Seven Year-End Financial Planning Strategies for Investors and Entrepreneurs


It’s no wonder that busy investors and technology executives often overlook important year-end financial planning. The end of the year is a busy time for everybody, as increased personal commitments are shoehorned into already busy work schedules. With that in mind, this article provides seven tips that could help you create significant and timely tax savings or wealth-creation opportunities specifically for investors and entrepreneurs.

1. DAFs and Foundations Are Common.

If you have taken liquidity (distributions, secondary, or other large exit) consider making a more significant than usual charitable gift. In addition to fulfilling a philanthropic aspiration, a charitable contribution may provide valuable federal and state tax deductions. Entrepreneurs and investors may want to consider using a Donor Advised Fund (DAF), or a private foundation, for greater flexibility, rather than making a direct gift to a charity. DAFs provide an easy way to manage the timing of charitable deduction from a tax perspective, while allowing the actual gifts to be made in the future.  Complex assets including some private or restricted stock, VC or PE interests, and real estate, are also eligible for charitable contributions to DAFs. Donors avoid paying capital gains tax (as high as 23.8 percent in federal taxes plus additional state taxes) on contributions of long-term shares with low basis. You should confer with your CPA before making any contributions, particularly with shares that may be eligible for QSBS treatment (see below).

2. ISO Exercise. 
Check with your CPA regarding whether or not you have an opportunity to exercise Incentive Stock Options without incurring additional tax liability under AMT in 2016.  If you are anxious to get the clock ticking for long-term capital gains treatment, regardless of the tax liability, you may consider exercising ISOs early next year (2017), since the AMT may not be due until April of the following year. Be mindful of possible tax changes, including those surrounding equity compensation taxation, such as those covered in our recent article EESO to the Rescue?


3. Roth Conversion. 
Uneven income streams allow for possible substantial year-end tax planning, including the opportunity to accelerate or defer compensation. In a lower than usual income year, such as a year of bootstrapping a new business, it's often prudent to review existing traditional IRAs and former employer 401(k) plans, and work with a tax professional to determine whether a conversion to a Roth IRA would be beneficial. Conversions require federal and state income taxes in the year of the transaction. However, all principal and earnings could grow income tax-free from that point on. Some retirement accounts, including Roth IRAs may allow for clients to invest in non-traditional private assets such as angel investments or private equity and offer the opportunity for substantial tax-free growth.  Moreover, many of our clients use Self-Directed IRAs  to make private investments.
4. Investment Interest Expense Deduction. 
How much can you borrow and deduct?  The mortgage interest deduction is currently limited to the interest on the first $1.1 million of mortgage debt. To take advantage of low interest rates and tax deductibility rules, consider using the investment interest expense deduction strategy, especially if your balance sheet normally carries substantial amounts of Net Investment Income. It is important to optimize balance sheet leverage from a tax standpoint of view and maximize tax deductions like the investment interest expense. We can work alongside your CPA, and we share more ideas in our recent article, Maximizing Deductible Interest
5. Does Your Job Situation Allow You To Use Self-Employed Retirement Plans?
Many investors and early stage entrepreneurs use self-employed retirement plans as an excellent opportunity to defer income tax liability. The two most popular plans, the self-employed 401(k) plan and the SEP IRA, allow for up to $53,000 of contributions in 2016, plus a $6,000 catch-up amount (for 401(k) plans only), all pre-tax. The deadline to establish a self-employed 401(k) is December 31st, although the plan does not have to be funded until your tax-filing deadline plus extensions. There are also other types of retirement savings options, such as defined benefit and cash balance type plans that allow for significantly higher pre-tax contributions. 
6. Annual Gifting and Wealth Transfers. 
Consider using your annual gift tax exclusion amount to a non-spouse ($14,000 per donor, per recipient) by funding a custodial account (UTMA/UGMA). Ideally, gifts of low basis stock to a custodial account could be sold during a more preferential tax bracket environment. Also, gifts to minors (e.g. your child who might have had earned income from a summer job) can be provided within the gift exclusion amount to fund a traditional IRA or a Roth IRA for them up to $5,500/year. Contributions to a 529 college savings plan would also fall into the annual gifting category and can be front-loaded for up to five years of the annual gift tax exclusion amount ($70,000 for individuals, $140,000 for couples in 2015) without a gift tax consequence.
Additional more substantial wealth transfers at possible discounted valuations could also come into play. For more information on these, as well as on possible changes to existing regulations, see our article, Could new rules make my estate plan less tax efficient? 
7. Capital Gains and Losses Decisions, Including QSBS. 
Many of our clients, and even some tax professionals, should assess the opportunity to reduce their capital gains burden with a strategy to take advantage of the Qualified Small Business Stock exemption (QSBS). Of course QSBS is relevant specifically to many founders, early employees and investors. If a stock is eligible for QSBS, one may be eligible for up to a 100 percent exclusion from the federal capital gains realized from the sale on the first $10 million. There are strict requirements for the stock to qualify as QSBS and the percent of tax exclusion varies, so be sure to bring up the issue with your CPA and get help in determining if it would apply to you.

Tax Loss Harvesting.  When selling a position, investors may realize a capital loss and potentially write off up to $3000 of collective losses against ordinary income — the rest can be used against any capital gains realized in the year. Any unused capital losses could be carried forward into future years indefinitely, providing a valuable tax-management tool. Be familiar with the wash sale rule, which may disallow the loss if you re-purchase the same or a substantially equal security 30 days before or after the sale date. In addition, Section 1244 losses may be useful if you invested in an early-stage private company and the business had to close down. Those losses are treated as ordinary losses rather than capital losses on your tax return, and could result in a greater tax benefit.



Most entrepreneurs and investors have a singular focus on running and growing the companies they love. This is a great time of year to take a look at your personal finances and not leave potential tax savings on the table. Take advantage of these opportunities. We would be happy to work alongside your tax and estate advisors to determine the best approach for you given your individual situation.



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About the Author

Sirma Tzoutzova is a Relationship Manager who specializes in providing personalized wealth management solutions and investment advisory services to entrepreneurs in the technology, life-sciences, private equity/venture capital and premium wine businesses. Her approach and experience help her understand the unique financial planning needs of her clients and their families, at the cross-section of private holdings and traditional investments and through the various stages of their financial life-cycle: from starting up a business, through pre-IPO to after the liquidity event and perhaps onto a new venture. She works closely with her internal team, as well as partners with third party tax, estate and insurance advisors to provide integrated wealth planning and counsel to her clients and their families.

Before joining Silicon Valley Bank, Sirma spent fourteen years with Fidelity Investments primarily in Palo Alto, California where she worked with both self-directed investors and people looking for professional advisory services.

Sirma was born and raised in Sofia, Bulgaria. She graduated from the University of Sofia with a Master’s degree in English and American Studies and a minor in journalism. Prior to immigrating to the US and during her university studies, Sirma worked as a journalist for several Bulgarian and English newspapers and as an interpreter and translator. She holds a number of professional designations: Certified Financial Planner ® (CFP®), Certified Investment Management Analyst ®, (CIMA®), Accredited Domestic Partner Advisor (ADPA®). When she is not busy advising clients and reading financial planning magazines, she enjoys being with her partner and their two children, gardening, doing yoga or enjoying a home-made meal in their Zen-themed back yard. She is also actively involved in the Bulgarian community in the Bay Area volunteering in its weekend school operations.

The individual named here is both a representative of Silicon Valley Bank as well as an investment advisory representative of SVB Wealth Advisory, a registered investment advisor and non-bank affiliate of Silicon Valley Bank, member FDIC . Bank products are offered by SVB Private Bank, a division of Silicon Valley Bank. Products offered by SVB Wealth Advisory, Inc. are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value.