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Most business owners ask, “What can I write off?” But once your business starts generating real profit, the bigger question becomes: Is your business structure designed to keep more of what you earn? In this episode, Sharran continues his Tax Advantage Matrix series by explaining Level Two: Designing the structure that allows entrepreneurs to keep more of their wealth.
He breaks down the three components of a tax-efficient structure and explains how choosing the right business entity, understanding how different types of income are taxed, and strategically deciding where assets or businesses are located can dramatically impact wealth creation.
Through examples like S Corp elections, capital gains, borrowing against assets, opportunity zones, and state domiciles, Sharran shows why wealthy individuals think about tax strategy before problems arise.
This episode gives entrepreneurs the framework to have better conversations with their advisors and create a stronger foundation for long-term wealth.
Listen to Part 1: Lower Your Taxes Legally – https://sharran.com/episode321/
“The tax problem is actually the setup. It is the same business that you have. You are the same person; it is the same general money that’s coming through. But when you have a different setup, that result is very different.”
– Sharran Srivatsaa
Timestamps:
02:11 – The Tax Advantage Matrix: Designing the structure
05:41 – Entity strategy: Choosing the right legal structure for your business
06:15 – S Corp elections and optimizing how business owners get paid
07:50 – Classification strategy: Understanding how each income is taxed
08:40 – Why wealthy people borrow against assets instead of selling them
13:12 – Location strategy: Using geography and asset placement for tax advantages
15:13 – Questions every entrepreneur should ask their tax advisor
15:28 – Recap: Part 2: Lower Your Taxes Legally
Resources:
– The Next Billion by Sharran Srivatsaa
– Board Member: ARC Multifamily Real Estate Investing
– Board Member: The Real Brokerage
Connect with Sharran:
– X
– YouTube
– Threads
Transcript:
[00:00:00] Hey, this is Sharran Srivatsaa. Welcome back to The Business School podcast. In this episode, I’m gonna take you into part two of how to lower your taxes legally, and the big thing is most people ask, “What can I write off?” And that’s fine when your business is small, but when your business starts to actually make any kind of profit, the tax question gets a little bit more complex.
[00:00:17] So the question is, what structure do you have that all the money’s flowing through? And it can be for everybody, no matter how small your business is, and that’s what I’m gonna break down for you. This is level two of the tax advantage matrix. I’m gonna break it all down for you step by step starting right now
[00:00:37] One thing is for certain, just because it’s tried and true doesn’t mean it’s working right now. So the big question is this, where can you learn what is working right now? The strategies, the tactics, the psychology, and the exact how to. How to grow your business, how to blow up your personal brand and supercharge your personal growth.
[00:00:59] That is the question, and this podcast will give you the answer. My name is Sharran Srivatsaa, and welcome to Business School.
[00:01:11] All right, let’s talk about level two, essentially, of how to lower your taxes, and I talked about this concept called the tax advantage matrix. And if you did not hear episode one, I think you should go listen to that ’cause I think it’ll give you immediately the things that you can use, the tools that you can use to actually reduce your taxes right now.
[00:01:27] But most importantly, I hope you know that I love the tax code. I read it to go to bed. I think taxes are the number one drag on wealth creation, and you should talk to your tax advisor because I am not your tax advisor. That would make sense. These are all ideas, uh, of course, ’cause I have to do these disclaimers, otherwise you think that I’m crazy giving you tax tips, which I don’t even know who you are, but you know who I am, and I’m trying to figure it out.
[00:01:46] All right? So please take this idea, talk to your advisor about it, and see if it’s the right fit for you. So here’s the whole thing, kind of a plain English version of what we’re talking about. The tax advantage matrix that I built, uh, for myself and my family has three levels. Level number one is to lower the bill.
[00:02:00] This is about this year’s income, and the three parts of lowering the bill is deductions that I can take today. Incentives and timing. All right? So I talked about that in episode number one. Episode number two, on this one, I wanna talk about designing the structure, because a-as soon as you are ready to do more things, which by the way, most of you are, and if you’re not ready yet, you probably should do it anyway because you’re gonna get there.
[00:02:23] There’s three parts there, and the part is what kind of entity structure should you have? How do you classify your taxes? And what is the asset location? Where do, where do you actually domicile those? And the third is to transfer the wealth. Now you say, “Well, Sharan, I don’t have the wealth.” Well, if you don’t set up the vehicle to actually do it, it won’t work.
[00:02:39] This is like building a plumbing system, and you need to build the system before you send water through it. And if you don’t build it now, you– t-too hard to build it later because it gets ultra complex and you’re like, “Man, I wish I’d done this 10 years ago.” And if you think all of this is complex, well, this is a choice between you actually being great and wealthy or you’re not.
[00:02:56] That’s all… That is the only difference. And the best part in all of this is it is all written down. It is all created. It all set up. You don’t have to learn anything. You just have to, like, figure out sm- these small pieces because this is the easiest way to put more money in your pocket. All right, so the transferring the wealth component has three pieces of the how to freeze something, how to give something, how to skip something.
[00:03:15] I’ll talk about that, uh, later. So today’s level two. Let’s talk about designing the structure, and I think just– I want you to just pay attention, listen, and anytime you hear something that’s beneficial to you or interesting to you, I want you to, like, maybe clip it and send it to your tax advisor. Feel free to send this to your tax advisor as well.
[00:03:29] Most ex– tax advisors listening to this will poo-poo me anyway because they’re like, “Man, you’re making me do more work for my clients,” which is exactly the job. But they can charge more, and they’ll save you more, which is the entire point of all of this, because the tax code is just a set of incentives.
[00:03:43] All right, questions that you’re probably thinking about, uh, what can I deduct? Can I write this off? Can I buy this through the business? Can I buy this through the business? Can I run this through the business? Is it a tax write-off? Those are level one questions. Those are useful questions. But at some point, I will tell you, the business grows past that, beyond that, gets more complex than that.
[00:03:59] You can only ask, what can I write off for so long? Because after that point, sure, you can write it off. But, like, after that point, when there’s some kind of real profit, the better question is, “Hey, what structure can I set up so that everything flows through the– in the most tax efficient way?” The tax problem is actually the setup.
[00:04:15] It is the same business that you have. You are the same person. It is the same general money that’s coming through. But when you have a different setup, that result is very different. So let me actually break down level two for you. Level two means designing the container that the tax flows through, and this is why level two has kind of three…
[00:04:31] Piece number one is entity. Piece number two is classification. Piece number three is location. Entity is just the legal form of the business. Classification is what is the type of income, and location is where it sits. So I’ll say it again. Entity is the legal form of the entity. You only have to do it once.
[00:04:46] Classification is the kind of income. You just have to know what to do. And location is where it is. The best part about this is there’s no extra work. Think about that for a second. I’m not asking you to do anything extra. I’m not asking you to go and do more cold calling. I’m not asking you to talk to more clients.
[00:04:58] I’m not asking you to pitch more businesses. I’m not asking you to build more product. I’m not asking you to, you know, create a new system. I’m not asking you to learn AI. You don’t have to do any of that. You only do it this one time, and then you get all the benefits for it. If you think about how great that is, that, that, that shows how irresponsible we are that we don’t do this thing.
[00:05:13] This is part of tax planning where you really want your CPA to, or your accountant take a, take a look under the hood to set yourself up right. Because a lot of business owners I will tell you are… If you have a… Like, here’s what’s happening. You, you h- you’re driving a tax version of a car with the wrong engine, the wrong tires, the, I don’t know, the, the, and the check engine light has completely been on for three years and you don’t know what to do.
[00:05:34] And then you’re asking, “Hey, how can I save money on gas?” Bro, we need another car, and that’s what this is, right? So idea number one is the entity. Entity is a legal form, meaning this is the company or the election or the trust or the account or the legal setup or the, uh, the, the, the, the thing that earns the money or holds the asset.
[00:05:52] Uh, I’d say a couple examples are like an S corp election or a C corp, which you have a flat 200% tax rate, or an LLC holding structure for liability, or a management company that operates above these companies, or maybe a self-directed retirement account that can actually own these assets. Because if you don’t have the right entity, then you are gonna be taxed as a sole proprietor.
[00:06:09] And when you, when you do that, all the things go on a Schedule C, and then, like, you get crushed because you have no benefits associated with that. For example, let’s look at the S corp election, because this is where most business owners start, and I think this is important to… If, if it’s you, you gotta get this right.
[00:06:22] I personally, any time I have earned income, I run it through my S corp. Essentially, the five points for you. Number one, an S corp election can change how you as a business owner get paid What, what that means is, number two, some portion of the money comes as a salary, and some portion of the money comes as owner profit or distribution.
[00:06:40] Number three, the salary has to be reasonable, which makes sense. But four, the structure may actually reduce a massive amount of payroll taxes when done correctly. So the point at which you need to start paying attention to this, if you’re making more than fifty-five thousand dollars a year, this will be important for you.
[00:06:54] So my question for you would be talk to your CPA and say, “Hey, should we review whether we need to be an S corp right now or not, whether it makes sense?” And if, if they say yes, you say, “Great.” If they say no, you say, “Well, at what point does it?” And I think that’s where it works, right? So I would talk to them about it.
[00:07:09] It, it will, in essence, it will automa– you know, if you do it right, it’ll start to save you thirteen percent, percent or more in taxes. So for if you’re making a hundred thousand dollars, that’s another thirteen thousand dollars that I just gave you without actually doing anything, and that’s what’s important, right?
[00:07:24] So that is kinda like the entity. Big call out here. Ask your CPA some important questions. “Hey, why am I using this entity right now? Does this entity still kind of fit at my business size? Should we review an S corp? Was that not the right idea? If I have an S corp, is my salary reasonable? Is it protective from a, you know, am I doing the right things from a tax perspective?
[00:07:43] Should all my assets sit in a separate LLC or a holding company? Where should it be?” And that is kinda like the big idea of number one, right? That’s the entity. Here’s number two, classification. What is classification? Classification is just a kind of income, meaning the tax code carries what kind of money it is.
[00:07:56] It actually puts a label on it. Is it a salary? Is it a profit, or is it a dividend, or is it capital gain, or is it a loan? They, they are all not the same thing. A dollar is not always treated like every other dollar. That’s what you need to understand, right? This is where peop- most people get insanely surprised because I’ll give you an example from the tax advantage matrix.
[00:08:11] If you convert ordinary income to long-term capital gains, you know, you almost double the amount of savings that you have. If you flip to qualified dividends, you almost double change the way your tax is structured. If you borrow against your assets instead of selling it, then you have z- almost zero taxes because you didn’t actually create any income.
[00:08:27] If you do the qualified small business plan, you can eliminate a whole bunch of taxes because you set it up that way, but you need a C corp to start. So I think that’s why this is important. Knowing the classification of the income is super important. I’ll give you an example. People always talk about like, “Hey, you know, billionaires borrow against their assets, and they don’t pay taxes.
[00:08:44] Why?” Well, m- m- I’ll break this down into a very high level. When you sell an asset, you create an event because you actually sold the asset. You don’t have it anymore, right? But when you borrow against an asset, you… the asset is a collateral, and you get cash without selling the asset. The, the taxable component only happens when you sell the asset.
[00:09:02] The asset may keep growing while the borrowing, the loan that you have gives you cash to go do other things with. The, there’s, of course, there’s risk here because if you have a loan, you have interest, you have rules, you have collateral, and if you kind of don’t do, don’t deliver on your agreements, they can take your collateral away, which is the same as selling the asset, which you would’ve done in the first place anyway.
[00:09:23] So I don’t even see that as a risk. So the question to your advisor is, “Hey, if I need cash, what do I have in my portfolio that I can borrow against and what are the risks?” Because if you don’t have that, if you don’t even understand that, then you don’t know how to borrow against it. It’s literally y- people talk about Elon borrowing against his assets.
[00:09:40] You can, you can too. You don’t, you don’t need, you don’t need to be Elon to borrow against your assets. Everybody can borrow against their assets. I’ve been borrowing against my assets for 10, well, you know, I don’t know, 10, 15 years now. I think this is one of those m- insane ideas that wealthy people understand really early, and you don’t want to always sell a great asset to get cash.
[00:09:55] Because if you sell it, the tax shows up. If you sell it, the tax is real today. You may not have planned for it. And, and also when you sell it, that asset’s gone, it’s actually not working for you. So the question is, it’s not about cash, it’s about the access to cash. And that may be like, um, hey, can I borrow against my stock portfolio?
[00:10:11] Can I borrow against my real estate? Can I borrow against my cash value life insurance policy? Can I borrow against something else so that you still use the collateral of something that’s growing and, and, and, and it’s– and you could invest, um, smartly otherwise. By the way, a lot of people are like, “Man, Sharan’s telling me to take debt because Ramsey told me not to take debt and, and tear up my credit cards.”
[00:10:29] The reason Ramsey told you to tear up your credit cards is because you don’t understand how to use your cards. It’s not that the credit cards are bad. Like I bought my first rental real estate property on credit cards. Like my American Express bought me my first real estate, uh, investment. The reason the, the, the, the throw the baby out with the bath water, bath water, bath water idea that Ramsey pr- provides is that you essentially are telling people, “Listen, uh, since you don’t know how to handle your debt, since you don’t have any education around it, since you are unwilling to learn it, since you’re un- since you’re going to be irresponsible with your money, I’m just gonna like cut something off.”
[00:11:00] Essentially that’s saying, like it’s like me telling my daughter, “Hey, since you don’t have any control over how much iPad time you have, I’m just gonna take your iPad away.” Like that’s dumb Right? So, uh, the, this does not mean debt is always smart. This means that bad debt is really bad for you, and if you don’t know how to plan for the debt, that’s terrible for you.
[00:11:17] But having the option of the access to cash and actually knowing how to actually work it is really powerful, because I will give you an examp- I’ll tell you– Let me explain this to you. If all the debt in the world disappeared, the, the world as we know it from a capital markets perspective would end.
[00:11:32] Like, let me re-explain that. If debt borrowing in the world disappeared, if the entire world cut up all its credit cards and everybody shut down all their loans, if everybody did what Ramsey was saying, we– this world would end. We would have no, like, the, the world as a capitalistic system would end. There would be no money.
[00:11:51] That’s what I want you to understand. The entire Federal Reserve System works on fractional lending laws. Like, without that, you would not have the money to buy a house. You would not have, like, a, a car loan. You would not… There would be no roads. There would be no companies. There would be no Chipotle.
[00:12:04] There would be no double meat. You would not get a smoothie, and you would have no Starbucks. The ability for companies to borrow money to run operations to create value is the fundamental way capitalism works, and that actually benefits you in your life. So if you don’t understand that, you will lose.
[00:12:19] And so Ramsey’s wrong. You, the, i- if the people that actually don’t know how to utilize debt should not have credit cards. I agree with him on that. The person that you, who’s sophisticated listening to this podcast, that actually is learning how to actually use this, will benefit dramatically from it because you now realize how to actually use the money in your favor, right?
[00:12:39] That’s what’s important, and that’s, that’s super, super important, by the way. Sorry for the rant. Uh, I should probably make this a yap at some point. All right. Classification Please, please, please ask your CPA, “Hey, what kind of income am I earning right now? What is… How much of it is ordinary income? How much of that could be long-term capital gain?
[00:12:56] Do I own these assets or could I borrow against them in some way? Am I selling anything this year that could be structured better? What can I do and reclassify my income?” That’s what you should ask, right? That is the important thing. Otherwise, if you don’t ask that question, your CPA will be like, “Oh, I don’t know.”
[00:13:07] But if you ask the question, he or she will be able to help you better. All right. Here’s number three. This is, uh, location. Location is where the income or the asset kind of sits legally, meaning the taxes can change based on where you live, where the entity resides, where the trust’s, you know, is, is incorporated, where the asset qualifies for a program.
[00:13:24] I’ll give you an example. There are no income state domiciles like Texas or Florida. There’s, in Puerto Rico, the Puerto Rico Act of 1960 essentially created this situation that if you move to Puerto Rico, all income earned as a Puerto Rican resident is a 3% flat tax. Like, think about that. If you made 100 mil- if you sold your business, you made $100 million, you paid $3 million flat tax.
[00:13:45] If you lived in California, and if it was not, you know, and if, if it was not structured well, you’re paying at best capital gain plus, you know, a- at thir- California state taxes. You’re paying 35% to 40%, which is crazy. There is opportunity zones, which is, uh, if you actually invest in a certain development zone that the government wants you to invest in and you invest in that, after, if that money stays in there over 10 years, anything that happens after that is tax-free.
[00:14:11] So they want you to lock your money up so they can actually create development in, in, in, in the, in the, in the country. There’s, you can, you can, um, put, if you’re, if you’re, if you invest in Nevada or Delaware or South Dakota, you have a bunch of different ways to, benefits that you can get. So where your domicile is, like where your domicile, where your assets or your entity lives is really important.
[00:14:32] And when you do that, you know, you get a bunch of tax advantages because there’s an incentive around it. If you’ve not heard about these state domiciles, state taxes, some states tax income very heavily. I live in the state of California. I pay 14 million percent taxes. Like some, you know… But o- on other cases, some states have no income tax.
[00:14:50] And changing the domicile has, is real life. It’s just like you can’t, you can’t just get a new mailing address. You have to go live in the count- Like you can’t, you can’t lie. Like you will get busted. Don’t do that, right? But the question is like if you moved to Texas and you lived in California, you would get a significant tax break, and that’s worth thinking about if that’s what you want to, you know, that’s what you want overall.
[00:15:13] So again, you would ask your advisor, “Hey, if I change my state, would that matter? Where am I legally domiciled? Where is my business domiciled? If I change my business location but my personal location, is there any difference to that? How does that work?” So these are like three big questions. Send your advisor this episode if you’d like.
[00:15:28] But when you design the structure of your business, everything becomes easy. And the best part is you only do it one time. And once you do it one time, it becomes real easy ’cause you don’t have to like do anything more after that and you still get massive amounts of benefits. The three things we talked about are the entity, the classification, and the location.
[00:15:41] Entity is the legal form that you operate with. Classification is like the kind of income that you get. Location is kind of like geographically where it sits, right? So please, please, please, I would talk to your advisor about this. Send them this person’s episode. They’re gonna be irritated that you sent them this episode.
[00:15:57] They’re gonna be irritated that I’m talking about to you about this episode because they’re like, “Man, are you creating more work for me?” But at the end of the day, if you do a lot of this one time, or at least plan for this, it’ll dramatically help you because we just stick our head in the sands and we never think about this overall.
[00:16:08] Hey, by the way, if you’ve not listened to episode one, I highly recommend you do that. And, uh, I’m gonna drop episode two, uh, episode three as well, so you have a three-part series on how to lower your taxes. Hey, if you like this, can you do me a favor? Can you screenshot this and tag me? That way I can make more like this for you.
[00:16:21] Screenshot this and tag me, and I can make more like this for you.
[00:16:31] Hey, this is Sharran. I have an awesome free gift for you just for listening to the podcast. As you may know, I’ve got a chance to build two billion-dollar companies the hard way. So if you like this episode, you will love getting the exact playbooks from those wins. It’s on my Substack, called My Next Billion. It has the exact frameworks I wish someone had given me when I was figuring it all out. Now you get the real lessons from the trenches as I go for a three-peat and build the next billion. So everything’s free at mynextbillion.com. Please check it out at mynextbillion.com.