If you are a high-earning business owner or professional, unhappy with the amount of taxes you are paying, year-end is a great time to consider new tax planning strategies. There are three routinely ignored strategies that can have a major impact on your tax situation. They involve: a Captive Insurance Company, Benefit-Focused Retirement Plan, and Net Operating Losses.
Understanding how each can significantly reduce your income taxes is a must for every individual who would like to retain the maximum amount of their hard-earned income, while preserving their estates and protecting their businesses.
Captive Insurance Company
A Captive Insurance Company (“captive”) is a property and casualty (P&C) insurance company owned and operated by a qualifying business or professional firm. To qualify for your own captive, your business must be highly profitable, have taxable income in the $1.5 to $100 million range, and have extensive commercial insurance, and $250,000 or more of self-insured or uninsured business risk.
Like other insurance companies, your captive would issue P&C insurance, collect and invest premiums, and pay claims. Unlike other insurance companies which may be issuing your insurance and collecting and investing your premiums, your captive would provide you with important tax, estate planning, insurance and risk reduction benefits, including:
Tax Benefits
- Tax exemptions for small captives collecting premiums up to $1.2 million per year and tax deductions for estimated future losses for larger captives
- Significant tax savings.
Estate Planning Benefits
- The ability to transfer the captive’s ownership to a limited liability corporation (LLC), gift the LLC’s limited interest to your children or a trust in their name, and let the assets grow without being subject to estate taxes
Insurance and Risk Reduction Benefits
- The ability to transfer monies as a business expense into the captive and protect those assets against litigation risks
- More flexible underwriting and customizing of policies to better cover exposures and reduce risk
- The ability to lower your insurance costs and improve your cash flow while reducing risks and gaining substantial tax savings
Benefit Focused Retirement Plan
Did you know that under the Pension Protection Act of 2006 and the IRS Code 415(b), you can legally defer over $500,000 in taxes every year? A benefit-focused defined benefit plan is how.
Integrating actuarial, legal and insurance concepts, this retirement plan enables you to:
- Minimize your current income taxes; gain savings of upwards of hundreds of thousands of dollars;
- Provide retirement income for you and a participating spouse;
- Protect your plan’s assets from creditor claims and preserve your estate;
- Supports your investment goals, business continuing planning objectives and estate planning with strategies that by-pass the estate tax structure by removing some assets from your (business owner’s) estate and providing liquidity to pay estate taxes on the assets remaining in your (business owner’s) estate.
When compared with a traditional defined-benefit retirement plan, a benefit-focused retirement plan can facilitate as much as triple the corporate tax deductions. Further, because of its life insurance component, obtained using pre-tax dollars, if an owner passes away, the benefits of the plan can transfer to his/her spouse and heirs, and the proceeds from the insurance are income tax free. This is a powerful advantage for purposes of both estate planning and succession planning.
Net Operating Losses
A popular estate and tax planning tool of the wealthy is the Roth IRA. However, while many of its benefits are recognized and realized (i.e., no minimum required distributions and realization of future tax-free distributions), a Roth IRA conversion can trigger heavy tax impacts in the absence of effective year-end tax planning strategies.
One way to effectively offset the conversion tax on a Roth IRA is the net operating loss carry forward strategy. This strategy can be used to offset the income derived from a Roth IRA conversion by owners of various corporate structures (i.e., sole proprietors, limited liability companies and partnerships, S- corporations) who report a loss on their personal income tax returns.
A net operating loss can be carried forward for up to 20 years, however, for some business owners; it may be most prudent to harvest the loss in a single year rather than carrying it forward for many future years.
Make the Most of Your Year-End Tax Planning
Business owners have a distinct opportunity at year-end to deploy new, effective strategies that reduce their tax liabilities, protect and preserve their personal and business assets, and address their broader estate and business planning objectives. Captives, benefit-focused retirement plans and net operating loss carry forwards are three such strategies that deliver significant tax planning benefits.
Charlie Massimo is the CEO and Founder of CJM Wealth Management. CJM Wealth Management specialize in helping entrepreneurs, business owners and professionals enhance wealth while mitigating taxes and risk through advanced planning solutions.
