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Archives for August 2018

Life Insurance: A Flexible Business Tool

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As a savvy business owner, you understand the importance of having key person life insurance to protect your company in the event that you — or a partner — unexpectedly pass away. The policy proceeds can be used to pay off debts, hire a replacement, or buy time until a decision about the future of the company can be made.

However, you may not realize that business owners like you can use life insurance for a variety of other purposes. Here are some you may find helpful.
Fund a Buy-Sell Agreement

A buy-sell agreement is a legal contract that establishes who can buy an interest in a company and under what conditions they may do so. For example, a company’s shareholders may agree that if one shareholder dies, the company will redeem his or her shares. Or they may agree that the shares will be sold to the surviving shareholders. A buy-sell agreement can ensure that your family and other beneficiaries receive a fair price for your business interest. Life insurance is often used to fund buy-sell agreements.
Help With Your Estate Strategy

If you are like other business owners, the majority of your estate may be tied up in the value of your business. Were you to die without an effective estate strategy, your business could end up being liquidated in order to pay estate taxes. However, preparing ahead of time can prevent this scenario from occurring.

One approach to consider is establishing an irrevocable life insurance trust that would own a life insurance policy on your life. The trustee of the trust is named as the beneficiary of the policy proceeds, which are then used to pay any applicable estate taxes due on your estate after your death. When properly drafted, the trust strategy avoids estate taxation of the life insurance proceeds.

Life insurance is a flexible, multi-use business tool that can serve and help business owners in numerous ways. Ask your financial professional and estate planning attorney to help you determine how life insurance can be useful in your business situation.

The Financial Flipside Podcast, Episode 13: The Economics of Immigration

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The human consequences of the current administration’s zero-tolerance immigration policy have been inescapable during this summer’s news cycle. Each day seems to bring with it new stories of parents separated from children, inhumane conditions in detention centers, and the stripping away of previously installed protections for asylum seekers and early childhood arrivals in the United States.As people, we found these stories impossible to ignore. As a show about how finance and economics interact with the rest of our lives, we thought  it important to spend some time thinking about the economics of immigration. Specifically, why does so much of the rhetoric about immigration in the US revolve around money and labor? What do the numbers say? What are the effects of framing discussions about immigration in economic terms? Are there alternatives to this sort of thinking, and what might they be? We do not pretend to offer definitive answers or policy fixes, but we hope that this episode leads you to your own fruitful discussions.

 

If you want to talk to us about any of the many topics discussed in this episode, you can find us on Twitter or Instagram (@financeflipside) or send us an email: info@financeflipside.com.

Missed an episode? All of our previous episodes are  on Apple Podcasts , Google Play, andStitcher. Looking for our  RSS feed? You can find ithere.

A correction: Switzerland held a referendum about introducing universal basic income in 2016, but it was rejected. At least part of the right-wing opposition to the measure centered on immigrant access to basic income payments.

Mentioned on the show:

 

The height of deportations in the US? 2012, when 34,000 people were deported each month

 

The (big) business of immigration enforcement

 

The Chinese Exclusion Act of 1882 and more about the act’s history

 

The Immigration and Naturalization Act of 1965, which put a premium on skilled labor and family reunification

 

2017 Immigration statistics from the American Immigration Council , a nonprofit that bills itself as  “powerful voice in promoting laws, policies, and attitudes that honor our proud history as a nation of immigrants.” It’s worth noting that The Center for Immigration Studies, a “non-partisan, non-profit, research organization” that seeks to “provid[e] immigration policymakers, the academic community, news media, and concerned citizens with reliable information about the social, economic, environmental, security, and fiscal consequences of legal and illegal immigration into the United States.” presents its own set of statistics (2016) that frame immigration in a much less favorable light. This is perhaps in keeping with its tagline, “low-immigration, pro-immigrant” and with its almost exclusively partisan testimonials.

 

On the sort of work done by immigrants to the US

 

Federal taxes paid by immigrant households (2014)

 

State and local taxes paid by undocumented immigrants (2014)

 

DACA recipients’ tax contributions (2016)

 

Immigrant impacts on native employment rates in the US

 

Immigration’s impact on native wages in the US

 

The UN Universal Declaration of Human Rights, which enshrines free movement as a human right.


While many arguments for open borders are accompanied by critiques of capitalism, there are some capitalist arguments for free movement as well.
How some Indigenous people in the US and Canada are responding to the current administration’s policies

 

Universal Basic Income is already being trialled in Stockton, CA.
Give People Money, a recent book by economics writer Annie Lowery, argues that universal basic income has the potential to transform society as we know it.

As an S Corporation Shareholder do You Need to Worry about Taxes?

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S corporation shareholders have an added reason to worry about their company’s annual performance: It has a direct impact on their own income taxes.
How It Works

Unlike a regular C corporation, an S corporation usually doesn’t pay federal income taxes itself. Instead, each shareholder is allocated a portion of the corporate income, loss, deductions, and credits on a special “K-1” tax form. The shareholder then must report the items listed on the K-1 on his or her personal tax return.

The K-1 allocations are based on stock ownership percentages. So, for example, if an S corporation has $100,000 of taxable business income for the year, a person who owns 75% of the stock in the corporation would be allocated 75% of that income, or $75,000.

This scheme can get complicated. Case in point: The K-1 may show more income than the shareholder actually received from the company during the year. That’s because the K-1 figure is based on the corporation’s actual taxable income — not on the distributions made to the shareholder.

Here’s an example: Tom starts a new corporation, electing S status. In the first year, Tom draws a $30,000 salary and receives no other distributions from the company. The company’s ordinary business income (after deducting his salary) is $10,000. Since Tom is the only shareholder, all the company’s $10,000 of income is allocated to him on his K-1. Tom must include both the $30,000 of salary and the $10,000 on his personal income tax return, even though all he actually received from the corporation was his salary.

This result seems harsh, but it’s not the end of the story. Special rules in the tax law prevent the same income from being taxed again. Essentially, Tom will be credited with already having paid taxes on the $10,000 so that any future distribution of the funds will not be taxable.
Tracking Basis

To determine whether non-dividend distributions are tax free, S corporation shareholders must keep track of their stock basis.1 The computation generally starts with a shareholder’s initial capital contribution (or the stock’s cost if it was purchased) and changes from year to year as the shareholder is allocated corporate income, loss, etc. Non-dividend distributions that don’t exceed a shareholder’s stock basis are tax free.

Note that starting in 2018, S corporation shareholders may be eligible to deduct up to 20% of their S corporation pass-through income. Eligibility depends on taxable income and other factors. S shareholders will want to consult their tax advisor to see if they can take advantage of the deduction to lower the taxes on their business income.

Source/Disclaimer:

1Most distributions made from an S corporation are non-dividend distributions. Dividend distributions can occur if the company was previously a regular C corporation (or in other limited situations).