Masonry Magazine June 1992 Page. 44
TAX MATTERS
A Window of Opportunity
The current recession may be the best opportunity you'll enjoy in your entire business lifetime to transfer your business to your kids.
HOW LONG WILL the recession last? No one seems to know. Chances are we'll find out together when the good times and good profits start to roll again. Most businesses are suffering during the prolonged recession that has been gripping the country, but a few businesses continue to prosper during these tough times.
Banks have kept the credit screws tight, causing most businesses to watch helplessly as cash flow slows to a trickle. A steady stream of articles and seminars attempt to tell you what not to do in the current depressing economic climate. But most readers of this column will be best served by grasping three important points.
Most important, hang on. If you are having a tough time, so are your competitors, and most likely your entire industry. Be a survivor. The recession, like other recessions, will end. The only question is when? As a survivor you will enjoy the fruits of the good times that have followed every severe downturn in our economic history.
Now, here are a couple of points that will allow you to win the money and tax game... big.
First, don't sell your business now. The worst time to sell a business is during bad times. Gloom reduces the market price of your business to start with; the inability for most buyers to get financing further reduces the price. If you can afford it or can arrange financing, now is the time to buy a business-preferably a competitor's.
And secondly, this may be the best opportunity you'll enjoy in your entire business lifetime to transfer your business to your kids. Why? Because businesses are worth less in the real world marketplace during a recession.
How much can you give away? $10,000 every year for each of your kids, plus $600,000 once. And double that if you're married. For example, if you have three children, you can give away $630,000 in 1992 ($1,260,000 if married) without incurring one cent of a cash gift tax liability. Remember estate taxes will eventually rob over fifty percent of your business' value if you're a typical successful closely held business owner. But the IRS can't tax what you have properly transferred to your kids.
One warning: Whether you want to buy, sell or transfer, don't go it alone. Yes, take advantage of this window of business opportunity, but don't make the mistake of dealing in an area where you have little or no personal experience. Work with a competent tax advisor.
Disability Insurance Choices
Most closely held business owners have their corporation pay the premiums for their disability insurance coverage. They consider it the perfect employee fringe benefit-the corporation gets a tax deduction equal to the premium cost and the owner walks away with a tax free benefit. Sure sounds like a good tax deal. And, in fact, this benefit is such a good tax deal that it's a popular perk often given to highly paid executives.
But the above only tells half the tax story the good half. Unfortunately, most employees-owners and executives alike-don't know the other half of the tax story and don't find out the sad consequences until it's too late. You see, when disability payments are received by the employee from the insurance company, the amount received is taxable income. The rule is simple: When the employer pays the costs of a disability plan, the employees are taxed when they receive the benefits. Ouch!
Is there a way out of this tax box? Yes. This is the rule: When the employees pay their own disability premiums, their benefits are tax free (See Ltr. Rul. 911027). Now that you know the rules, you can make an informed choice.
Just one more thought. If you decide to go the tax free benefit route, you (as the employer) might consider giving each high paid employee a raise (deductible by the employer) equal to the amount of the premium. The employee, subject to paying the income tax on the raise, could then use the increase to pay the premium.
Mileage Allowance Up
Tired of keeping records of the actual expenses you pay for the business use of your car? Well, take heart. There is an easier way to do it. You can use the optional mileage allowance method when calculating auto expenses. If you use the optional method, keeping records of each expense is no longer necessary. Instead, just keep track of your business miles driven and use the IRS's mileage allowance. And here's more good news. The IRS just announced an increase in the allowance to 28 cents per mile for 1992 (up from 27.5 cents in 1991).
Here's an example. Sue Sales does a lot of auto traveling in her line of work. She is tired of keeping records of gas receipts, repairs and maintenance. Sue stopped keeping records of her actual expenses in June of 1991. She only kept track of business miles-25,000 for all of 1991. How does Sue figure her auto expense deduction for 1991? Simple. Just multi-
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 subcontrators. Blackman consults with readers of this column. Call his Tax Hotline at 312/207-1040
44 MASONRY-MAY/JUNE, 1992