Be aware before giving out your SSN, home address, or date of birth.
• Shred everything, open a P.O. Box, get a home safe, go paperless, and regularly change passwords.
• Pay for a credit bureau tracking service and monitor activity.
• Keep critical data secure and invest in a safe deposit box or fireproof safe.
• Go paperless with an encrypted cloud hosting service.
• Move car glove compartment contents to a locked box in the trunk.
• Shred important documents with a cross-cut shredder and install antivirus software.
• Run the math to determine how much equity is exposed in your property.
• Identify your state's homestead exemption and filing requirements.
• Verify if your state allows tenancy by the entirety and update titles accordingly.
• Consider equity stripping or a DAPT if equity remains exposed.

8. Retirement Plans and Estate Planning

Maximizing retirement accounts and establishing family trusts secure your long-term legacy and avoid probate.

Choosing the right retirement plan requires balancing discretionary income, tax deductions, self-direction goals, and early withdrawal needs. You can scale from a traditional IRA up to a Roth IRA, SEP, and ultimately a Solo 401(k) or pension plans as savings goals increase.

Small-business owners using an S corporation can leverage a Solo 401(k) to make massive annual contributions and include family members. A Solo 401(k) allows you to contribute through W-2 salary income via elective salary deferrals and nonelective company matches of up to 25 percent of payroll. Putting a spouse on payroll can effectively double family retirement contributions.

High-income earners locked out of direct Roth IRA contributions can utilize a Roth 401(k) or execute a back-door conversion.

• Fund a new nondeductible traditional IRA up to the annual limit of $6,000 or $7,000 if age 50 or older.
• Roll over funds from an old 401(k) from a previous job to an IRA to expedite the process.
• Convert the nondeductible traditional IRA to a Roth IRA.

Self-directed retirement plans allow investments in real estate, private notes, and small companies while strictly forbidding transactions with disqualified persons.

Mitt Romney accumulated an IRA valued between $20 million and $100 million by self-directing his retirement account into small companies and private equity investments he understood, such as Bain Capital.

Active business operations inside a retirement account trigger UBIT, while acquisition debt on assets triggers UDFI taxes unless held in a 401(k). Unrelated business income tax applies to ordinary income generated from selling goods, services, or rehabbing more than three real estate properties a year, with tax rates as high as 37 percent.

• Determine how much you can save on a monthly, quarterly, or annual basis.
• Decide if you need a tax write-off or can afford to pay the taxes and use a Roth IRA or 401(k).
• Consider self-directing and make sure your plan offers such an option.
• If you can and want to contribute more than $10,000 a year, run the numbers on other types of plans rather than a basic IRA.

Estate Planning and Game Plans

Over 50 percent of Americans lack a will or estate plan, forcing families into probate court. A Revocable Living Trust avoids the high costs and delays of probate court while functioning as an instruction manual for distributing estate assets.

A client's grandfather created a trust to pass wealth down without probate, but failed to fund it with any assets before falling ill and passing away, resulting in an empty trust and family inheritance conflicts.

• Create a comprehensive estate plan including a Revocable Living Trust and ancillary documents such as a will, powers of attorney, and living will.
• Fund the trust by transferring titles of real estate, business entities, investment accounts, and life insurance policies into the name of the trust.
• Review and update your estate plan at least once every five years.

Successful entrepreneurs must replace last-minute emergency decisions with systematic, recurring business game plans and professional advisory teams.

• Create structured game plan sections addressing organizational issues, product development, systemization, hatting, training, employees, retirement, estate planning, and statistics.
• Commingle objectives and tasks into a master timeline broken into three-month, six-month, and 12-month periods.
• Update your game plan monthly and redraft it completely every three months.
• Manage business operations and track progress using objective statistics and financial reports.

10 Key Ideas

1. Starting a small business on the side serves as the primary mechanism for building wealth and legally converting personal expenses into business write-offs.
2. An S corporation allows business owners to split their earnings into a reasonable salary subject to self-employment tax and pass-through income exempt from it.
3. Heavy vehicles weighing 6,000 pounds or more, including SUVs, trucks, and RVs, qualify for unlimited bonus depreciation and Section 179 write-offs in the first year.
4. Travel expenses for business are 100 percent deductible if justified by specific business purposes such as meeting with clients or checking on rental properties.
5. Payments made to your minor children for legitimate services performed in your sole proprietorship or LLC owned solely by parents are exempt from income tax withholding, Social Security, Medicare, and unemployment taxes.
6. Purchasing rental properties provides four major wealth-building benefits through appreciation, mortgage principal reduction, powerful tax write-offs including depreciation, and positive cash flow.
7. You can execute a completely tax-free transition when selling appreciated property by combining strategies like the home sale tax exclusion, a 1031 exchange, and a charitable remainder trust.
8. Effective asset protection relies on statutory methods, proper business habits, separate checking accounts, and umbrella insurance rather than exotic offshore structures.
9. Self-directed retirement plans allow you to invest your retirement funds in assets you understand, such as real estate and private notes, while strictly forbidding transactions with disqualified persons.
10. A Revocable Living Trust avoids the high costs and delays of probate court while functioning as an instruction manual for distributing estate assets.