Tax Planning, Business Structure, and Wealth Strategy for Law Firm Owners | Mike Milligan CFP

Tax Planning, Business Structure, and Wealth Strategy for Law Firm Owners

Most law firm owners think about taxes once a year. That single habit is costing them more than almost anything else in their financial lives.

Mike Milligan is a Certified Financial Planner, founder of 1.oak Financial, and author of The One of a Kind Financial Plan. In a recent conversation on Your Profitable Law Firm, Mike broke down the real difference between tax prep and tax planning, the specific strategies available to business owners that most financial advisors never mention, and why the gap between what you owe and what you actually have to pay is entirely within your control.

Tax Prep vs. Tax Planning: The Distinction That Changes Everything

The most common misconception Mike encounters is that having a tax professional means having a tax plan.

Tax preparation is historical work. Someone takes what happened last year and documents it on a return. Tax planning is forward-looking work. Someone looks at your current structure, your income, your goals, and your timeline, and makes strategic decisions before the end of the year that reduce what you owe legally.

The frustration most business owners feel, "why didn't my tax person tell me I was going to owe $40,000," almost always comes from hiring a tax preparer and expecting a tax planner. The solution is understanding what to ask for and who actually provides it.

Mike also pointed out something that many people don't realize: financial advisors at large firms like JP Morgan, Merrill Lynch, and Edward Jones are actively instructed by their compliance teams to stay off the topic of taxes. It is not that they don't know. It is that the firm's legal structure prohibits the conversation. As a result, massive decisions like taking $100,000 from a 401k to pay off a mortgage get made without anyone mentioning the tax implications or the potential impact on healthcare costs for retirees.

Taxes Are Your Biggest Expense

Mike makes a claim that most financial professionals avoid: taxes are the single biggest expense in your life.

He has had to defend that statement to the Securities and Exchange Commission, which regulates what financial advisors can say. His argument: even someone with minimal income is paying personal property tax, real estate tax, sales tax, gas tax, and taxes embedded in travel and hotel stays. When you add federal income tax, state income tax, Social Security tax, and Medicare tax for a business owner, the total dwarfs any other expense category including housing and education.

The difference between other large expenses and taxes, according to Mike, is that taxes can be controlled. With the right structure, the right advisor, and the right timing, a business owner can legally reduce what they pay in taxes and reinvest that difference into building wealth.

The Tax Code Was Written for Business Owners

One of Mike's core points is that attorneys, like all business owners, have access to tax strategies that employees do not. The tax code contains far more provisions for business owners than for individuals or retirees, and most business owners never take advantage of them.

He walked through several that are particularly relevant for law firm owners:

Business Structure and Reasonable Compensation

The foundation of any tax strategy for a law firm owner is proper business structure. Establishing a payroll and paying yourself a reasonable compensation reduces the amount subject to Social Security and Medicare taxes, which for self-employed individuals can add up to 15.3% of net income. Getting this structure right is the starting point before any other strategy makes sense.

The Augusta Rule

Named for the practice in Augusta, Georgia, where homeowners rent their homes during the Masters tournament, this IRS provision allows a business owner to rent their home to their business for up to 14 days per year and receive that rental income completely tax-free. The 14 days do not need to be consecutive, and the rule applies across the entire United States, not just in Augusta. Business meetings, client events, or planning sessions held at your home can qualify. The income is not reported on your personal return, which effectively moves money from the business to your pocket without tax.

Section 179 Depreciation and Vehicle Deductions

Business owners who use a vehicle for multiple work locations may be able to deduct the full cost of a vehicle in the year it is purchased rather than depreciating it over time. Combined with proper documentation of business use, this strategy can effectively allow a business owner to acquire a vehicle using entirely pre-tax dollars, reducing taxable income in the year of the purchase.

The Solo 401k

For law firm owners without employees, or solopreneurs in general, the Solo 401k is one of the most powerful retirement and tax reduction tools available. Contribution limits are substantially higher than a traditional IRA. If the owner is married, contributions can also be made for a spouse. The plan can include a loan provision, giving the owner access to capital for business needs without triggering a taxable event. Mike described this as one of the biggest benefits that goes unused by solo and small firm owners.

Geographic Arbitrage

Where a business owner lives has a direct impact on their overall tax burden. Moving from a high-income-tax state to a state with no income tax is a straightforward example. Mike takes this further with Puerto Rico's Act 60, which allows qualifying individuals to pay a 2% tax rate on business income imported from the US mainland, with no federal income tax on that income. For a virtual or remote business, the geographic flexibility to restructure around tax-advantaged locations is a significant opportunity.

Green Light, Yellow Light, Red Light Tax Strategies

Mike categorizes tax strategies into three tiers based on risk and complexity:

Green light strategies are all-day approvals. Business structure, the Augusta Rule, the Solo 401k, vehicle deductions, family employment arrangements where children do real work in the business, and Roth conversions when income is in a lower tax bracket. These are well-established, well-documented, and straightforward to implement and defend if questioned.

Yellow light strategies require understanding. If a client can explain back to Mike exactly what the strategy is and why it works, he will implement it. The reason: if the IRS ever questions a return, the taxpayer cannot abdicate responsibility. They have to be able to explain what was done and why. Yellow light strategies are legitimate but more nuanced, and the owner needs to understand them well enough to defend them.

Red light strategies are off the table. Not because they cannot be argued, but because the risk and complexity make them inappropriate for most clients. A good advisor protects clients from strategies that look attractive on paper but create outsized exposure.

How 1.oak Financial Works With Clients

Mike described a structured engagement process that goes well beyond tax strategy. A 1.oak Financial engagement starts with identifying the vision and purpose behind a client's money, then surfaces where money is currently being wasted or misaligned with that purpose.

From there the firm covers investment management, tax reduction through their Tax Reduction Strategies division, retirement income planning, long-term care planning, and legacy planning including wills and trusts.

On long-term care, Mike cited a statistic worth sitting with: 70% of people who reach age 75 will need some form of long-term care. The cost of that care continues to rise, and the earlier planning begins, the more options are available. He made the same point about wills and trusts that many attorneys hear regularly but rarely apply to themselves: these documents are not for the person who creates them. They are for the people left behind.

The Origin Story Behind 1.oak Financial

Mike's path to financial planning started at age 11 in small-town North Carolina, selling collard sandwiches at construction sites and convenience stores with his grandmother Grady after his grandfather passed away unexpectedly.

His grandfather had run a construction business primarily in cash and had not trusted the banking system, leaving no Social Security and no retirement savings. Mike and his grandmother Grady built a small food business out of necessity, eventually accumulating enough cash in Folgers coffee cans to require a bank account. Mike walked Grady three blocks to the nearest bank and opened one.

That experience, watching a man in a suit do something meaningful with money, set the direction for everything that followed. Mike went to college, earned a degree, worked in banking and insurance for 11 years, and eventually left to build a firm that prioritized clients the way the large institutions never could.

The name 1.oak Financial stands for one of a kind. Every financial plan the firm builds is designed specifically for the individual client, not drawn from a template.

The Difference Between a Tax Filer and a Tax Planner

Mike closed with a point that applies directly to the decision every law firm owner makes about financial and tax support:

Paying $5,000 for a tax professional who does planning throughout the year will save more in taxes than it costs in most cases. Paying $2,000 for someone who files a return and nothing more may feel cheaper until you look at what you actually owed versus what you could have owed.

The questions to ask before hiring any tax or financial professional: are you a tax filer or a tax planner? Do you do proactive planning throughout the year or only at filing time? What strategies do you use for business owners in my practice area and income range?

The answers to those questions determine whether you are getting what you are actually paying for.

Key Takeaway

Taxes are not an afterthought. They are the largest financial variable in a law firm owner's life, and they respond to planning in ways that almost no other expense does.

The strategies Mike covered, from business structure to the Augusta Rule to the Solo 401k to geographic arbitrage, are not complicated in concept. What they require is someone in your corner who knows to ask the right questions before the end of the year, not after.

Connect with Mike Milligan

Website: https://1oakfinancial.com 

Radio show and question submission: https://1oakradio.com 

LinkedIn: https://www.linkedin.com/in/mikemilligancfp/ 

YouTube: https://www.youtube.com/@1.oakfinancial 

Instagram: https://www.instagram.com/1oakfinancial/ 

Text IDEAS to 600-700 to reach Mike or his team directly

Books:

• The One of a Kind Financial Plan

• Retirement Deja Vu
  

If taxes are your biggest expense and you don't have a plan in place, this episode is a good place to start.

Frequently Asked Questions

What is the difference between tax prep and tax planning for law firm owners?

Tax preparation is historical work: documenting what happened last year on a return. Tax planning is forward-looking: making strategic decisions before the end of the year to reduce what you owe legally. Most business owners hire a tax preparer but expect a tax planner. Understanding the difference and asking directly which service a professional provides is the first step toward actually reducing your tax burden.

What is the Augusta Rule and how can law firm owners use it?

The Augusta Rule is an IRS provision that allows a business owner to rent their home to their own business for up to 14 days per year and receive that rental income completely tax-free. The days do not need to be consecutive. Business meetings, client events, and planning sessions held at the owner's home can qualify. The income does not appear on the personal return, effectively moving money from the business to the owner's pocket without federal income tax.

What is a Solo 401k and who qualifies?

A Solo 401k is a retirement plan available to business owners who do not have employees, or whose only employee is a spouse. It allows significantly higher annual contributions than a traditional IRA. If the owner's spouse is employed by the business, contributions can be made for both. The plan can include a loan provision, giving the owner access to capital for business needs without triggering a taxable distribution. For solo and small law firm owners, this is one of the most underused tax reduction tools available.

Is it risky to put tax information into AI tools?

Mike flagged this as a genuine concern. Consumer AI tools gather input data to improve their models, and sensitive financial information entered into a public AI system may not be protected the way information shared with a licensed professional is. For actual tax preparation or planning, work with a licensed CPA, enrolled agent, or CFP rather than relying on an AI tool, which also lacks the contextual knowledge to ask the right follow-up questions specific to your situation.

What does geographic arbitrage mean for law firm owners?

Geographic arbitrage refers to reducing your tax burden by choosing where to live and operate based on the tax environment. Moving from a high-income-tax state to a no-income-tax state is one example. Mike uses Puerto Rico's Act 60, which allows qualifying individuals running a remote or virtual business to pay a 2% tax rate on income imported from the US mainland with no federal income tax on that income. For law firm owners who can practice virtually or who have relocated, the geographic dimension of tax planning can produce significant long-term savings.

Related Reading on Your Profitable Law Firm

If this episode connected with where your firm is right now, these posts go deeper on related topics:

• Why Your Law Firm Needs CFO-Level Thinking, Not Just a Bookkeeper 

• 3 Hidden Money Leaks Draining Your Law Firm's Profits (and how to find 7 more)

• Why Great Service Doesn't Automatically Generate Referrals