During the height of the pandemic, I was asked to be a guest on Westfair Business Buzz, hosted by Phil Hall, and chat about on of our previous articles (below). I consider it one of the highest professional compliments to be invited as a guest on a show with Phil’s stature and had a great time chatting with Phil. You can listen to our conversation through the linked image below and/or you can read the original article below.
Original Article: Four Commonly Overlooked Ways to Reduce Business Taxes and Expenses
At Finance For Thought, we take great pride in our ability to not just reduce the tax burdens of the individuals and businesses we work with, but to reduce other costs and business expenses as well. We’ve been doing so for the better part of a decade and have found that the four following strategies are the most overlooked.
Payroll Tax Reduction Plans
A Payroll Tax Reduction Plan is the most overlooked strategy businesses are not using. What’s most unfortunate about this, is that it not only reduces the payroll taxes of the business, it also substantially increases employee benefits with no out of pocket cost to the employee. You can see the high-level benefits and guidelines below:
Key Benefits of the plan:
- The employer receives an annual tax savings of up to $1,400 per participating employee
- Through the limited medical benefit provider, employee receives tax credits to fund additional healthcare and insurance benefits
- The tax credits reduce overall taxable income, decreasing the businesses FICA and payroll taxes
- On average employee benefits quadruple and their take home pay DOES NOT change
Employer Eligibility Requirements:
- 25 or more full time W2 employees making at least $25,000 a year.
- Employer must currently offer a healthcare plan
Employee Eligibility Requirements:
- Must currently have healthcare (it does not have to be with the employer, it can be through a spouse, parent the exchange ect)
- Must be full-time with the employer
- Must be a W2 Employee
- Must be 18 years or older
- Must have an annual income of $25,000 or more with the same employer
You can read more in depth about PTRPs here.
Medical Cost Sharing Communities
For employers who would like to reduce their healthcare costs without having to increase their deductibles or maybe are not currently offering health care because of the high costs. Incorporating a Medical Cost Sharing Community is often a viable option that is often overlooked. The high-level benefits and guidelines of MCSCs are below.
Key Benefits:
- Monthly premiums are, on average, 30-60% lower
- Initial Unshareable Amount (IUA), similar to a deductible, normally doesn’t exceed $1,500 and can be as low as $500
- No restrictions due to a network, HMO or PPO
- Overall reduced cost of care
- Promotes healthy lifestyles
- Increased convenience due to technological implementations
- Provide competitive pricing with quality care for small employers (only 3 employees are required to enroll)
Employer Eligibility Requirements:
- Must have at least 3 employees enroll
- To maintain an MCSC 3 employees must re-enroll on an annual basis
Not ideal for employees who are:
- Tobacco users over 50 years old
- Have pre-existing conditions
- Have a history of illegal drug use
- Have high cost prescriptions drugs (curative treatments such as cancer treatments/drugs are covered)
To read more about MCSCs click here.
Captive Insurance
Businesses that have high insurance premiums have often overlook Captive Insurance. Captive Insurance is a great way for a company to keep 50-80% of their insurance premiums in their pocket. The key benefits and guidelines are below. Note that the eligibility guidelines are a rule of thumb, a feasibility analysis is required to determine actual eligibility.
Key Benefits:
- Keeping a significant amount of your current insurance premiums in a company that you own
- Create a more cost-effective way to cover the need of commercial insurance
- Gives the business owner the ability to re-invest insurance premiums
- Creates another estate planning vehicle that offers the same asset protection as a business
- Enables a business to more effectively manage its insurance risks
- Gives the business the ability to insure risks that most commercial insurance companies won’t, such as; loss of a key contract, key supplier and/or accounts receivable.
General Business Eligibility Guidelines:
- Doing at least $4,000,000 a year in revenue
- Currently paying $50,000 a year or more in insurance premiums
To read more about Captive Insurance click here.
412(e)3 Plans
Smaller businesses have often overlooked defined benefit plans. Defined benefit plans were popular decades ago but have since been phased due to the high cost to maintain for employees and have replaced by 401k plans and other defined contribution plans. However, that high cost can directly benefit the business owner if they do not have a lot of staff. The most tax advantageous defined benefit plan is a 412(e)3 plan. The key benefits and guidelines of a 412(e)3 plan are below.
Key Benefits:
- A fully insured 412(e)(3) DB plan can provide substantial retirement benefits without market risk;
- From a retirement standpoint, it gives the largest tax deduction under the law.
- Can provide guaranteed income you cannot outlive, a maximum annual benefit of about $220,000 a year.
- Reduces, diversifies or potentially eliminate market risk.
- Allows you to buy estate planning tools on a pre-tax basis.
- Because benefits are funded based on the contract guarantees, the 412(e)(3) fully insured DB plan can provide a maximum current tax-deductible contribution for the business;
- There is no full-funding limitation under IRC Section 404(a)(1)(A);
- No quarterly contributions are required; and
- There can be no under-funding because contributions are based on the guaranteed provisions of the level premium contracts.
Ideal for Businesses That:
- Have consistent revenue in excess of $500,000 annually
- Are “top heavy” or have less staff (in order for the business owners to receive the best benefit)
- Have owners that have large personal tax burdens
You can read more about 412(e)3 plans here.
We do have commonly overlooked strategies for individuals and real estate professionals as well. For individuals who have assets in which they will realize large capital gains, a Charitable Estate Replacement Plan (CERP) is commonly overlooked. And for real estate professionals we can add flexibility and contingency plans in place when utilizing a 1031 exchange.
Dan Nuwash, MBA is the Founder and Managing Partner of Finance For Thought and can be reached through our website here.