I have been working with a client recently that will end the year with a significant tax liability. We have been exploring ways to defer some of the company earnings in a retirement plan change. The first step in this process was to develop a good cash flow forecast so we could get the “peek into the future” on the company performance and understand the estimated tax liability that would exist at year end.
There are not many significant options available for business owners to defer taxes apart from retirement plans. Of course this is a good time to bring in your team of experts – your B2B CFO, CPA and retirement plan advisor so that you can understand the options available to you and set things up before the end of the year.
One tax deferral method that is gaining in popularity is the captive insurance company. Here is the brief concept of the captive. A new insurance company (the captive) is created with one client – your business owner’s company. The captive is owned by the business owner or a related party. Legitimate risk areas are identified that are then insured by the captive and premiums are paid into that company. Years later, if no claims are paid out or there is remaining cash, the captive is closed and the cash transferred to the estate of the business owner. On the plus side, up to $1.2 million in premiums can be made to the captive and deducted by the owners company. On the downside, these situations are relatively expense to establish and maintain and must be carefully managed to IRS regulations.
Another area to defer tax dollars in in the structure of your company retirement plan. Cash balance plans and defined benefit plans can be structured to put away significant dollars for the owner and key employees while offering a great benefit to the other employees. Once again it is very important to have your team of experts in on this task to insure you are compliant with IRS regulations and understand all of the pros and cons of each plan.
Let me know if you would like to discuss these things as the year end is getting close.
Enjoy your day!