Checklist of Specific Tax-Advantaged Benefits
Here are some specific tax-favored ways of taking money out of a business broken down into general categories. We hope this will be a useful checklist and will form the basis of further discussion.
Items deductible in whole or in part by the business and fully or partially tax-free to the owner:
Health benefits, disability insurance, business meals, educational expenses, meals on premises, lodging on premises, reimbursements of moving expenses, use of company gym, business entertainment, business-provided transportation, officers' and directors' liability insurance, employee awards, supper money, various other fringe benefits including employee discounts, de minimis fringes, transportation benefits, employer-provided group term life insurance, and dependent care assistance. A host of benefits also escape FICA taxes.
Items deductible by the business and tax-deferred to the owner:
Contributions to qualified pension plans, profit-sharing plans, stock bonus plans, employee stock ownership plans (ESOPs) and other qualified retirement plans, and contributions to simplified employee pensions. An added advantage of ESOPs is that a business owner may sell company stock to the ESOP and reinvest the proceeds in other stock without being currently taxed on the gain.
Item deductible by the company and that may mostly be taxable to the owner as capital gain:
Nonqualified stock options may trigger some ordinary income on grant or when the option becomes substantially vested, while gain on the stock acquired when the option is exercised may be capital gain.
Items deductible by the company and taxable to the owner as ordinary income:
Compensation consisting of cash, stock appreciation rights, phantom stock, performance shares, and interest on funds borrowed from the owner.
Items not deductible by the company but taxable to the owner-employee as capital gain:
This category includes incentive stock options and stock purchase plans.
This category includes various items that do not neatly fall into any of the above categories, but nonetheless offer potential tax savings: below-market loans (subject to various restrictions and limitations), employment of family members, split-dollar life insurance, housing aid, redemptions and buyouts of a portion of the owner's interest in the business, and sales to the business.
We must stress that not all of these breaks will be available to you. However most business owners can benefit from many of them. If particular items are of interest to you, please contact us to explore whether you and your business are eligible to make use of them