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5 Big Things for Family Businesses to do Now About Taxes

5 Big Things for Family Businesses to do Now About Taxes. Woodbury Family Business Seminar June 11, 2009 John E. Karayan , JD PhD http://faculty.woodbury.edu/karayanj. 5 Big Things to do Now. Create & Keep Documentation Incorporate Business, not Assets Outsource

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5 Big Things for Family Businesses to do Now About Taxes

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  1. 5 Big Things for Family Businesses to do Now About Taxes Woodbury Family Business Seminar June 11, 2009 John E. Karayan, JD PhD http://faculty.woodbury.edu/karayanj

  2. 5 Big Things to do Now • Create & Keep Documentation • Incorporate Business, not Assets • Outsource • Pay Tuition Directly • Use a Living Trust

  3. Make Sure the Tail Does Not Wag the Dog • Cinderella • King Lear • Hippies & Hobos pay no taxe$

  4. Saving Taxes is not Free • Change Operations • Lose Control • Use Management Time • Pay Professional fees

  5. Importance of Non-Tax Considerations • Mixing and matching families: QTIP Trusts • Entrepreneurs want to retain control: • U-Haul, Carl’s, and King Lear • Liquidity & Solvency • Access to Capital Markets – Tax Based Books • Keeping it Simple

  6. Goal: OptimizeFamily Wealth • Optimize, not just Minimize • Non-Tax Factors More Important • Tax Strategies are not free • Family, not just “The Company” • Wealth, not just Income

  7. Mission: Manage Taxes • Global: All Taxes • Multilateral: All Related Parties • Strategic: Consider Non-Tax Factors

  8. Estate & Gift Taxes • 50% of net FMV, but loopholes • Non-taxed gifts: to spouse or ex • : tuition/medical • :12K annually • : charities • Unified Credit: $1M/3.5 M

  9. More Important Non-Tax … • Avoid Probate/Conservatorship • Choosing who gets what & when • Keeping Control • Spoiling Brats &Dodging Rats

  10. Strategies • Live Long • Pay tuition/medical Directly • Step-up in Basis < Estate Tax • Gift Giving Program

  11. Gift Giving Program • Fund with appreciating assets • Crummy Trusts • Discounts & Family Partnerships • Loans at Treasury Bond Rates

  12. Income Taxes • Progressive Rates: ~ 40% of net • Separate Entities • Exclusions, Credits, & Deductions • No Gain, No Pain

  13. Income Taxes • Incorporate, but no dividends • Deducting Dual Use Assets/Expenses • Lease Assets into Business • Insurance & Municipal Bonds • Tax Credits

  14. Pensions & Profit Sharing • Avoids Creditors • Forced Savings but Severance Bonus • Traditional IRA < Roth IRA • Favors Family

  15. If it is too good to be true… • Nevada Inc. & “nowhere” income • Multiple Corporations • Foreign Accounts • Disguised Dividends

  16. Payroll Taxes • % Compensation with Ceiling • Employer Tax and Withholding • Penalties which Hurt

  17. Payroll Taxes • Kids on Payroll • Independent Contractors • Outsourcing & Churning • Subchapter S Dividends

  18. Sales Taxes • % gross retail sales of tangible personal property in Calif. • Exemptions: • Sales for Resale • Out-of-State Sales • Occasional Sale

  19. Sales Taxes • Fabrication Labor • Exemptions Need Documents • Resale Certificates • Out-of-State Sales • Other States • On-line Purchases • Sale of a Business

  20. Property Taxes • Write-offs of Machinery & Equipment • Change of Ownership • Inventory in Other States • Decline in Value

  21. Interaction with Other Taxes • Step-up in basis at death versus avoiding future appreciation • Prop. 13 property tax revaluation • Social Security Tax on Kids in Corps.

  22. Generic: Arbitrage and Time Value of Money Creation: use tax giveaways Conversion: better tax status Timing: better tax year Splitting: multiple graduated rates Fraud: cheat

  23. Strategies: [1 + R(1-t0)]n Creation: tc 0 Conversion: tg < to Timing: (1 + R)n(1-te) + tf Splitting: (te1 + te2 ) < t0 Fraud: to = 0 or >100%

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