Masonry Magazine August 1989 Page. 26
TAX MATTERS
continued from page 25
All you have to do is hold a bona fide business meeting before or after the game. Then, the Super Bowl and related expenses would have been associated with the conduct of the company's business.
We Win: The taxpayer entertained clients in New Orleans, Puerto Rico and Las Vegas. The clear business purpose was to introduce real estate professionals to its insurance products. Formal business meetings were held at each location. The court allowed most of the expenses as a deduction. The trips were directly related to the company's business because the guests were involved in at least one formal business meeting on each trip (United Title Insurance Company, TC Memo 1988-38.)
There is no reason to lose a deduction when you are spending money to entertain customers. When the entertainment location or activity is not conducive to business, arrange for a business discussion before or after the activity. In other cases, build the business-related activity into the overall time frame. Make up a program and agenda that shows the main purpose for the trip was business.
New Rules Shrink Qualified
Plan Benefits
Qualified plans (pension and profit-sharing plans) have always been a tax-saving leader. They still are. But over the years Congress has been hacking away at the benefits the owner of the successful, closely held business can salt away into a qualified plan for his own benefit.
The new 1988 tax law takes a fresh swing that narrows the benefits even further. For tax years beginning in 1989, a $200,000 limit is placed on any qualified plan participant's compensation that is used to determine the benefit (for a typical pension plan) or contribution (for a typical profit-sharing plan.) This applies to all plans even plans that are not top heavy. Prior to 1989, only top-heavy plans were subject to the $200,000 limit.
What does this mean to high-earning business owners? Consider this example. Joe Success owns 100% of Little Company and earns $300,000 per year. Little Company has many other employees, each earning $25,000. Prior to 1989, Little Company had a non top-heavy 10% profit-sharing plan. Joe received a contribution of $30,000 (10% of $300,000) while each of the other employees received $2,500 (10% of $25,000.) For 1989, Joe will only receive $20,000 (10% of $200,000) while the other employees will receive their same $2,500 contribution. Sure, Joe could kick the plan up to 15% and still get the same $30,000 (15% of $200,000), but that would raise the cost to $3,750 (15% of $25.000) for each employee.
Wait, there's more. The $200,000 limit is subject to the so-called "family aggregation rules." Any 5% owner and most highly compensated employees are subject to the rule. The salary of a husband, wife and their children or grandchildren under the age of 19, who all work for the same company are all considered one unit for the purpose of the $200,000 limit. For example, if Henry Owner earns $200,000, his wife earns $50,000 and his 18-year-old daughter earns $25,000, the salary may total $275,000, but only $200,000 will be considered, and the contribution must be split among the family.
What should you do if you think you may be caught by the new rules? Meet with your plan consultant to determine if your present plan or plans should be amended, your contribution policy changed, a new plan started, or some other strategy employed.
Qualified plans are only one of the dozens of ways for a business owner to take money out of his closely held corporation.
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26 MASONRY-JULY/AUGUST, 1989
1989 Solaris U.S.A.