Lifetime Tax Planning

September 14, 2023

When putting together a tax plan for your small business, it’s important to keep things in perspective. Once you start earning a significant amount of income, it’s easy for taxes to become your greatest consideration when making financial decisions. I know it may sound funny hearing someone who does tax and financial planning for a living say this, but taxes should not be your top priority for every decision. In fact, taxes should only be a supplemental factor to most decisions. Sure, having a small business tax plan is a key part of your financial success, but when taxes come first in all matters it can quickly lead you towards decisions that have a negative financial impact.

Prefer to watch a video breakdown? Check out our video version here.

A good, solid tax plan is one of three key components of every financial plan. Financial planning can be broken into the following areas:

  1. Tax & Cash Flow Planning
  2. Protection Planning
  3. Investment Planning

Together, these different areas complement each other and help you increase your net worth and accomplish your goals faster. However, when one of these three items takes control of the other two, you can introduce unnecessary risks into your life and slow down your progress towards those same goals.

One of the main issues we see for those who focus solely on tax planning is a risk to your investment planning or future goals. When tax planning overrides everything else, it tends to to show itself in subpar investment decisions. One of the key tenets of tax planning for Ironclad Wealth Management is that taxes should be minimized over your lifetime and integrate with your financial plan. Tax decisions shouldn't be made in a yearly scramble to make your income as low as possible for one year.

When we talk about prioritizing lifetime savings over short-term savings, I think people reflexively say, “Well of course, that makes sense.” However, it takes consistent, thoughtful planning to turn that concept into reality. When this doesn’t happen, those short-term decisions can compound over time into huge financial mistakes.

There are several different examples of what small business tax planning looks like when taxes take priority above all – but the main example I want to focus on in this blog is taking deductions to buy depreciating assets you don’t need.

In other words, this is what I call the “eh, it’s a business expense so why not” method.

This is a prime example of short-term tax planning. I typically see people doing this when they haven’t planned, realize they’re having a great year, and go hunting for deductions to offset the taxes they will owe.

And hey, I understand the desire for lower taxes, but let’s dig into this and determine how this affects your total financial plan.

The Situation:

  • It’s October and you realize you’re going to owe a lot in taxes.
  • You’re in the highest tax bracket – 37%.
  • You have $60,000 sitting in the bank.

We’re going to compare three different scenarios based on the above situation. These scenarios will compare the advantages of the options over a 20-year period.

The Bad Tax Plan

The first scenario I’d like to discuss is the “Bad Tax Plan” but could just as easily be called the short-term tax plan. As we mentioned above, this tax plan starts with the following characteristics:

  1. You haven’t planned.
  2. You’re looking for last-minute deductions.

The largest deduction that most business owners can get last minute for something they don’t “need” is buying a new truck. If you meet certain criteria, you can buy the truck and expense the $60,000 purchase in one year.

At 37% tax rates, that saves you $22,200 in taxes which goes a long way towards justifying that purchase you don’t need!

It may sound good, but let’s think about what just happened. You’ve used cash to buy an asset that will go down in value over time.

So, you have a deduction, a good thing, and a depreciating asset, a bad thing.

Let’s assume that the truck depreciates in value at 20% annually, you sell it in year 6, and then reinvest that money in an investment account earning 7%. We also assume you invest your tax savings at the same 7%.

For illustrative purposes only. Projections are made utilizing 37% tax rate, 20% depreciation rate on vehicle, 23.8% capital gains rate, and 7% net investment return. Vehicle is sold in year 6 and reinvested in taxable brokerage account to compare over a similar 20 year time period. Tax savings are also invested starting in year 1 with the same assumptions.
Year 1 Year 5 Year 10 Year 15 Year 20
$39,816 $49,015 $63,559 $82,417 $106,871

Under these assumptions, you save $22,200 in taxes, but at the end of 20 years the $60,000 you used to purchase the truck is only worth $42,867 and that’s if you reinvest every dollar! In our example, we also assume you invest your tax savings which improves the overall picture. However, if you don’t invest the tax savings the results look much worse.

Now imagine what happens if you make the same mistake year after year.

This isn’t to say that you shouldn’t buy the vehicles, goods, and equipment your business needs to succeed. The best ROI you have is investing in your own business. However, investing in depreciating assets just to create a deduction is not a path to increasing your net worth or accomplishing your goals.

The Better Tax Plan

As we mentioned earlier, a truly good tax plan takes into account all of the goals and objectives of someone’s financial life. Let’s assume that you haven’t quite planned ahead but you are thinking long-term. Here is what that may look like:

  1. You haven’t planned ahead.
  2. You’re trying to save less on taxes, but your true goal is to have a higher net worth.

The main trade off to consider from Option 1 is what the outcome would have been if I paid the taxes and reinvested the remaining proceeds.

Let’s assume that you do the opposite of Option 1 and forgo the deduction, pay the taxes, and invest the proceeds in an investment account returning 7%.

Here’s how that would look:

For illustrative purposes only. Projections are made utilizing 37% tax rate, 20% depreciation rate on vehicle, 23.8% capital gains rate, and 7% net investment return. $60,000 is saved year 1 in a brokerage account with a 7% investment return.
Year 1 Year 5 Year 10 Year 15 Year 20
$39,816 $49,015 $63,559 $82,417 $106,871

As you can see, you start with a much lower starting point than you do in Option 1 due to the lack of tax savings. However, over time this option continues to grow in value and builds more wealth over time than Option 1. Once this option passes Option 2 in year 5, it never looks back and continues its lead.

Even though this option doesn’t save you anything in taxes, and in fact results in you paying more taxes, it considers the rest of your plan and meets your main objective: putting more money in your pocket. Even though you pay more in taxes, I believe this option is far superior to Option 1.

Sometimes, the better tax plan maybe paying the taxes.

A Good Tax Plan

A good tax plan allows you to marry both benefits of Options 1 and 2. Finding ways to buy appreciating assets in tax advantaged ways is a huge benefit to any tax or financial plan.

The simplest way for me to illustrate this is through a 401(k). There are other options, but this is the one I will focus on today. A 401(k) allows you to take tax deductions today and invest in assets that should appreciate in the future. While a 401(k) has certain rules that must be followed with regards to putting both money in and taking money out, let’s see how it looks purely from a mathematical standpoint if you earn the same 7% in a 401(k).

For illustrative purposes only. Projections are made utilizing 37% tax rate, 20% depreciation rate on vehicle, 23.8% capital gains rate, and 7% net investment return. $60,000 is saved year 1 in a 401(k) with a 7% investment return. The tax savings in year 1 are saved in a brokerage account that returns 7%.
Year 1 Year 5 Year 10 Year 15 Year 20
$86,400 $111,482 $153,467 $211,494 $291,768

As you can see, the power of marrying a deduction when you are in the top tax bracket and investing in an appreciating asset is the best option of the three that we’ve discussed today. While the 401(k) does have drawbacks which may not make it right for everyone, the simple concept of marrying tax benefits with investing is much better than having to choose one or the other.

That’s what takes tax planning to the next level – identifying the options, making sure it works with the rest of your plan, and analyzing the lifetime impact. Even if you took the 401(k) all in one year at the same 37% tax bracket, it would still have $205,860 in value which is well above the other options.

The Final Comparison

Finally, I have the results of each option stacked together in a chart for comparison. The chart reiterates what we have discussed, but I think it’s helpful to view them all at once.

For illustrative purposes only. Projections are made utilizing a 37% income tax rate, vehicle depreciation at 20% annually, 23.8% capital gains rate, and a 7% investment return.
Plan Year 1 Year 5 Year 10 Year 15 Year 20
Bad $70,200 $39,715 $51,499 $66,779 $86,594
Better $39,816 $49,015 $63,559 $82,417 $106,871
Good $86,400 $111,482 $153,467 $211,494 $291,768

As you can see, there is a dramatic increase in value when you make sure to buy appreciating assets and not depreciating assets. The 401(k) option is far and away the best option. The item I find most interesting though is how Option 2 passes Option 1 in year 5 and never looks back. The difference in buying appreciating assets versus depreciating assets is so powerful that even paying the taxes and investing the remainder beats out buying the truck!

That leads us to the most important question you need to ask yourself – what is more important – getting that large tax deduction or increasing your net worth over the long term?

If the answer is increasing your net worth, and I hope it is, then you can see how chasing those tax deductions just for the sake of tax savings with no regards to your wider plan can slow you down on the path to achieving your goals.


In conclusion, a valuable part of any small business tax plan is emphasizing lifetime savings over short-term savings. Sometimes, that means prioritizing other goals over finding a way to save that next tax dollar. At the end of the day, a tax plan that truly benefits you should be integrated into your financial plan. That means knowing when it may make sense to pay the taxes. While these may seem like small decisions, if you keep repeating them year-over-year, they may add up to a significant difference in your long-term financial health.

If you’re a business owner with 1-25 employees who wants their tax plan to integrate with their financial plan, Ironclad Wealth Management offers a free introductory call where we can dig into what you are doing today and how we can help.


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