Taxes and Insurance Agencies

Strategies to take for 2010 and beyond, from our article in Insurance Journal recently

By Bill Schoeffler, CIC and Catherine Oak, CIC, CRM

We are all familiar with the old saying "the only thing certain are death and taxes."

From where we stand right now in 2010 it is clear that we will be taxed, however, at what rate? There hasn't been a zanier year in recent memory to try to do some tax planning for business owners.  There are a lot of provisions up in the air, awaiting Congressional review. But there are a few basic strategies that are sure to work, no matter what Congress does in 2010.

For those who die during 2010 there are absolutely no estate taxes. However, on the stroke of midnight January 1, 2011 estate (death) taxes default back to a 55% tax rate with only a $1 million exclusion. Likewise, federal income taxes and capital gains taxes will also revert back to higher rates, federal as a minimum from 36% to 39.6% and capital gains from 15% to 20%, respectively.

A major part of our current weak economy is the "uncertainty factor" that many business owners are facing. Businesses are not taking action because they're finding it difficult to predict what might happen even only one year out.

As this article is being written Congress has not taken any action to adjust or revise tax rates. This is not surprising since many in Congress would like to raise the taxes in order to pay for their out-of-control spending. There is a general feeling among the people that some definitive action needs to take place, even if it is affirming the scheduled rate increases.

So what does this mean for the typical insurance agency owner?

Here are a few points about taxes that the typical insurance agency owner needs to consider.

Estate Taxes - Is your estate worth over $1 million and you don't expect to die in 2010? Hopefully this applies to all of our readers. Action needs to be taken this year to help minimize taxes in the future. There are many proven tools used to minimize estate taxes, such as the use of trusts. Another technique is the use of life insurance to pay for the estate taxes and preserve the actual assets within the estate. Put down on your list of things to do to contact a qualified CPA or estate tax attorney to discuss these items.

Business Succession - Owners close to retirement need to consider that business succession strategy now. Federal capital gain taxes are at a low point of 15% on long-term gains. There is a very good chance that this most likely will be increased in 2011. For those who are selling their agency, this means there will be less money in the bank account because of the higher tax rate.

If the plan is for internal perpetuation to family members an effective tax tool is a GRAT, or Grantor Retained Annuity Trust. Although there are some important limitations to a GRAT, it is an excellent way to pass the ownership of a business to the next generation with a minimum of taxes paid.

If your exit strategy involves selling to an outside party, consider selling the agency or at least a portion of it in 2010 in order to take advantage of the current low federal capital gains rate.  If there are monies paid each year as earned, the tax rate in place in the year received governs. If it is not practical to sell this year than other tax strategies need to be explored and incorporated.

Retirement Plans - Many businesses have cut expenses throughout the year and now have some cash in the bank account.  Business owners should consider establishing a SEP-IRA retirement plan.  You can contribute up to 25% of your compensation from the business into a SEP-IRA plan.  You will have to contribute the same percentage for all the qualifying employees.  You have until the due date of the tax return, plus extensions in order to establish the plan and make the current year contribution (as late as October 15, 2010 for individuals and/or September 15, 2010 for corporations).

For 2010 and later, to maximizing retirement contributions, implement a SIMPLE-IRA plan for your business.  The type of program is required to be offered to all employees and they can contribute the lower of their income or $11,500 (an extra $2,500 for those 55 or older).  The employer is required to match the contribution dollar for dollar for up to 3% of the employee's contribution.  This plan needs to be implemented prior to October 1, 2010 to be effective for the year ending December 31, 2010

Reduce Taxable Income - Reduce taxable income any way legally possible -- defer income into a HAS (Health Savings Account) or into next year, or make charitable donations.  Add to an IRA or 401(k) with the maximum allowed for your age and situation.

In 2010, capital expenses up to $135,000 can be deducted in the year of purchase under Internal Revenue Code §179.  Normally, these purchases are depreciated over 3 to 15 years.  There are some simple restrictions that need to be followed, so consult with your CPA. Yes, you have permission to go shopping for equipment that you need, and stimulate the economy.

Sales Opportunities - Keep in mind that the strategy can be offensive as well as defensive. What product or service do clients need in this crazy tax environment that the agency can offer to them? Think of ways to exploit any tax changes or tax uncertainty.

The pending upward spike for estate taxes is an excellent opportunity to sell life insurance to help wealthy clients cover their estate taxes (after 2010 of course). How about offering Health Savings Accounts? Work with your clients to find out more about their insurance needs. This is a good opportunity to cross sell property/casualty accounts with life and health products by properly implementing sound tax strategies.

Bottom Line

Consult with your tax advisor to get the best and most current tax advice for your situation. The key is to be aware of the changes and know options that can be taken to improve your business' fiscal strength.