Planning for your non-income-producing years

There are an infinite number of ways tax law creates methods for business owners and top executives to be paid by the company in tax-advantageous ways. For the business owners who are not independently wealthy apart from the company, Uncle Sam has provided many choices for you to have a healthy stream of income without getting direct pay from your business. The list that follows will give you a good idea of what can be done to support your current lifestyle over and above Social Security and stock market investments.

• Rental income on buildings, land and equipment used by the business. This income saves dollars on payroll taxes.
• A non-qualified deferred compensation plan can provide income until the time of death for both husband and wife. When the company makes the payment to the former owner(s), it becomes a business deduction, and dad and mom pay tax in their federal income tax bracket only. No other taxes are to be paid. To assure money will be paid, set up a rabbi trust and segregate the funds needed to make the payments.
• The Accumulated Adjustment Account is taxable income that has been accumulated while the corporation is an S corporation. If the corporation has not accumulated much income, you can prepare for a stock redemption by retaining earnings. Many companies will do this naturally as they re-invest cash in the business. The stock redemption is tax-free to the extent of your AAA account.
• Cash can be taken from a 401(k) plan, but taxes will have to be paid.
• A family limited partnership can allow you to control the assets it holds and own a very small portion. Limited partners own the assets but have little to say about their management because you are the manager and can be paid for your work.
• Fringe benefits such as new vehicles, cell phones, accounting work, travel, etc.
• Shareholder loans to the company that have never been paid back—now is the time to collect.
• Retained earnings that have accumulated over the years can be removed from the company for your use.
• Consulting and director fees.
• Work part-time for business.
• Private annuities.
• Off-the-books perks, such as trips to conventions, a vacation home or an expense account.
• Medical and health insurance can be provided by the new medical savings plan.

All of these plans are available to provide the retiring owner income when his/her reign of leadership has ended. One caveat: Most, if not all, of these cash-producing techniques will not work if the company is not profitable.

hmm@questex.com

Mike Henning is the founder of the Henning Family Business Center, which was established in 1985 and is headquartered in Effingham, Ill. He can be reached at hfbc@mikehenning.com and www.mikehenning.com.