Tax planning CASH management

Tax Planning CASH Flow Ratio Analysis • Entails having the following proactive advisors working in concert on one overall plan ERISA Attorney Estate Planning Attorney Valuation Analyst

Tax Planning CASH Flow Ratio Analysis

• Entails having the following proactive advisors working in concert on

one overall plan

ERISA Attorney

Estate Planning Attorney Valuation Analyst

Accountant Insurance Advisor (Life/Disability)

Pension Administration Co Cost Segregation Specialist

Pension Actuary

Pension Solutions Pension Solutions Analysis

Succession Planning RISK Management Analysis

Comprises of 4 integrated Wealth Management Disciplines

• You need a “Rep” in the Wealth Management Process

Conversion of Non-Deductible to Deductible

Flow Management

The process of managing and increasing your current cash flow

by creating an IRS “subsidy” by converting and sheltering taxable income

And

SHelter Income From Taxes

- CASH Flow Ratio Analysis

- 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

• Please consult your tax advisor before implementing any of these

strategies

• 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

- CASH Flow Ratio Analysis

• Design and implement creative tax planning strategies

that can increase after tax cash flow to the agency

Goals of CASH Flow Ratio Analysis™

• 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

• 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 do 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

• Assuming there is a business purpose to have another

corporation you can uses S and C Corp strategies to take advantage of each structure.

Double or Triple Breasted Structure

- Hypothetical Case Study

• 80% owner of Rep Agency Has two other

shareholders He is 50 yrs old

• He pays himself W-2 income of around $350,000/yr

• 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 is funding $50,000/yr into a Variable Universal Life

Policy with after tax dollars

• He built from a shell his building he occupies for

$2,000,000 He is straight line depreciating since 2003.

• Is still making payments on former buyout as Corporate

Goodwill

• As any rep has a major concern that a line loss could

substantially impact his company

- Convert Taxable Income

1 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, 7 or 15

yrs instead of 39 Any property classified as tangible

property can have the depreciation accelerated to the 5,

7 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

1 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 5 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.

- Convert Taxable Income

• 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

2 Convert To C Corporation

A M&E Expense Reduction C Corp ($13,000/yr in savings)

- Convert Taxable Income

• 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

2 Convert To C Corporation

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

W-2 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 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 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

• 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)

• client is funding $50,000/yr into a life insurance policy.

• 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

• 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.

• All employees must be offered coverage and please

consult with your tax advisor and insurance advisor

before implementing

- CASH Flow Management

• Creative Tax Planning Strategies to reduce tax exposure,

subsequently increasing your cash flow

Tax Planning is an essential element in your Wealth Management Planning

- CASH Flow Management

Please consult your tax advisor before

implementing any of the discussed strategies.