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5 Ways Life Insurance Benefits Small Business Owners

 

The primary purpose of life insurance is to pay a death benefit – almost always tax free – when the insured dies. We’re all familiar with the need to insure the life of a breadwinner to protect a spouse and children from financial catastrophe. But business owners have some special needs to address, too, over and above their role as breadwinners for their families. Let’s take a closer look at the use of life insurance in a business context.

Life Insurance as an Employee Benefit

You can buy life insurance for your employees as an employee benefit, similar to any other benefit, under Section 7702 of the Internal Revenue Code. Generally, the law lets business owners deduct the premiums for up to $50,000 of term life insurance for their employees. This is important in a society where employees are more and more used to getting insurance coverage from work. In some cases, this coverage may be the only life insurance a worker has.

Funding Buy Sell Agreements

If you have a business with one or more partners or other shareholders who are active in managing or running your business, you should have a buy-sell agreement in place. In a nutshell, this is a written agreement that the survivor will purchase the deceased partner’s interest in the business for cash from the deceased’s estate – and that the deceased’s estate will sell.
If you fail to create a buy-sell agreement, you may find yourself in business with your partner’s spouse. Or worse, your partners’ spouse’s lawyers. Your partner’s heirs may have no expertise in or interest in running your business, which could create big problems down the road. They will still be entitled to your ex-partner’s share of any dividends or distributions from the business, and will demand their fair share of cash even though they may contribute little or nothing to the business’s operation. A buy-sell agreement protects both sides by ensuring the heirs get the cash they need, while you get to continue running the business.
And where does the cash to fund the agreement come from? Life insurance. Each partner can own a policy on each of the other partners, or the business itself can own the policy.

 

Key Person Insurance

Does your business have a key salesperson, manager or technician who is so productive, or so crucial to your operation, that it would severely damage your business if this person were to unexpectedly pass away? If so, you have an insurable interest in that individual, and you may want to consider owning a policy on him or her. If the worst happens, the policy will provide your business with enough cash to keep functioning while you search for, hire and train a replacement. This could cost tens or even hundreds of thousands of dollars.

Bonus Plans

Some life insurance policies – specifically ‘permanent’ insurance policies such as whole life or universal life policies, build cash value. The policy owner can use this cash value for any purpose. In some cases, you can structure a plan to award the cash value to a key employee as a bonus after a certain number of years of service. This so-called “golden handcuffs” plan gives your top employees a powerful incentive to stay with your company, and as time goes by, it gets very difficult for competitors to “poach” your key people.

Supplemental Retirement Planning

Cash value plans can also be a great way for you to supplement your retirement income, without all the many restrictions that come with standard retirement plans such as 401(k)s and IRAs. You can restrict life insurance-based retirement plans to owners and executives, for example, to supplement your other retirement savings. By purchasing a modest-sized death benefit, and funding the policy with substantial premiums, you can build significant cash value over time. You can use this for retirement or even as a source of reserve capital for your business. You don’t have to wait until you are age 59 1/2 to use the money. Or you can simply keep the policy in force and use it for the purpose for which it was designed: Life insurance.

There are nearly as many ways to use a life insurance policy to benefit a business or business owner as there are businesses. Every business is different.

 

 

 

Preparing for Possible Tax Reform in 2013

Significant changes in the tax code are expected next year — or even during the post-election Congressional session — that could have a big impact on decisions that you — the small business owner — make regarding capital expenditures, acquisitions, and simply your overall business operations and strategies.

In what is being dubbed the “fiscal cliff”, we could be seeing the effects of tax reform at the end of 2012 and into 2013. Due to the 2013 federal tax reform, as a small business, you need to consider making some adjustments in 2012 so that you are in the best position when any sweeping tax code changes roll in. The following provides insight into what your business can do to prepare for the upcoming 2013 federal tax reform.

Steps to Prepare for Possible 2013 Tax Reform

Review current tax operations. The first step to prepare for the 2013 federal tax reform is to review your current tax operations, including examining your accounting methods. Knowing where your tax rates stand right now can help you be better prepared about where they may head in 2013. During the Bush administration, tax cuts put the average tax rate from ordinary income between 10% and 33%. However, these rates may increase up to 39.6% for 2013 for certain levels of ordinary income. Decide if accelerating income makes sense. Many businesses typically defer income while accelerating expenses to have a more favorable tax situation. However, this approach may not end up being the best if certain tax code changes are made before the end of 2012. In other words, it may be more prudent for your business to accelerate income into 2012 and defer expenses into 2013 in order to minimize the potential of higher tax rates next year. If you decide to accelerate income, you’ll need to fit certain criteria. This includes collecting a bonus before December 31st, selling a home before January 1st 2013, selling any assets with capital gains, billing your customers immediately so your payments come in before the end of 2012, and delaying your 2012 capital expenditures and expenses. Convert traditional IRAs to Roth IRA’s. Your retirement savings, including IRAs, could result in negative consequences in the upcoming years due to the tax reform. One way to overcome this is to convert any traditional IRAs to a Roth IRA before the end of 2012. Consider delaying charitable contributions. If you typically make charitable donations near the end of 2012, consider holding off until January 1st 2013 or later. This will help reduce your taxable income in 2013, rather than being applicable for the 2012 tax year. Rebalance investment exposure to increase tax-exempt investments. One of the big hot topics for the 2013 tax reform is the Medicare surtax. This includes the addition of a 3.8% surtax for Medicare for anyone who has income not earned by salary or trade. As a business owner, consider rebalancing your portfolio of investments to increase tax-exempt investments exposure, which will lower your net investment income. While the entirety of how the tax reform will play out in 2013 is uncertain, in all likelihood some substantial changes are on the horizon. Examine the above considerations to prepare for possible tax reform, and be sure to speak with us about how the possible upcoming tax code changes can impact your business.

 

 

As a business owner, taxes are a necessary evil, and they are especially important to keep in mind toward the end of the year. As year-end approaches, there are some things you need to plan for, including tax planning for your small business. With year-end tax planning your business can reduce liabilities and increase deductions. With the help of proper organization, a solid business plan, and an experienced accountant, you can avoid a stressful situation — and paying unnecessary taxes.

Year-End Tax Planning Strategies

Here are are three important tasks to conduct as the end of the tax year-end approaches:

1) Get organized. Start by getting your tax documents organized, which includes both your business expenses and income. If you handle your own accounting for your business, it’s prudent to use an accounting software program, which will help you record your income and expenses accurately as well as make it easier to organize your finances. An accounting software program can also be used for invoicing clients, creating business reports, and having access to balance sheets and income statements. It’s important to keep all financial areas of your business in order, including inventory monitoring, invoicing, incoming and outgoing funds, payroll, and other monetary paperwork. If you start getting organized now, the remainder of your year-end planning will go more smoothly.

2) Consider setting up a retirement plan. If you haven’t done so already, it’s not too late to set up a retirement contribution plan. Whether you decide to use a Traditional IRA or Roth IRA, any pretax contributions you make prior to year’s end will reduce your taxable income. As a result, your tax liability is reduced, offering some much-needed tax relief. If you haven’t yet maxed out your retirement contributions for the year, then if at all possible, do so as part of your year-end tax planning.

3) Set up an appointment with your tax accountant. Before the December holiday season — and the sooner the better — you should also set up an appointment with the accountant who handles your taxes. Ideally, this should be the accountant or CPA that you meet with to file your business tax return. In any event, if you have been following your business plan throughout the year with excellent recordkeeping and organized files, this end of the year meeting will go quickly and smoothly. Your tax accountant will use your documents, finances, and business assets for preparing your end-of-year taxes and plan for the next year.

The end of the calendar year is important for small businesses for many reasons, but tax planning is one of the most important. Tax time will be here before you know it, but if you have your financial house in order, you won’t have any hiccups.

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Who you hire for your organization can be the most critical decision you make for the future success of your company. Hire the right team and success is almost guaranteed. Hire the wrong group and your company’s very survival can be in jeopardy. In other words, hiring is nothing to take lightly. This article will serve to provide the 5 best practices when hiring employees.

Practice 1. Define the position

Create a clear and exact description of the position you are seeking employees for. This will enable you to advertise to attract only those who are qualified for the position. Prospective employees need to know exactly what you are seeking before applying for the position. Fail to do this and you may be overwhelmed by ill qualified candidates.

Practice 2. Determine the salary range

Knowing what you are able to pay for the position can eliminate many headaches in the hiring process. If the position requires years of experience, a higher starting salary can attract qualified candidates. On the other hand, if the position is entry level, a lower starting salary can eliminate your dealing with prospective employees who need greater compensation.

Practice 3. Look inside first

Many hiring managers only look outside the organization when seeking talent. However, the best candidates are often already within the company. Hiring from within eliminates many of the hassles of training someone new into the company’s culture. Not to mention, a much lower cost than recruiting from outside. Always look inside first.

Practice 4. Advertise on many sources

If you can’t locate someone inside the company, the position should be marketed on multiple sources. This includes newspapers, websites, social media, universities and even by word of mouth with your current employees, coworkers and fellow business people.

Practice 5. Put it in writing

Once you locate the ideal candidate, put the offer in writing to avoid any misunderstandings. Verbal offers are a major no in this day and age. Be certain that the offer letter contains a complete description of the position, salary, benefits and expectations of the employee. It’s far better to have the employee turn down the job based on the offer letter than to hire and find out there was a misunderstanding about what the position entails.