12 great ideas in 60 minutes

12 Great Ideas in 60 Minutes

James Sacher, CPA

October 30, 2014

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• Twelve solutions looking for a problem

• Huge increase in tax rates make these worth some thought

• Won’t work for everybody

• Some may be old some, some forgotten, some obscure, some new

• If anything strikes a chord – call us

GREAT IDEAS

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FOR CHILDREN

#1: IRA

• What to look for:

Closely held business operating profitably

Family members of working age

Some disposable income

• The opportunity:

Put the kids to work

Pay them a reasonable wage

Contribute their earnings to an IRA

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FOR CHILDREN

#1: IRA

• The benefit:

Tax free income to the kids

(because of the IRA contribution

deduction and/or tax rates)

The miracle of compounding

‒ 8 years of $2,000 contributions from

age 14 to 21, at 3%, grows to

$65,296 by age 65

Bonus: use a Roth IRA; miss the

tax deduction, but completely tax

free at age 65

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Accrual basis business

That is profitable

Prepaid expenses on the Balance Sheet


Treat prepaid expenses on the cash basis

• The benefit:

One time deduction on all of the prepaid expenses on the

Balance Sheet

No permission for change of accounting method required

#2: PREPAID EXPENSING

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• What to look for: Real estate acquired within the last several years

Tax paying entity

Cost over $750,000

• The opportunity: Reclassify property depreciated over 39 years into shorter lives

(5, 7, or 15)

• The benefit: Faster tax depreciation, larger tax deductions

Missed depreciation from prior years can be caught up all at once (big deduction)

#3: COST SEGREGATION

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FOR LLC MEMBERS

#4: MINIMIZING SE TAX

• What to look for: LLCs that are operating profitably

Have owners that are active in the business

• The opportunity: Create a second class of ownership units (B units) with no voting

rights

Issue at least 20% of the ownership to non-active third parties (spouse / family members)

• The benefit: B units do not attract the self-employment tax

Savings 2.9% - 3.8% of trade or business income

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Business owners that have

available cash flow

Business owners that want to

compensate key management


Create a long-term care plan for

key executives

Could supplant their existing out

of pocket costs

#5: LTC INSURANCE

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• The benefit: Provide long term care insurance at no tax cost to select

employees

Tax deductible to the corporation

Benefits are tax free to the insured

Can be discriminatory

Includes spouse and family members

Portable

Discounted pricing

Could even be a trade for salary

No brainer

#5: LTC INSURANCE

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CHARGE DISC

#6: INTEREST


Profitable operating businesses selling into foreign countries

Where most of the production costs are in the US


Create an Interest Charge (IC) Domestic International Sales

Corporation (DISC) to act as the “selling agent” for the operating

business

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CHARGE DISC

#6: INTEREST

• The benefit:

Sales commissions paid to the IC DISC are tax deductible to the

operating business

The IC DISC is tax free: dividends paid to shareholders taxed at

20%

Can be accumulated for estate planning

Can shift income to lower bracket tax payers

“The bucket of money in the parking lot”

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POLICY

#7: R&M CAPITALIZATION


Fixed asset purchases

Profitable company

Audited financial statements


Adopt formal fixed asset capitalization policy

Expense all purchases under $5,000

• The benefit:

Immediate tax deduction for capital assets

Reduced record keeping

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Purchases of fixed assets

Hiring of employees

Expansion of business


The State of Ohio InvestOhio Program

Limited time only!

#8: INVESTOHIO

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• The benefit:

Ohio income tax credit equal to 10% of equity contributed to

business

Available in five years

Found money – the state will subsidize 10% of your cost

#8: INVESTOHIO

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Company sponsored retirement plans

Business owner as trustee

Risk averse


Hire a section 3(38) advisor

• The benefit:

Transfer investment risk to a third

party

Clean up ERISA risks

Better management of retirement

assets

#9: ERISA REVIEW

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INSURANCE COMPANY

#10: CAPTIVE


Profitable business that wants to better manage its insurance

costs or has difficulty obtaining cost effective coverage

Annual insurance premiums of about $1MM


Create a private insurance company to provide first layer of

coverage for business risks

Insure otherwise problem risks

Better control risk management

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INSURANCE COMPANY

#10: CAPTIVE

• The benefit:

Better control of insurance costs since the operating business

takes the first layer of risk

Can find coverage for hard to insure risks

Create a tax deduction for the operating business without

creating taxable income for the insurance company

Perhaps convert ordinary income into capital gain

Build a war chest for future claims

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#11: ESOP


Profitable business

Older owners interested in

taking risk off the table

Not quite ready to sell to a

third party


Create an Employee Stock

Ownership Program to buy the

company

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• The benefit:

Owner sells the business for fair market value

Bank financing for the buy out

No immediate gain to the owner

Steady, regular cash stream to the owner

Increased cash flow for the business

Owner stays in some level of control

#11: ESOP

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DEDUCTION

#12: SECTION 199


Profitable business

Engaged in manufacturing

Qualified Production Activity Income less than Taxable Income


Increase the Domestic Production Activity Deduction

For all open years

• The benefit:

Tax savings from increased deductions

Can apply to construction companies and software developers

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RETIREMENT PLAN

BONUS #13: CASH BALANCE


Profitable business

Disposable cash flow

Small or younger work force or workforce with generous current

retirement plan

Owners older and active in the business

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RETIREMENT PLAN

BONUS #13: CASH BALANCE


Create a tax favored retirement plan that

behaves like a 401(k) plan with defined

benefit plan limits

Large contributions on behalf of older

owners

• The benefit:

Large tax deductions for money going to

owners

Creditor protection

Some flexibility

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• Lots of ideas in a short time

• Many technical requirements

• Do it right; no shortcuts

SUMMARY

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IDEA AT THE TIME

IT SEEMED LIKE A GOOD

Don’t be like this guy…

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If you have any questions, or need additional

information, please contact:

Jim Sacher, CPA

Partner(440) 449-6800

[email protected]

QUESTIONS?

mailto:[email protected]