Tax planning CASH management

Comprises of integrated Wealth Management Disciplines Tax Planning CASH Flow Ratio Analysis Pension Solutions Pension Solutions Analysis Succession Planning RISK Management Analysis • Entails having the following proactive advisors working in concert on one overall plan ERISA Attorney Estate Planning Attorney Accountant Pension Administration Co Pension Actuary • Valuation Analyst Insurance Advisor (Life/Disability) Cost Segregation Specialist You need a “Rep” in the Wealth Management Process - CASH Flow Ratio Analysis Conversion of Non-Deductible to Deductible And SHelter Income From Taxes Flow Management The process of managing and increasing your current cash flow by creating an IRS “subsidy” by converting and sheltering taxable income - CASH Flow Management • The following presentation and strategies use Hypothetical examples with actual strategies that have been implemented • This presentation illustrates the potential tax planning opportunities that exist given the proper facts and circumstances • Most tax advisors for rep agencies are not familiar with what a rep does and are not tax attorneys • Competent Tax Advisors are crucial to your overall Succession and Wealth Management Planning • Please consult your tax advisor before implementing any of these strategies - CASH Flow Ratio Analysis Goals of CASH Flow Ratio Analysis™ • Design and implement creative tax planning strategies that can increase after tax cash flow to the agency • An increase of cash flow creates additional value and allows for the opportunity to position additional cash flow to leverage that value • The ability to create an IRS “subsidy” ie dollars that the IRS usually receives are retained or re-invested into the agency • Additional Dollars can be used in your Wealth Management Plan - Corporate Entity Three Main Choices • S Corporation • C Corporation • LLC S Corporation • Minimize Payroll Tax So on $300,000 of compensation in C Corp and full w-2 you pay FICA (6.25% each) on first $102,000 and Medicare (1.45% Each) on the full amount • As S corp you could W-2 $125,000 and take k-1 of $175,000 You would save 2.9% on $175,000 or $5,075/yr • The other benefit to S Corp is Accumulated Adjustments Account (Retained earnings) If you Redeemed shares in C Corp there is no step up in basis So if you redeemed $1,000,000 of stock and went to sell in future, pay On entire amount - Corporate Entity • As an S Corporation the Payments would be added to your AAA and you would have cost basis of $1,000,000 in future C Corporation • The C Corp has taxes on the first $75,000 of profit at 18% effective tax rate vs Personal Tax rate of 35% • On $75,000 of Profit C Corp would pay $13,500 vs S Corp flow through of $26,250 or almost $13,000/yr in tax savings • The other benefit is if you have other minority shareholders You not have to pay pro rata distribution on profits - Corporate Entity LLC • The benefit to this structure is Pass through like S Corp but can pay disproportionate distributions Double or Triple Breasted Structure • Assuming there is a business purpose to have another corporation you can uses S and C Corp strategies to take advantage of each structure - Hypothetical Case Study • 80% owner of Rep Agency Has two other shareholders He is 50 yrs old • Has one key person to bring in as potential successor • Company is S Corporation with annual profit of around $350,000 (K-1) before bonuses • He built from a shell his building he occupies for $2,000,000 He is straight line depreciating since 2003 • He pays himself W-2 income of around $350,000/yr • Is still making payments on former buyout as Corporate Goodwill • He is funding $50,000/yr into a Variable Universal Life Policy with after tax dollars • As any rep has a major concern that a line loss could substantially impact his company - Convert Taxable Income Cost Segregation Study • Federal Tax law require building costs to be depreciated over 39 yrs In this case the $2,000,000 of building cost is being depreciated over 39 yrs or $25,000/yr • tangible property cost can be depreciated over 5, or 15 yrs instead of 39 Any property classified as tangible property can have the depreciation accelerated to the 5, or 15 yr period, vs the straight line of 39 yrs • In Health Corp of America Inc vs The Commissioner the Tax Court held that a taxpayer may allocate building costs between the structural components of the building and tangible personal property Prior to Health Corp of America Inc vs The Commissioner the IRS’s position was you could not separate the costs The tax court disagreed and the IRS “acquiesced” meaning it would not appeal - Convert Taxable Income Cost Segregation Study ($44,000 Tax Savings) • In this case we are able to segregate $244,000 as tangible assets $90,000 as 15 yr, $155,000 as yr • This generates additional depreciation deductions of $244,000 • There will also be the accelerated depreciation going forward on the new depreciation vs the old Depreciation $109,088 $ 18,792 $ 17,028 $ 9,205 $ 1,710 - Convert Taxable Income Convert To C Corporation A M&E Expense Reduction C Corp ($13,000/yr in savings) • The company has $29,000 of M&E expenses paid but not deducted In order to pay $29,000 after tax the company has to generate $44,615 in taxable income, pay taxes of 35% or $15,615 to be left with $29,000 after tax - Convert Taxable Income Convert To C Corporation • The C Corp will pay for those expenses at the lower C Corp tax rate of 15% This means that in order for the C Corp to have $29,000 after tax it would have to generate $34,117, pay taxes of 15% or $5,117 to be left with $29,000 after tax This saves $10,498/yr B Profit Distributions to 20% Shareholders $15,615/yr savings • • As an S Corp 20% or $29,000 of income ($145,000X20%) is taxed to 20% shareholders The agency was paying W2 income to them to pay for the taxes on this income ($10,150) This means the company had to bonus $15,615 of income As a C Corp this $15,615 will not have to be paid Accelerating Asset/Goodwill Purchases • Many Owners have purchased previous agencies as Asset Sales Asset sale is amortized over 15 yrs to the buyer • The asset that comprises most of the sale are the Lines/contracts As part of the sale a non-compete is usually signed that prohibits the seller from taking back the lines • the personal good will of the owner has really been purchased If it was not personal goodwill you would not need a non-compete • their may be an opportunity to accelerate the 15 yr amortization into one year So if you have $500,000 to amortize over a remaining 10 yrs you could potentially take the full deduction of $500,000 in this tax year • The savings in this example is the present value of $500,000 deduction today or $500,000 over 10 yrs The savings would be around an additional $134,00 increased deduction or $50,000 in cash savings - Shelter Taxable Income Captive Insurance Company • • This strategy fits with an owner who has substantial Profit each year, pays a lot of taxes on the Profit and has potential liability to lose a line, and would like to protect Profits/Assets from Liability Captive Insurance companies fall under section 831 of the Tax Code 24 States now officially provide Captive Insurance company domiciles • You set up A C Corporation with ownership as you wish for the purpose of insuring against a line loss Other risks that may be included could be product liability, employee competition and other non-traditional risk items that you cannot insure • An Actuary underwrites a custom policy for your company and assigns a premium on the coverage As an example to self insure against $1,250,000 of a line loss and other liability the annual premium would be $300,000/yr - Shelter Taxable Income Captive Insurance Company • The $300,000 is funded into the C Corp and the $300,000 is fully deductible to your company The Tax Savings in a 40% combined tax rate would be $120,000/yr • The C Corp would invest the dollars in tax free municipal bonds or similar non-taxable investments since any growth of the company would be taxable So invested properly it is tax free • • Any claims you make are paid to your parent company with no taxes This allows you to self insure against a line loss on a tax deductible basis You not have to make pay a claim on a loss, although there must be some activity Any annual profits could be distributed as dividends Only subject to 15% tax rate currently - Shelter Taxable Income Captive Insurance Company • Eventually when you dissolve the corporation the dollars are taxed at Capital Gains rates These are currently only 15% They may go up but there should always be a 20% or so difference between income tax and capital gains tax rates • The company assets are fully protected against liability and so this company provides asset protection • The primary reason for the company is to self insure against a line loss and other liabilities but the tax treatment of the company is: Fully Deductible on the Premiums Tax Free to the extent you have tax free investments Tax Free on Claims Dividend tax on profit distrubutions Capital Gains Tax Upon Retirement - Shelter Taxable Income Captive Insurance Company cost • The cost of the set up of the plan must be evaluated upon a cost to benefit ratio But first year costs may range from $60,000 for Pure Captives and could be as low as $10-$15,000 in “Group” Captives • If you just paid taxes on the $300,000 of profit you would pay $120,000 in taxes and be left with $180,000 subject to potential liability • Even in the pure captive the cost of $60,000 first year set up is much less than the $120,000 in taxes and the annual administration will be far less than the annual taxes - Sect 79 Insurance • client is funding $50,000/yr into a life insurance policy • IN General Cash Value life insurance is a creative way to protect for business or personal planning Dollars are funded after tax, cash value grows tax deferred, death benefit is tax free and you can access cash value for retirement tax free (as long as policy stays in force) • The two ways to benefit from the tax benefit is to fund the maximum into the plan and fund it with tax efficient dollars • Funding $50,000/yr into a cash value policy really costs $83,333 per year in a 40% combined tax rate • A section 79 plan allows you to fund the same premium and ultimately receive around a 35% tax deduction on the funding IT ultimately allows you to fund an additional $17,500/yr into the plan In 10 yrs that could equate to an additional $225,000 of cash All employees must be offered coverage and please consult with your tax advisor and insurance advisor before implementing • • - CASH Flow Management Tax Planning is an essential element in your Wealth Management Planning • Competent Advisors • Creative Tax Planning Strategies to reduce tax exposure, subsequently increasing your cash flow Cost Segregation C Corp/S Corp Amortization of Goodwill Captive Insurance Company Section 79 Plan - CASH Flow Management Please consult your tax advisor before implementing any of the discussed strategies   [...]... equate to an additional $225,000 of cash All employees must be offered coverage and please consult with your tax advisor and insurance advisor before implementing • • - CASH Flow Management Tax Planning is an essential element in your Wealth Management Planning • Competent Advisors • Creative Tax Planning Strategies to reduce tax exposure, subsequently increasing your cash flow 1 2 3 4 5 Cost Segregation... $120,000 in taxes and the annual administration will be far less than the annual taxes - Sect 79 Insurance • client is funding $50,000/yr into a life insurance policy • IN General Cash Value life insurance is a creative way to protect for business or personal planning Dollars are funded after tax, cash value grows tax deferred, death benefit is tax free and you can access cash value for retirement tax free... $300,000/yr - Shelter Taxable Income Captive Insurance Company • The $300,000 is funded into the C Corp and the $300,000 is fully deductible to your company The Tax Savings in a 40% combined tax rate would be $120,000/yr • The C Corp would invest the dollars in tax free municipal bonds or similar non-taxable investments since any growth of the company would be taxable So invested properly it is tax free • •... income tax and capital gains tax rates • The company assets are fully protected against liability and so this company provides asset protection • The primary reason for the company is to self insure against a line loss and other liabilities but the tax treatment of the company is: Fully Deductible on the Premiums Tax Free to the extent you have tax free investments Tax Free on Claims Dividend tax on... 18,792 $ 17,028 $ 9,205 $ 1,710 - Convert Taxable Income 2 Convert To C Corporation A M&E Expense Reduction C Corp ($13,000/yr in savings) • The company has $29,000 of M&E expenses paid but not deducted In order to pay $29,000 after tax the company has to generate $44,615 in taxable income, pay taxes of 35% or $15,615 to be left with $29,000 after tax - Convert Taxable Income 2 Convert To C Corporation... company with no taxes This allows you to self insure against a line loss on a tax deductible basis You do not have to make pay a claim on a loss, although there must be some activity Any annual profits could be distributed as dividends Only subject to 15% tax rate currently - Shelter Taxable Income Captive Insurance Company • Eventually when you dissolve the corporation the dollars are taxed at Capital... as policy stays in force) • The two ways to benefit from the tax benefit is to fund the maximum into the plan and fund it with tax efficient dollars • Funding $50,000/yr into a cash value policy really costs $83,333 per year in a 40% combined tax rate • A section 79 plan allows you to fund the same premium and ultimately receive around a 35% tax deduction on the funding IT ultimately allows you to fund... for those expenses at the lower C Corp tax rate of 15% This means that in order for the C Corp to have $29,000 after tax it would have to generate $34,117, pay taxes of 15% or $5,117 to be left with $29,000 after tax This saves $10,498/yr B Profit Distributions to 20% Shareholders $15,615/yr savings • • As an S Corp 20% or $29,000 of income ($145,000X20%) is taxed to 20% shareholders The agency was... distrubutions Capital Gains Tax Upon Retirement - Shelter Taxable Income Captive Insurance Company cost • The cost of the set up of the plan must be evaluated upon a cost to benefit ratio But first year costs may range from $60,000 for Pure Captives and could be as low as $10-$15,000 in “Group” Captives • If you just paid taxes on the $300,000 of profit you would pay $120,000 in taxes and be left with $180,000... deduction of $500,000 in this tax year • The savings in this example is the present value of $500,000 deduction today or $500,000 over 10 yrs The savings would be around an additional $134,00 increased deduction or $50,000 in cash savings - Shelter Taxable Income Captive Insurance Company • • This strategy fits with an owner who has substantial Profit each year, pays a lot of taxes on the Profit and has ... your tax advisor and insurance advisor before implementing • • - CASH Flow Management Tax Planning is an essential element in your Wealth Management Planning • Competent Advisors • Creative Tax Planning. .. for business or personal planning Dollars are funded after tax, cash value grows tax deferred, death benefit is tax free and you can access cash value for retirement tax free (as long as policy... the tax treatment of the company is: Fully Deductible on the Premiums Tax Free to the extent you have tax free investments Tax Free on Claims Dividend tax on profit distrubutions Capital Gains Tax