Tax Guide: Tips for Business Owners

Tips for business owners

See our newest planning guide, with tips and strategies for 1998!

A foundation
of solid business planning can
reduce taxes.

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 for additional benefits.

Make a succession plan. Have you provided for a succession plan in the event of your death or incapacity? Many business owners wait too long to recognize all the benefits from making a succession plan (such as an orderly transition at 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 a nonfinancial perspective (intra-family and intra-company squabbles).

Consider the limited liability company (LLC) and limited liability partnership () forms of ownership. These recently-created entity forms should be considered for both tax and nontax reasons. (See Chapter 8.)

Avoid nondeductible compensation. Compensation can only be deducted if it is reasonable. Recent court decisions have agreed with business owners deducting 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 28%. Consult your tax adviser before the corporation purchases stock from family members.

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