Tax Planning CASH Flow Ratio Analysis

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(No Transcript)
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Comprises of 4 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 Valuation Analyst
• Accountant Insurance Advisor (Life/Disability)
• Pension Administration Co. Cost Segregation
  Specialist
• Pension Actuary

• You need a Rep in the Wealth Management Process
  

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- 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.
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- 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.

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- 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.

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- 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.

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- 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.

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- 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.

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- 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

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- 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
  IRSs position was you could not separate the
  costs. The tax court disagreed and the IRS
  acquiesced meaning it would not appeal.

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- 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.
• Depreciation
• 1 109,088
• 2 18,792
• 3 17,028
• 4 9,205
• 5 1,710

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- Convert Taxable Income
2. Convert To C Corporation
A. ME Expense Reduction C Corp (13,000/yr in
savings)

• The company has 29,000 of ME 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.

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- Convert Taxable Income
2. 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 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

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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.

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- 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.

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- 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

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- 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

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- 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.

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- 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.

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- 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. Cost Segregation 2. C Corp/S Corp 3.
Amortization of Goodwill 4. Captive Insurance
Company 5. Section 79 Plan
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- CASH Flow Management
Please consult your tax advisor before
implementing any of the discussed strategies.
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