2000 Tax Guide: Tips for Business Owners

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Chapter 3
Tips for Business Owners
Tax Strategies for 2001

Know what
deductible
compensation is.

Consider establishing an employee stock ownership plan (ESOP). If you own a business and need to diversify your investment portfolio, consider establishing an ESOP. A properly-funded ESOP provides you with a mechanism for selling your shares with no current tax liability. Consult a specialist in this area to learn about additional benefits.

Make a succession plan. Have you provided for a succession plan for both management and ownership of your business in the event of your death or incapacity? Many business owners wait too long to recognize all the benefits from making a succession plan. These benefits include ensuring an orderly transition and ensuring the lowest possible tax cost. Waiting too long can be expensive from a financial perspective (covering gift and income taxes, life insurance premiums, appraiser fees, and legal and accounting fees) and from a nonfinancial perspective (intrafamily and intracompany squabbles).

Consider the limited liability company (LLC) and limited liability partnership (LLP) forms of ownership. These entity forms should be considered for both tax and nontax reasons. These entities are discussed in Chapter 8.

Avoid nondeductible compensation. Compensation can be deducted only if it is reasonable. Recent court decisions have allowed business owners to deduct compensation when (1) the corporation’s success was due to the shareholder–employee, (2) the bonus policy was consistent, and (3) the corporation did not provide unusual corporate perquisites and fringe benefits.

Purchase Corporate Owned Life Insurance (COLI). COLI can be a tax-effective tool for funding deferred executive compensation, funding company redemption of stock as part of a succession plan, and providing many employees with life insurance in a highly leveraged program. Consult your insurance and tax advisers when considering this technique.

Avoid dividend treatment when a corporation purchases stock from family members. In certain circumstances, the family member may be treated as receiving a dividend and have to pay tax at ordinary income rates on the entire amount of the redemption proceeds. If certain tests are met, the family member may instead report only capital gain equal to the difference between the proceeds and basis and pay tax at a maximum rate of 20 percent. Consult your tax adviser before the corporation purchases stock from family members.

Consider establishing a SIMPLE retirement plan. If you have no more than 100 employees and no other qualified plan, you may set up a Savings Incentive Match Plan for Employees (SIMPLE) into which an employee may contribute up to $6,000 in 2000. You, as employer, are required to make matching contributions. Talk with a benefits specialist to fully understand the rules and advantages and disadvantages of these accounts.

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