Masonry Magazine February 1992 Page. 53
IRV BLACKMAN helps you, not the IRS. The most published CPA in the country, he also shares his tax-saving knowledge as a dynamic speaker. He is a partner in Blackman Kallick Bartelstein, a CPA firm specializing in contractors and subcontractors. Blackman consults with readers of this column. Call his Tax Hotline at 312/207-1040.
Tax Wise Way to Reward Star Employees
An Illinois business owner came to see me with a tough, yet very nice tax problem. What a lucky guy! Let's call him Joe. Joe's business makes about $1-million a year. His wife isn't active in the business. Neither are his two adult kids. As a matter of fact, Joe only spends about three months a year physically working at the business. He skis, vacations, and travels the rest of the year. So who runs the business? A hired gun named Frank. Unrelated in any way to Joe's family, Frank-age 51-is the CEO and president. He runs the day-to-day business operations and, with input from Joe, helps make all major policy decisions.
Joe, of course, would like Frank to stay. Frank wants to stay, but wants a piece of the business. Joe is willing to share the profits but not stock ownership. I spent many hours negotiating with Joe and Frank at separate meetings. (I was one-on-one with either Joe or Frank. We never negotiated together.) Following are the most important provisions of the non-qualified deferred compensation arrangement (often called golden handcuffs) we put into place.
Frank would get a piece of all future profits, before tax, in excess of a set base, scaled up from a low of 17 percent to a high of 33 percent depending on the amount of before-tax profits. This amount, when computed each year will be called a special bonus. One-third of the bonus will be paid to Frank in cash. The remaining two-thirds will be paid into a special trust. Frank has the authority to tell the trustee how to invest these funds. The amount put into the trust, plus earnings, will be paid to Frank (or his heirs) over a five-year period when Frank reaches age 65, becomes disabled, or dies. If Frank terminates his employment before any of these three events, he forfeits everything in the trust-the golden handcuffs.
What are the tax consequences of such an arrangement? For Frank: He doesn't pay one cent in taxes until he (or his heirs) receives each payment from the trust. For the corporation: It gets a deduction equal to the amount of each payment to Frank. No deduction is available when the funds are paid into the trust, but all trust earnings are taxable to the corporation. What happens if Frank forfeits any or all of the amount in the trust? All funds are simply returned to the corporation, tax free.
And here are a few more neat things about a golden handcuff plan.
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MASONRY-JANUARY/FEBRUARY, 1992 53