Peter DeGregori, Managing Partner of Vertical Advisors LLP, talks to Finance Monthly about the variations in federal tax, the use of offshore trusts for tax mitigation and keeping up to date with new legislation.
Is it fair to say that most HNWIs and SMEs pay more tax than is necessary? How would individuals and companies be alerted to this scenario?
In our experience, we see individuals and privately held companies paying too much income tax and not having a good understanding of the strategies and options that are available. If a taxpayer files a tax return and feels they are paying too much income tax, they should stop and get a second opinion. In our experience most tax preparers are not tax strategists.
Are there particular state or federal taxes that could easily be reduced with timely professional advice?
Each business is slightly different but there are a lot of similar strategies that privately held businesses can utilize. Surprisingly, we are seeing that tax returns are not prepared correctly and just that error creates an audit risk, which can consume time and money. We also see that businesses are not utilizing Research and Development Credit, the Domestic Production Activity Deduction and many other tax strategies that are available.
In your experience, what are the typical problems that small businesses have regarding their accounting and income tax?
When we meet with a new client, we first focus on their accounting and financial reporting. In our experience, this is the most critical piece of their business. This data provides the company with information to help them run their business, and make better business decisions. Too often we find that the accounting function isn’t running properly and we must fix that first. Good accounting is not only needed for management to run the business but it can be an integral component for tax planning, employee compensation, banking, government examination, and potential sale or IPO.
Offshore trusts that are used for the purposes of tax mitigation have received bad press in recent years – what is your view on trusts used as a vehicle to offer lower taxes?
It is a tool that can be part of a strategy if it makes sense for the taxpayer. Too often we see a professional suggesting an offshore trust or a complex strategy when we don’t feel it is necessary.
How can tax saving initiatives be kept up to date, especially in light of changing legislation? What happens if a current tax plan is no longer viable because of legislative changes?
Unfortunately, tax laws change often. Most tax strategists keep up on the tax law changes so they can perform their job well. We review our client’s tax strategy at a minimum annually. If there is a big tax change, then we review with each affected client.
Many companies and individuals may wish to minimize tax liabilities, but are put off by potentially being challenged by the IRS? In reality is this the case? Is there increased risk by undertaking a tax mitigation plan?
Certain tax treatments can increase the change of an examination. However, if the tax strategy is done correctly, then we suggest it as it is the law and we build each client file to be prepare for a government examination.
Is tax mitigation more possible in the context of federal taxes?
Yes, depending on the state(s) you reside or have business activity in, income taxes can cost up to 50% of profits. We feel this is very high, and we are passionate about creating customized tax strategies to help our clients legally mitigate income tax.
Are there certain industry sectors that benefit from tax breaks in the US?
There are typically tax strategies that any industry can use. However, some of the more typical strategies that can be used are for US manufacturers, real estate, farming, and any business that spends a good amount of money in R&D. However, there are tax strategies which are not dependent on the type of industry.