Consider establishing an employee stock ownership plan (ESOP). An ESOP can be beneficial in diversifying your client's investment portfolio if they own a business. A properly funded ESOP should allow them to sell shares with no current tax liability. A specialized consultant should be able to provide them with further details.
Avoid nondeductible compensation. Business owners are usually allowed to deduct compensation if the following requirements are met:
The success of the corporation can be attributed to the shareholder-employee
The corporation did not provide unusual corporate prerequisites and fringe benefits
The bonus policy was consistent
Advise your client to make a succession plan in the event for their death or incapacity. Benefits to be gained by making a succession plan for both the management and ownership sides of the business include an easier and smoother transition as well as lower tax costs. Waiting too long to come up with a plan can be costly later on as everyone squabbles trying to cover gift and income taxes, life insurance premiums, legal and accounting fees.
Buy Corporate Owned Life Insurance (COLI.). COLI can come in very handy in a tax-related manner in a couple of different aspects. COLIs can be good for funding deferred executive compensation, funding company redemption of stock as part of a succession plan and providing many employees with life insurance in a highly leveraged program.
Your clients should try to avoid having corporate purchases of family member's stock treated as a dividend. In certain circumstances where certain tests are met, a family member may be allowed to report only capital gain equal to the difference between the proceeds and basis pay tax at a maximum rate of 20%.
