Contract Analysis & Insurance for High Net Worth Individuals in Austin

It stops at the law, and that boundary is the first thing worth saying plainly. The Reed Corporation is a CPA and tax firm. We do not draft agreements, we do not opine on whether a clause is enforceable, and we do not replace your attorney. What we do is read the terms your attorney negotiated and tell you what they will cost after tax. Those are two different jobs and they are both needed. A lawyer can win you a term that reads beautifully and moves 40 percent of the money to the IRS. We work alongside counsel, not instead of counsel, and the deliverable is a tax memo your lawyer can act on rather than a legal opinion.

Inside that boundary the ground is wide. In practice, contract analysis for high net worth clients in Austin usually means answering four questions about a document. What is the character of each dollar, meaning ordinary income against capital gain. When is each dollar taxable, which is a timing question the agreement often decides by accident. Who is the taxpayer, meaning you personally or an entity you control. And what does nobody pay attention to until it is too late, which is usually the withholding and reporting mechanics buried in the payment section. Character alone can swing the federal result by roughly 17 points before you count the net investment income tax, and no negotiating room exists after signature.

Austin sharpens the analysis in a useful way. Texas has no state personal income tax, so once the federal characterization is settled, the individual answer is settled. A seller in New York or California is running the same analysis twice because a state treats the gain differently and often taxes capital gain as ordinary income. You are not. That said, entity level exposure is real. If the contract is signed by your LLC or S corporation, the revenue may enter the Texas franchise tax base administered by the Texas Comptroller, and whether a payment lands in the entity or on your personal return changes both the franchise tax and the self employment tax answer. Which taxpayer signs is a term, and it is negotiable. The IRS overview of business structures is the plain starting point for why the signature line matters.

A short example. A client was selling a minority stake in an operating business for 2,400,000 dollars. The draft allocated 400,000 dollars to a two year consulting agreement, which read as generous because it was extra money on top. Consulting income is ordinary and carries self employment tax, so that 400,000 dollars was going to be taxed at roughly 37 percent plus the Medicare component instead of the 20 percent long term capital gain rate applying to the equity. We modeled it, counsel reopened the point, and the parties moved 300,000 dollars of that allocation into the purchase price for the interest itself, where it belonged economically since the client was not going to do 300,000 dollars of consulting. The characterization rules for dispositions are covered in Publication 544. The change was worth about 55,000 dollars of tax on a document that was two weeks from signature.

The mistake, and it is close to universal, is sending us the executed PDF. Once signed, the allocation is a fact and the analysis becomes a description of what already happened. The second version is assuming the attorney is handling tax. Most transactional attorneys will tell you directly that they are not, and they are usually the ones who call us.

Contracts do not sit in isolation, so this work runs against your books and inside a standing tax strategy rather than as a one off read. As deal structures keep drifting toward earnouts and equity rollovers, the households that route drafts through a tax review before signature will keep the room to negotiate that everyone else gives away at closing.

Because the tax code follows labels more closely than people believe, and in a negotiated agreement the parties get to write the labels. When a business or an asset is sold, the total price gets allocated across what is being sold, and each category carries its own rate. Goodwill sold by an owner is generally a capital asset producing long term capital gain. Equipment that was depreciated produces ordinary income to the extent of that depreciation, which is recapture, and it reports on Form 4797 rather than flowing quietly to Schedule D. A covenant not to compete is ordinary income to you at full rates, and the buyer amortizes it over fifteen years, which is exactly why buyers push value into it. Consulting payments are ordinary and carry self employment tax on top. Same total price, wildly different net.

Both sides sign one allocation and both sides are bound by it, which turns the allocation into a negotiation rather than an accounting exercise. Buyers and sellers want opposite things, and the price that gets agreed usually reflects a compromise that nobody modeled. That is the moment contract analysis for high net worth clients in Austin earns its keep, because a seller who knows the after tax value of each category can trade an allocation point for a price point and come out ahead on both. The basis rules that make the arithmetic work are in Publication 551, and the reporting for the capital piece runs through Form 8949.

Timing is the second label. An earnout paid over three years is not a lump sum and is not automatically installment treatment either. Whether payments are contingent, whether interest gets imputed on deferred amounts, and whether an election is made all change the year the tax lands. Deferring 500,000 dollars into a year when you also close a second transaction can push both through the net investment income tax and cost more than the deferral saved. We run those years side by side before anyone agrees to a schedule.

Here is a worked case. A client sold a services business for 1,800,000 dollars. The buyer’s draft allocated 250,000 dollars to a noncompete and 150,000 dollars to consulting, leaving 1,400,000 dollars to goodwill. The 400,000 dollars in those two ordinary buckets would have been taxed at about 37 percent, with the consulting slice also drawing self employment tax, against 20 percent on goodwill. Net difference of roughly 70,000 dollars. The buyer cared about the noncompete for real business reasons, so we did not fight that. We showed counsel that the consulting allocation had no economic support, since the client had agreed to about twelve hours of transition help. It moved to 25,000 dollars, and 125,000 dollars shifted to goodwill. Tax saved was near 23,000 dollars for a conversation that took forty minutes.

The mistake is treating allocation as boilerplate because the total is what got negotiated. Sellers focus on the headline number and let the buyer’s counsel fill in the schedule, and the buyer’s counsel is being paid to fill it in the buyer’s favor. A second and quieter error is ignoring recapture. An owner who took accelerated depreciation for six years and expects capital gain treatment on the sale of those assets is in for a surprise that Publication 550 and the recapture rules will not soften.

None of this works without accurate historical records, which is why our bookkeeping and tax strategy work are usually already in place before a letter of intent shows up. Deal terms are drifting toward more contingency and more rollover equity every year, so the sellers who model character and timing during the drafting window are the ones who will still have choices when the document is final.

More than any other sentence in the payment section. An employee has taxes withheld and a payer covering half the payroll tax. A contractor gets the gross and owes the whole thing. Self employment tax runs 15.3 percent, which is 12.4 percent for Social Security up to the annual wage base plus 2.9 percent for Medicare with no ceiling, and it is computed on Schedule SE. Above the wage base the Social Security piece stops, which is why the classification question hurts less at very high income than people assume, but the Medicare component and the additional Medicare tax keep running on every dollar. The IRS explanation of employment taxes lays out where the line sits.

Classification is not something the contract gets to decide, which surprises people. The agreement can say independent contractor in bold letters and the IRS can still find an employment relationship based on behavioral control, financial control, and the nature of the relationship. That risk mostly sits with the payer, but not entirely, and if you are the one signing on the entity side of a deal it is your exposure. When you are the one being paid, the label being wrong usually means someone else’s problem becomes your audit anyway.

The mechanics matter more than the label for most of our clients. A Form W-9 with the wrong taxpayer identification number produces a Form 1099-NEC reported under the wrong name, and that mismatch triggers backup withholding at 24 percent and a matching notice about eighteen months later. If the contract pays your single member LLC but the W-9 shows your Social Security number, the reporting will not agree with the return no matter how correct the return is. This is the least glamorous part of contract analysis for high net worth clients in Austin and it prevents more notices than everything else combined.

Texas changes the cash flow picture in a specific way. With no state personal income tax there is no state withholding to smooth anything, so the entire burden is federal and it arrives quarterly rather than by payroll deduction. A client who signs a 480,000 dollar contract as a contractor sees the money in four payments and owes roughly 178,000 dollars of federal tax with nothing held back. Estimated payments are due April 15, June 15, and September 15 of 2026 and January 15 of 2027, and the framework is in the IRS estimated tax guidance and Publication 505. Set aside the wrong percentage and April is brutal.

A concrete one. A client negotiated a 300,000 dollar contract and asked us to compare taking it personally or through an existing S corporation. Personally, the full 300,000 dollars faced self employment tax on the Medicare side plus ordinary rates. Through the S corporation, with a defensible reasonable salary of 140,000 dollars and the remainder as a distribution, the Medicare component fell away from about 160,000 dollars of the income. The saving was near 4,600 dollars annually, against roughly 2,000 dollars of added payroll and filing cost. Worth doing, but not the miracle the internet promises, and only defensible because the salary figure was supportable.

The common mistake is spending the gross. Contractor money arrives whole and feels like income in a way withheld pay never does, and the tax on it is real and already accrued. The second mistake is signing before checking which entity the W-9 will name, because unwinding reported income is far harder than directing it correctly the first time.

We keep clients out of that trap with routine bookkeeping that reserves tax as revenue posts, and our individual return work reconciles every 1099 to the contract that produced it. As payment platforms keep widening 1099 reporting, the contracts you sign this year will be visible to the matching program long before you file, and the people who set the reporting up correctly at signature will never hear about it.

Insurance clauses look like risk management and behave like tax provisions, and almost nobody reads them that way. Start with who pays the premium, because that single fact usually decides whether a benefit is taxable. Disability coverage is the clearest case. When a company pays the premium and deducts it, the benefit the executive collects is taxable income. When the individual pays with money already taxed, the benefit arrives tax free. An agreement that quietly shifts premium payment to the entity as a perk can convert a future tax free 240,000 dollar annual benefit into taxable income, and it does this while looking like a raise. Your attorney will draft the clause. We are the ones who tell you what it costs.

Key person life insurance follows a different rule that catches business owners regularly. Premiums a company pays on a policy where it is the beneficiary are not deductible, which the business expense rules in Publication 535 address directly, while the proceeds generally come in free of income tax. So the money goes out with after tax dollars and comes back untaxed. Buy sell agreements funded with life insurance carry a further wrinkle that changed recently at the Supreme Court, where proceeds a company receives to fund a redemption were held to increase the company’s value for estate tax purposes without an offset for the redemption obligation. Whether your agreement should be restructured in response is a question for your counsel. Our role is modeling what each structure does to the estate and income tax result so counsel and the family are deciding with real numbers.

Indemnity and settlement language is the third piece. The character of a payment follows the claim it replaces. Money that stands in for lost profits is ordinary income. Money that compensates for damage to an asset generally reduces basis first and produces gain only past that point, which is where Publication 551 and the disposition rules in Publication 544 do the work. Business interruption proceeds are ordinary income, full stop, and a clause that recites what the payment is for gives you a much better position than a bare number.

Entity terms sit right next to this, and it is where contract analysis for high net worth clients in Austin does its quietest work. Whether the contract names you or your S corporation or a partnership filing Form 1065 decides who reports the income, whether self employment tax applies, and whether the revenue enters the Texas franchise tax base at the Texas Comptroller. Texas has no personal income tax, so the entity question here is about franchise tax and payroll tax rather than a state rate on you. That makes the answer different than it would be for a family in California carrying an entity level state tax on top of everything else.

An example ties it together. A client’s company was paying about 12,000 dollars a year in premiums on his disability policy as a courtesy written into his employment agreement. Nobody costed it. Had he become disabled, the roughly 180,000 dollar annual benefit would have been fully taxable, netting something near 113,000 dollars. We moved the premium to him personally, the company grossed up his salary by the 12,000 dollars, and the future benefit became tax free. The annual cost was about 4,400 dollars of tax on the gross up. The protected value was around 67,000 dollars a year of benefit, for as long as a claim would have run.

The mistake is reading insurance clauses as administrative filler and skipping to the money. They are not filler, and by the time a claim pays, the tax treatment was locked in years earlier by who wrote the check. Coordinated bookkeeping and a live tax strategy catch these at renewal instead of at claim. As buy sell and executive agreements get revisited in light of the recent estate tax developments, the families reviewing the tax side of those clauses now will be the ones not renegotiating under pressure later.

Before signature, and ideally before the term sheet hardens. The honest version is that our value falls off a cliff at execution. Two weeks before signing, a payment schedule is a variable and moving it costs a phone call. The day after signing, it is a fact and we are writing a description of what happened to you. Most clients learn this once. The best window is when counsel circulates the first real draft, because that is the point where both sides still expect changes and nobody has anchored on the structure. Clients holding a draft can request a consultation while the terms are still open.

What you receive is a tax memo, not a redline of the law. It walks the agreement clause by clause and states the tax consequence of each term, quantifies the alternatives where a term could go either way, flags the questions your attorney needs to answer, and gives counsel specific language requests framed as tax outcomes rather than legal drafting. That division is deliberate. We are CPAs, and contract analysis for high net worth clients in Austin means the tax layer of a document, running alongside your lawyer who owns the legal layer. When the two run together the client gets a deal that is both enforceable and efficient. When they run separately the client usually gets one of the two.

Timing questions inside the memo are often where the money is. Whether your business reports on the cash or accrual method decides which year a December payment belongs in, and the rules for accounting periods and methods are in Publication 538. A cash method taxpayer who lets a buyer wire funds on December 28 rather than January 4 has volunteered a year of deferral for nothing. A large gain also drives the net investment income tax computed on Form 8960 and blows up the estimated tax picture, so the memo always includes what the payment does to your estimated payments for the year and whether a safe harbor still holds.

Here is what that looks like in practice. A client was closing a 900,000 dollar transaction with a scheduled December 20 payment date. Cash method. That year he had already recognized a large gain from an earlier sale and was sitting near the top bracket with the net investment income tax fully engaged. Moving the closing payment to January 8 cost him three weeks and dropped the payment into a year with materially less other income. The federal difference was roughly 41,000 dollars, and the only concession was a modest interest accrual the buyer accepted without argument because it cost them almost nothing. That was a scheduling question hiding in a document everyone had already read for legal risk. Investment income reporting rules that shaped the analysis are set out in Publication 550.

The mistake is the one we opened with, which is arriving late, and it has a subtler cousin. Clients send the contract and not the context. A document tells us what the deal says. It does not tell us what else closed this year, what carryforwards exist, what the entity did, or whether a spouse is about to trigger a gain of her own. The memo is only as good as the picture, and the picture lives in the return and the books.

That is why this work runs on top of ongoing bookkeeping and the annual individual return rather than as a standalone read. Contracts are getting longer and the tax sensitive terms are getting further from the front page every year, so the clients building a habit of sending drafts early will keep finding the 40,000 dollar decisions that sit quietly in a payment schedule nobody thought was a tax provision.