Business Owners

You may already be offering health, disability and a retirement program. If you aren’t you may want to look into your options. If you are, what else can you do?

Show your employees that you care through low-cost, high-value employee benefits. Consider things like flexible work schedules, social activities, and discounts to local establishments (support your local business community). Look to promote healthy lifestyles, consider offering gym memberships and free healthy food options at the office such as fruit, nuts and soft drink alternatives.

You could also offer financial service counseling for your employees and make it available during work hours.

The biggest advantage of incorporation is that the business assets of the corporation are separate from your personal finances. As a result, your personal assets generally can be shielded from creditors of the business.

Selecting to be treated as a C Corporation may also allow you, the business owner, to be eligible to participate in certain fringe benefit programs available only to workers classified as employees of the corporation.

To maintain this legal separation you must keep corporate assets separate from personal assets, hold periodic shareholder meetings, and file reports required by various government agencies, including a separate tax return. There is a cost associated with establishing and maintaining corporate formalities, and should be considered before making any decision. You will want to consult with your legal and tax advisor regarding the impact for your business.

When doing business as a C Corporation there are certain tax implications to consider and should be reviewed with your legal and accounting team.It is possible that the Corporate tax bracket may be lower than your personal tax bracket – this may lead to some benefit opportunities. Also, remember that a distribution from the C corporation to you as a shareholder may be treated as a dividend. This is sometimes referred to as double taxation – the earnings were taxed at the corporate level then again as a dividend when received by the shareholder. Whether this results in a higher tax cost than might be available through other business entities will actually depend on the corporate tax rate and the dividend tax rate.

Before deciding to incorporate, you should seek legal and tax advice on what type of ownership best suits your business.

The answer is it depends. It depends on what you anticipate your future individual tax rate to be and whether you can put the funds in a tax deferred asset as an alternative to the qualified plan. If you anticipate that your personal tax rate will be lower at retirement, then it may make sense for you to contribute to a qualified plan (and receive a current tax deduction and tax deferred growth). If you think your tax rates will be the same or higher in the future you need to factor in other issues. Determine if you will be able to use the potential tax savings from the contribution to the qualified plan and contribute the tax savings to a tax deferred growth fund. The combination of current tax savings, contributions to the qualified plan and the growth of the tax savings if contributed to a fund, may overcome the ultimate tax cost on withdrawals from the qualified plan.

Work with your tax advisor to see if a qualified plan makes sense for you.

Through the use of a so called Intentionally Defective Grantor Trust (funny name but that’s what the tax code calls them), you may be able to minimize both income and estate taxes.

By selling the business to the trust, any future appreciation of your business will be removed from your estate.It may be possible for you to receive a stream of payments from the Trust (as payment for the business) which may provide cash flow to you for retirement. Under current tax rules, the sale of the business through an installment note to the grantor trust should not result in taxable gain and the installment payments may also avoid current personal income taxes.

This area of planning is complex, and you will want to work with your legal advisor on the best solution for you.

Qualified Plans

If your businesses are considered a controlled or affiliated service group, which would be the case if you owned 100% of both businesses, then both businesses have to be covered by the plan. To determine if you are a controlled or affiliated service group, you will want to consult with your legal/tax advisor.

Yes. Employers, regardless of your entity type, are eligible for a tax credit of up to $500.00 for three years if they establish a qualified plan that covers rank and file employees.

No. As long as you do not have any employees, and your plan assets are less than $250,000, you do not have to do annual 5500 filings.

Non-Qualified Plans

Three common methods that are used. The simplest method is the multiple of income method and often a multiple of five or seven is applied. Another method is the cost of replacement method. This method considers such things as expenses to recruit, hire, and train as well as salary. Slightly more complicated is the contribution to earnings method. Your legal or tax advisor can assist you with which method is most appropriate for your business.

No. There are no formal requirements to establish an Executive Bonus program. The employee will apply for, and own, the life insurance policy. Your business will pay the premium directly to the insurance company. The premium will be considered as a “non-cash” fringe benefit for withholding purposes and are reported as other compensation on the employee’s W-2, subject to FICA and FUTA.

Business Continuation

There are three common methods that are used. The simplest method is the multiple of income method and often a multiple of five or seven is applied. Another method is the cost of replacement method. This method considers such things as expenses to recruit, hire, and train as well as salary. Slightly more complicated is the contribution to earnings method. Your legal or tax advisor can assist you with which method is most appropriate for your business.

No.There are no formal requirements to establish an Executive Bonus program.The employee will apply for, and own, the life insurance policy.Your business will pay the premium directly to the insurance company.The premium will be considered as a “non-cash” fringe benefit for withholding purposes and is reported as other compensation on the employee’s W-2, subject to FICA and FUTA.

Business Transition

No. Although the premiums are not deductible, the death benefit will be received income-tax free (as long as the notice and consent requirements under IRC Section 101(j) are followed).

If your life insurance is permanent insurance that has accumulated cash values, you may be able to withdraw, or take a loan against, those cash values to provide cash towards your purchase of their interest.

Life insurance policy loans and withdrawals reduce the policy's cash value and death benefit and may result in a taxable event. Surrender charges may reduce the policy's cash value in early years.