Category Archives:Risk Management

Preventing Financial Mistakes Independent Contractor Physicians Make: Reducing Your Tax Bill

When a physician is transitioning from receiving a modest salary as an Intern/ Fellow / Resident to being paid as a board certified physician, there are a myriad of financial mistakes that are often overlooked, but that can be very easily prevented. This critical point is the time to make these decisions, and not after the consequences have reared their head.

Incorporate: Form an Inc. / PA / PC / LLC

Aside from any possible asset protection benefits, the simple act of incorporating will save you money. This will allow you to receive some of your compensation in the form of dividends, rather than earned income. The simple math is that if you receive $100,000 in dividends, rather than as salary or Schedule “C” income, you will save $2,900 in taxes annually.

Establish a Regularly Scheduled Payroll

Setting up a regular payroll will allow you to establish a monthly budget that you will be able to adhere to. This process will also make sure that you are making your regularly scheduled tax payments. Failure to do cause you to deposit your “gross earnings” (Form-1099 earnings) into an account that will then be used to pay for your lifestyle. The saying goes, “If you deposit your gross dollars, you will spend your gross dollars”. There will be a day of reckoning, and that will typically arrive every year on April 15th when the funds are not there to make your tax payments and the related penalties. The cost of a payroll service is far less than the penalty charged by the IRS for not making quarterly payments.

Open a SEP-IRA

Unlike a 401(k) that you would have as an employee, you, as the owner of your physician corporation, are permitted to have a SEP-IRA. The difference is that the contribution to this account is an expense to the business, and not subject to FICA/Medicare taxes. A $50,000 annual contribution would save you at least another $1,450. Pay yourself first, and be able to pay yourself more.

Hire a Physician Business Manager

Hiring a physician business manager who has the experience to guide you through the process is well worth the expense. After all, the savings alone are greater than the annual cost. As a physician, you have spent countless hours honing you knowledge and skills. Why would you want to spend your valuable time doing accounting and filling out forms?

Don’t let yourself get caught in the tax trap of missing filing deadlines, and not making payroll tax payments at the appropriate time. Take the steps necessary early, rather than having to deal with tax liens and legal bills later. Remember, it is easier to start out with a lower salary, and gradually increase it, rather than to start out spending it all, and having to cut back.

My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Small Business Owners and Entrepreneurs.

We specialize in Corporation filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts.

We are not simply a document filing service; we are here to help you with the part of the business that you have to do, so you can focus on what you love to do.

Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients.

Email us with any questions or call us at: 1-800-517-0CFO (1-800-517-0236)

For a Limited Time, get FREE Incorporation with our Accounting/Payroll Services! Submit your e-mail for more information, or schedule a quick phone call with me here.

Small Business Mistakes You Can Easily Avoid: Incorporate / Payroll Taxes / Accounting

Working for oneself is one of the “American Dreams,” but if you don’t follow certain steps, this could become your nightmare. Regardless of why you are breaking out on your own, the most important this is that you have done it. Now, the key is to not make the mistake of not properly filing the proper tax returns, and to make the necessary tax payments.

Inc. / PA / PC / LLC

Going to the Secretary of State website and filing your documents is relatively easy, unless you are a licensed professional, in which case, there may be additional steps. What is typically overlooked is that once you file with the state, and establish your entity, you then have to request an EIN number so that you can file your taxes correctly, and there may be other forms/documents required as well. The steps most often overlooked are board meetings and minutes. If you don’t behave like a corporation, you don’t get the protection of a corporation.

Regularly Scheduled Payroll

If you are the only employee in your small business, how and when you pay yourself is really up to you; however, if you have employees, they will expect to be paid on a regularly scheduled basis. What goes along with paying employees is the handling of their appropriate deductions and withholding amounts, as well as the appropriate employer matches to Social Security and Medicare taxes. Failure to appropriately handle these funds has caused long lasting tax problems for small and large business owners.

Payroll Tax Payment and Reporting

Regardless of how often you pay yourself and/or your employees, the state and federal government demand that reports get filed, along with the appropriate tax payments on a strict schedule. Failure to file these reports and make timely payments can result in severe penalties, which unfortunately revert back to the owner of the business. Learn early on what these amounts are, and when these reports are due, and you will be thankful you did.

Small Business Accounting

Odds are that unless you are an accountant, you did not start your business to spend all of your time bookkeeping. While your primary focus is that of either developing your products and/or services, or marketing them, failure to spend the requisite amount of time taking care of the business accounting and bookkeeping can negate the potential tax savings that can come your way, simply because you own a small business.

Costs and Efficiency

It doesn’t matter if you are an Independent Contractor Physician, Attorney, IT Professional or a Salesman who has decided to break away from “Corporate America” and go it alone, every small business owner knows that you get to keep more money if you can figure out how to do more with less expense. Spend your time doing what makes you money, and let someone else focus on doing the things that don’t make you money, i.e., payroll, tax reporting etc.

Don’t let yourself get caught in the tax trap of missing filing deadlines, and not making payroll tax payments at the appropriate time. Take the steps necessary early when you are still building your business, rather than having to deal with tax liens and legal bills when your business is successful.

My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Small Business Owners and Entrepreneurs.

We specialize in Corporation filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts.

We are not simply a document filing service; we are here to help you with the part of the business that you have to do, so you can focus on what you love to do.

Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients.

Email us with any questions or call us at: 1-800-517-0CFO (1-800-517-0236)

For a Limited Time, get FREE Incorporation with our Accounting/Payroll Services! Submit your e-mail for more information, or schedule a quick phone call with me here.

6 Ways Independent Contractors, Physicians and Employees Lower Taxes, Protect Assets, & Fund Retirement

As an Independent Contractor Physician, when you are at work, you are complete control. In order to have that complete control on the rest of your life, you need to first look at the way you are earning your money, how it is being paid to you, and what you are doing with that money. There are several ways to change the amount of money you keep, which can result in you actually working less to earn the same amount of money, and it doesn’t matter how long or short the period of time you have been practicing. If you would like to learn how you, as a Physician can lower taxes and protect assets, keep reading.

Nice Assets

With some young doctors, purchasing expensive homes, cars, boats, and other toys seems to takeprecedence over saving for a rainy day. For a young physician starting out in a specialty with an early burnout rate, this is especially dangerous. What if you could have an extra 15% of your income? Not only would it make paying for these assets easier, it could be the easiest way to fund your retirement. and it doesn’t matter if you are the owner/partner in a practice, or if you are an employee.

Become Your Own Employer

Whether your are the owner/partner of a practice, an Independent Contractor Physician or employee, lower taxes comes from changing your compensation structure. This is the first step in taking control of your taxes. Becoming your own employer can be as easy a forming a physician corporation or an LLC. This allows you to pay some expenses direct from the business, and collect dividends on the profits.

Pay Yourself First

As the owner of your Physician Corporation, you get to determine how you compensate yourself. By paying yourself first, we are referring to the funds that will go into your retirement accounts. These funds are not taxed until you actually withdraw the money to spend it, so by putting as much as possible in to tax advantaged retirement accounts, you are effectively reducing the amount of income taxes you will pay annually, in addition to reducing your payroll tax expenses as well.

Social Insecurity

Everyone has to pay Social Security and Medicare taxes. What everyone does not have to do is overpay them. By reducing your Physician Salary to one that that is reasonable, you can reduce the Medicare taxes you pay, and eliminate the additional matching portion that your Physician Corporation would pay as well. For years citizens have been asking for the ability to invest their own social security funds, because few think it will be there when it comes time to collect. We can show you how to make it happen today.

Physician Pension

We have now arrived at the most important piece of information. The Physician Pension is not only the vehicle that will single handedly reduce your income taxes by nearly $50,000 per year, but it is the vehicle that will dictate how many years you work, how many hours you work each week, and even give you the flexibility to retire after just 15 or 20 years of work, rather than the typical 30 years. Your Physician Pension allows you to pay, as a business expense, a contribution that, given the right investment strategy, can allow you to take a salary of up to $195,000 each year in retirement. As an added incentive to take advantage of a Pension Plan, retirement plans are exempt from civil judgment in most states. This means that not only would you be adding to your net worth, but your Physician Pension protects assets. This is much more cost effective than most any other asset protection strategy.

Hire an Expert

You have gone to school for several years, completed Internships, Residency, and perhaps even a number of fellowships to attain the level of expertise you possess. When it comes to establishing your Physician Corporation and setting up your Physician Pension, make certain that you are working a Physician Business Manager who has the expertise you require. What you want is someone thorough and detailed, not a document filing service and a broker who is looking to sell you something, rather than actually managing your assets for your well being. Keep in mind that the ideas discussed above are just a sample of the various tax savings that are available to Physicians. You work hard for your money, and should look for every viable avenue to minimize your tax burden, but make sure you work with a professional. We take care of the areas of business you hate to do, so you can do what you love to do.

My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Small Business Owners and Entrepreneurs.

We specialize in Corporation filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts.

We are not simply a document filing service; we are here to help you with the part of the business that you have to do, so you can focus on what you love to do.

Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients.

Email us with any questions or call us at: 1-800-517-0CFO (1-800-517-0236)

For a Limited Time, get FREE Incorporation with our Accounting/Payroll Services! Click here to submit your e-mail for more information.

5 Tips for Independent Contractors: Biz Start-up, Outsource Accounting, Reducing Self Employed Taxes

As an Independent Contractor, you literally have the best of both words. Not only do you get to determine how much money you want to make, and how hard you want to work, but also you can never be laid off. The downside to this, is that there are things that you have to do that can actually take as much or more of your time to complete than you actually spend generating income, and unfortunately, failure to perform these regular tasks can result in quite the headache, resulting in tax liens and perhaps even the loss of your business. If you are interested in maximizing the time you spend creating income, and reduce the time you spend on the other business related activities, while reducing self-employment taxes, read on.

Start Your Own Business

As the owner of a business, the IRS allows you a variety of tax advantages. The best way to take advantage of these is to step outside your role as an Independent contractor, and formalize the way you conduct business. This will enable you to shield yourself from potential personal liability, and allow you to take a salary and profits, rather than self-employed income. This alone will reduce your annual tax bill, and allow you to keep more of what you work hard to earn. You can even deduct that new laptop or iPad as a business expense. What typically stops people from going the next step is they do not know how to incorporate.

Incorporate

When you start a new business, there are many ways you can go about incorporating. You can simply go to one of the hundreds of websites that offer to help you incorporate online. They will give you the minimum that you ask for, and will leave you to pick up the rest of the pieces along the way. Honestly, the process is not that difficult, but like most things, it can become complicated quickly if you do not follow the proper steps. This is your business we are talking about. Don´t trust your business to the lowest bidder. You may get exactly what you pay for.

Outsource Accounting

As an Independent Contractor, you are an entrepreneur. This means you must be versatile and play a number of roles, from chief salesperson and bookkeeper to head marketer and bill collector. Doing your own small business taxes and accounting does not make you any money. Outsourcing your accounting will cost you less than hiring someone part time, and give you the expertise of having your own in-house accountant.

Hire a Corporation Service Company

As the owner of your small business, you have many important decisions to make. One of the most important ones you can make is to hire a corporation service company. Not only will they assist you in making sure certain things don´t fall through the cracks, but they can also provide you with someone to talk over other important decisions. You are in business to make money. Make the right choices early on, and you won´t regret them later.

Fund Your Retirement

Retirement plans can be extremely confusing to Independent contractors and small business owners. What you need to know is that there are options available to you that will allow you to put away more money for retirement than you may have known, and also that by doing this, you are not only reducing self employment taxes, but also your income taxes. The key is to start your own pension plan, and work with someone who has your best interests in mind.
You have either just set your inner entrepreneur free, or you are about to do so.

While this can be a scary time for some, you have the ability and the drive to make it a success. Be thoughtful and deliberate about each and every decision you make, and about every dollar you spend. Make sure that before you commit to something, it should either make you money, or free up your time to allow you to spend time making more money. Also, don´t be someone else´s guinea pig when it comes to your future. Work with professionals who are working with you, not just for your money. Remember, as the owner of the business, you are the one in control, so take the wheel, and enjoy the ride.

My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Small Business Owners and Entrepreneurs.

We specialize in Corporation filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts.

We are not simply a document filing service; we are here to help you with the part of the business that you have to do, so you can focus on what you love to do.

Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients.

Email us with any questions or call us at: 1-800-517-0CFO (1-800-517-0236)

For a Limited Time, get FREE Incorporation with our Accounting/Payroll Services! Click here to submit your e-mail for more information.

5 Things Every New Physician Should Do to Lower Taxes and Protect Assets

When speaking with physicians, whether it is one on one, or in a group setting, two topics of conversation are a virtual constant, taxes and asset protection. Notwithstanding the litigious environment we live in, I can clearly see why physicians want to do whatever possible to protect their assets. Reducing taxes is something everyone wants to do.

Even if someone pays very little in taxes, they still want to pay less, so it only make sense that physicians want to keep more of what they make, especially after paying insurance and education costs. So if you would like protect your assets and pay less in taxes, read on.

Form a Physician Corporation

Establishing a Physician Corporation will allow you to pay various expenses from the corporation. Since these expenses are paid before you take your salary, they are deductible from your overall income, and are not taxed at all. Owning a Physician Corporation will also enable you to take advantage of other options which are only available to corporations. Pay Yourself a Salary – Of course you want to make as much money as possible, but in the end, it is really about how much you get to keep. By paying yourself the lowest possible salary, your overall tax burden will be lower, because you will not have to pay FICA taxes on the dividends you take from your Physician Corporation.

Contribute to Retirement Accounts

Your retirement accounts aid you in both reducing your taxes and protecting your assets. From a tax perspective, retirement plan contributions are not subject to income or FICA taxes, so the more you can contribute, the lower your tax bill. As it pertains to protecting your assets, in most states, retirement accounts are not subject to levy as payment in the event of a civil judgment. Therefore, the more you contribute to these plans, the more assets you have protected. Create a Physician

Pension

As the owner of your Physician Corporation, you are able to establish a Physician Pension for yourself. This does two things. First, it allows you to fund a retirement vehicle for yourself as an expense to the business. These funds are not taxed, and do not require you to take a significant salary in order to make the contributions. Second, as a retirement account, these funds are also protected from civil judgment in most states.

Hire a Physician Business Manager

At first glance, you may be saying to yourself that this is an unnecessary expense. With some additional time, you will come to realize that it takes some expertise and experience, and hiring a professional is well worth it. Protecting your assets and reducing your taxes is a full time job that takes expertise and experience. It also requires a disciplined approach that experience tells us is best implemented by someone other than yourself. After all, our experience has told us that more often than not, assets need to be protected from one ́s own spending habits, and perhaps those of a spouse or possible ex-spouse. Your Physician Business Manager will give you the facts; they will not tell you simply what you want to hear. While you may not always like the answer, you will appreciate the candor, and will always know that your best interests are always the first priority.

Trying to manage a significant income and sizeable assets on your own can be a daunting task and if not done properly can wind up unnecessarily costing you tens of thousands of dollars. After all, earning a significant income comes with a great deal of personal responsibility. If you feel like it may take more time and effort than you personally want to invest, don ́t be afraid to outsource it to a professional who will always look out for your best interests. You are a professional, and people look to you as an expert. You should not be hesitant in doing the same.

My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Small Business Owners and Entrepreneurs.

We specialize in Corporation filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts.

We are not simply a document filing service; we are here to help you with the part of the business that you have to do, so you can focus on what you love to do.

Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients.

Email us with any questions or call us at: 1-800-517-0CFO (1-800-517-0236)

For a Limited Time, get FREE Incorporation with our Accounting/Payroll Services! Click here to submit your e-mail for more information.

Legislative Changes to 831(b) are a Net Positive for Business Owners

In a flurry of legislative activity in mid-December of 2015, Congress passed and President Obama signed a so-called “Tax Extenders” bill titled H.R. 34. This created a stir in the captive insurance industry both before and after passage, as H.R. 34 included Section 262 titled, “MODIFICATIONS TO ALTERNATIVE TAX FOR CERTAIN SMALL INSURANCE COMPANIES.” These modifications impact small captive insurance companies (CICs) that make an 831(b) tax election.

These small captive insurance companies are often described as micro-captives or 831(b) captives. Both of these names are really a misnomer. “Small” captives are real insurance companies that usually serve small and mid-market companies in the same way that “large” captives serve larger companies. 831(b) is simply a tax election designed to encourage small and mid-size companies to improve their risk management posture by owning their own insurance company. Small captives are good for small business and good for America.

What Is A Captive Insurance Company?

Simply put, businesses or their owners can choose to OWN THEIR OWN INSURANCE COMPANY. A captive insurance company is a licensed, closely-held insurance company. Captives are formed to provide insurance protection to businesses and related entities. They are usually owned by the business, business owners or other related parties. Businesses pay premiums as an ordinary business expense to their captive insurance company(ies). The captive issues insurance policies to the company. Captive policies are priced by an actuary. When the business files an insured claim, the captive pays it.

Like commercial insurance companies, captives also accumulate loss reserves. Reserves can be invested in accordance with the captive’s Investment Policy Statement (IPS). The IPS is usually approved by the domicile that licenses the captive.

What Is An 831(b) Tax Election?

Small captive insurance companies, as define d in Section 831(b) of the Internal Revenue Code, may elect to pay no federal income taxes on their underwriting profits each year. Underwriting profit is simply calculated as premiums received less claims paid.
Prior to H.R. 34, “small” captives were defined as having premium revenues of less than $1.2 million annually. Starting in 2017, thanks to H.R.34, this increases to $2.2 million and adjusts for inflation each year thereafter.

What Has Changed With The Passage Of H.R. 34?

In addition to adding an additional reporting requirement for small captive insurance companies, H.R. 34 makes essentially two changes to the existing 831(b) election. First, it increases the maximum premium revenue that a CIC can receive and still be eligible to make an 831(b) election, a big “win” for taxpayers. Second, it adds a “diversification” requirement that impacts either ownership structure or risk distribution. To meet the “diversification” requirement to be eligible for an 831(b) election, a small captive must meet one of two new tests starting in 2017.

What Is The Specific Language Of H.R. 34 Regarding “Diversification” Requirements?

”(i) IN GENERAL.-An insurance company meets the requirements of this subparagraph if no more than 20 percent of the net written premiums (or, if greater, direct written premiums) of such company for the taxable year is attributable to any one policyholder.

”(ii) ALTERNATIVE DIVERSIFICATION REQUIREMENT.-

An insurance company meets the requirements of this subparagraph if-

”(I) such insurance company does not meet the requirement of clause (i),

”(II) no person who holds (directly or indirectly) an interest in such insurance company is a specified holder who holds (directly or indirectly) aggregate interests in such insurance company which constitute a percentage of the entire interests in such insurance company which is more than a de minimis percentage higher than the percentage of interests in the specified assets with respect to such insurance company held (directly or indirectly) by such specified holder.

What Does That Mean in Plain English?

Essentially, to be eligible to make an 831(b) election, a captive insurance company must meet one of two tests starting in 2017.

The second test is rather “clean” and straightforward. It simply means that the ownership of the captive insurance company (as a percentage) must closely mirror the ownership of the parent company (ies). Many captives managed by CIC Services, LLC meet this test already. Others may be able to meet this test with slight ownership adjustments to their captives or parent companies or insured companies.

The first test is a bit more complicated, as it states a captive may not receive more than 20% of net premiums from one policy holder. This language requires business owners to either share a common captive insurance company making an 831(b) election (also known as a “group” captive), or it will require more “cross-insurance” or re-insurance than most small captive structures currently employ. Our initial assessment (and the assessment of other industry experts) is that risk distribution or re-insurance pools utilized by small captive insurance companies can be modified to meet this second test, and this will likely be the preferred approach of most clients.

CIC Services, LLC is thoroughly scrutinizing this new legislation and be proactively contacting its clients to discuss beneficial ways of complying with the new rules. Again, the new rules do not take effect until 2017, so there is plenty of time to consider options and get things right.

What Is CIC Services, LLC’s Perspective On H.R. 34?

Unlike many of the nay-sayers in the industry who have wrung their hands and gnashed their teeth at the changes (CLICK HERE), we see H.R. 34 as a net positive for small captive insurance companies and the small and mid-size businesses they serve.

Consider the following analogy.

In the glory days of college basketball, Dean Smith’s Tar Heels would run the stall with a 2 point lead and 15 minutes left in the 2nd half. At the same time, massive centers like Ralph Samson, Hakeem Olajuwon, and Patrick Ewing would park near the basket and shield off defenders. These monster centers would take a pass down low and make an easy short jumper or shoot a close skyhook. The game was often slow and a bit cumbersome.

What happened? Basketball changed by making a few new rules. They added a shot clock and made the 3 second lane wider, forcing teams to adapt their style of play. However, they also added the 3 point line! These rule changes combined to open up the game, making it far more exciting for players and fans.

Congress essentially did the same thing for small CICs making an 831(b) election. The new rules on diversification are manageable. Yes, they will likely require adjusted risk sharing arrangements and possibly new ownership structures (in the worst cases), but the benefits far outweigh the costs. Basketball teams easily adapted to the new rules, and most small captives will also. In fact, many small captives comply with the new rules already and require no adjustment at all.

And everyone will directly or indirectly benefit from the higher 831(b) limits. Raising the maximum premium level from $1.2 million to $2.2 million for CICs making an 831(b) election (and indexing it to inflation) is like adding a 3 point line. For some clients, it’s more like adding a 4 point line!

What Additional Perspective Can CIC Services, LLC Provide On H.R. 34?

What is most striking about H.R. 34 is not what it says, but what it doesn’t say. In 2015, The I.R.S. and the Self Insurance Association of America (SIIA) specifically asked Congress to ban trust ownership of captives and to ban captives from investing in life insurance. However, after thoughtfully considering the issue, Congress declined both requests in favor of the new rules discussed above, which are much more reasonable. We can now say with confidence that both Congress and the Courts are skeptical of the IRS’s claims of rampant abuse of captive insurance structures.

When Does H.R. 34 Take Effect?

The amendments apply to taxable years beginning after December 31, 2016. This provides a full year for captives and their corresponding risk distribution pools to restructure to meet the new requirements. In the weeks ahead, CIC Services, LLC will be publishing additional perspective on H.R. 34 and providing guidance to captive owners and prospective captive owners on complying with the new legislation. In the meantime, readers can rest confident that the benefits of captive insurance companies to small and mid-market businesses are greater than ever and rest on even stronger legal footing.

My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Small Business Owners and Entrepreneurs.

We specialize in Corporation filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts.

We are not simply a document filing service; we are here to help you with the part of the business that you have to do, so you can focus on what you love to do.

Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients.

Email us with any questions or call us at: 1-800-517-0CFO (1-800-517-0236)

For a Limited Time, get FREE Incorporation with our Accounting/Payroll Services! Click here to submit your e-mail for more information.

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The Most Efficient Approach For Businesses To Build Liquid Reserves

One of the greatest challenges that small and mid-market businesses face is building up sufficient liquid reserves. It has often been said that, “Cash Is King,” and liquid assets are key to the long term health and survival of an enterprise. Being in a strong cash position is particularly important if an unforeseen calamity strikes. Also, liquidity enables businesses to quickly adapt or pivot to address changes in the marketplace.

I recently talked with an insurance agent in the Mid-West who explained why many farmers were land and equipment rich but cash poor. During good years, many farms are quite profitable, creating strong cash flow. However, to avoid high taxes many farmers purchase brand new equipment, even if their current equipment is fairly new and in good working order.

Our experience in business has revealed two time-proven destroyers of liquid reserves:

Destroyer #1 – Uninsured Losses

Destroyer #2 – Taxes and/or Tax Incentives

As an example, consider taxes on “excess” retained earnings, known as the Accumulated Earnings Tax. This tax is deliberately designed to discourage business wealth and liquidity.The Accumulated Earnings Tax (AET) is a penalty tax, imposed on C corporations perceived as trying to avoid or defer shareholder income tax through an “unnecessary” accumulation of earnings. The AET threat is intended to encourage corporations to make timely payments of dividends, thus triggering the double taxation of C corporation earnings. Once an IRS agent asserts that there is an excess accumulation of earnings, the burden of proof shifts to the taxpayer to substantiate that the accumulations were for anticipated needs and were reasonable in nature.

Can Liquidity Destroyers 1 & 2 Be Meaningfully Addressed?

The great news for business owners is that Destroyers 1 and 2 outlined above can be addressed by one game-changing, risk management and financial strategy – Enterprise Risk Management (ERM) with a Captive Insurance Company (CIC). The chart below that visually depicts the powerful benefits of implementing an ERM approach with one or more CICs. Indeed, we know of no other risk management and financial vehicle that affords its owners the array and magnitude of benefits that captive insurance companies do. By choosing to own their own insurance company, a business owner or CFO is able to simultaneously have more insurance protection and more money.

The chart below compares the status quo on the left with ERM implementation and captive ownership on the right. This illustration covers a 10 year period and assumes a 4% rate of investment return for both scenarios. Both businesses have third party insurance coverage in place to insure core risks.

The business on the right which implemented ERM with a captive insurance company has more insurance coverage and more money. In fact, over a ten year period, the business on the right has almost 80% more wealth (or liquid reserves) than the business on the left.

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Understanding Liquidity Destroyer 1

Today, small and mid-size business owners face far greater challenges than their predecessors faced. In fact, they are far more likely to face existential threats that can drain their limited cash reserves or completely wipe out their operations. For instance, cyber risk is a growing and wildly unpredictable threat. Terrorism and impact from international conflicts are very real threats to businesses and their operations (Even if a business isn’t directly targeted, how long can cash reserves last without power…without infrastructure…without key suppliers…without key customers?).

Spending a little time on Ready.Gov, the U.S. Department of Homeland Security’s business preparedness web-site, puts the threats listed above into perspective. The threats are real and their impact can be catastrophic.

Ready.Gov notes that “40% of businesses affected by a natural or human-caused disaster never reopen.”

The government site recognizes that low-frequency and high-impact risks are the ones that pose the greatest threats to small and mid-size businesses, largely because they can wipe out liquidity. Addressing small business disaster preparedness, Ready.Gov notes that:

* “Businesses can do much to prepare for the impact of the many hazards they face…including natural hazards like floods, hurricanes, tornadoes, earthquakes, and widespread serious illness such as the H1N1 flu virus pandemic.
* Human-caused hazards include accidents, acts of violence by people and acts of terrorism.
* Examples of technology-related hazards are the failure or malfunction of systems, equipment or software.”

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Illustration From Ready.Gov On Threats Facing Small Businesses

Consider “Human-caused hazards [like] terrorism.” Ready.Gov makes it clear that any business, large or small, in the U.S. could be impacted by terrorism. Businesses should have business interruption insurance for lost revenue caused by terrorism including chemical, biological or nuclear attack.

Businesses should also be insured for business interruption caused by failure of the power grid (due to natural disaster, terror attack or a solar storm). Also, businesses should have robust business interruption insurance to cover lost revenue in the event of a pandemic disease in the U.S. It is not inconceivable that the government would confine all non-essential workers to their homes for 30, 60 or 90 days to stem a national emergency.

In addition to the existential threats covered above which can quickly empty business coffers, small and mid-size business owners face risks posed by their own governments – local, state and federal. Government regulators wield more power than in bygone days. Overzealous government regulators often “shoot first and ask questions later.” They often have the power to shut down a business until a dispute can be resolved by the courts.

Finally, litigation is an ever-increasing threat to business owners and liquidity, and the dangers come from inside and outside of their businesses. Business owners and their staffs must navigate a complex maze of employment laws, healthcare laws, worker’s compensation laws, environmental laws, tax laws and many other laws that can result in costly lawsuits. Also, many commercial insurance liability policies will cover damages, but do not cover punitive damages awarded in a lawsuit. In many cases, punitive damages awarded to plaintiffs are 3 to 10 times higher than compensatory damages.

ERM with a CIC can address the liquidity threats outlined above by supplementing commercial insurance coverage with insurance coverage provided by the CIC.

Addressing Destroyer 1 – Enterprise Risk Management – Blending Third Party Insurance With Formal Self-Insurance

For many, a far more powerful approach to risk management is Enterprise Risk Management that results in a layered or blended approach. By combining third party insurance with a captive insurance company, a business owner can establish a far more comprehensive and thorough risk management approach. ERM is also a better forward looking approach, because the captive insurance company will accumulate additional reserves in years with low claims. These ERM reserves can provide more robust insurance coverage in the future and, when necessary, can be accessed by the owner (or CFO) as a war chest to address contingencies or unanticipated risks.

What Is A Captive Insurance Company?

Simply put, a captive insurance company is a closely-held insurance company that insures primarily thought not exclusively your business. It is a C corporation and is licensed and domiciled like any large insurance company. Captives also have their own reserves, policies, policyholders, and claims. Insurance policies are issued by the captive to its parent or related companies and are actuarially priced. Owning a captive insurance company is a sophisticated way to self-insure, and captives are generally formed to insure the risks of a business, group of businesses and related or affiliated third parties. A captive (or captives) form the chassis of a small / mid-size business ERM strategy.

Why Is ERM With A CIC A Powerful Approach To Address Destroyer 1

A CIC is one of the most powerful risk management and wealth accumulation tools that a business can access. When properly employed, there is nothing else that can do what a captive insurance company does. By operating their own insurance company as part of ERM, business owners and CFOs can:

Fill Third Party Gaps
A captive insurance company can issue insurance policies that address gaps not covered by third party insurers. Captives can also insure third party insurance deductibles, enabling the parent company to raise its deductible and lower its third party insurance costs. Also, a business can enjoy more broad business interruption coverage with ERM and a CIC when an adverse event occurs, particularly events where third party insurance doesn’t cover all damages or peripheral damages.

Utilize Customizable Coverage
Captive insurance companies can write customizable coverage for the businesses they insure. Many businesses face unique risks that may not be addressed by commercial insurers. Unique coverages can also be very expensive when covered by commercial insurers. This feature enables business owners and CFOs to say, “this has gone wrong in the past, let’s insure against it in the future,” or “other companies have experienced this adverse event, we can insure this via our captive.” The flexibility afforded by a ERM with a captive is extremely beneficial in a complex world.

Benefit From Few Or No Policy Exclusions
Captives can provide broad coverage without the exclusions that riddle typical commercial insurance policies. Insurance coverage is worthless if an exclusion prevents the insured from receiving a claims payment when it needs it most.

Avoid Sunk Cost Of Third Party Insurance
Premiums paid to a captive insurance company remain the property of the captive owners (usually the business or business owners). One of the reasons that most businesses are underinsured is that purchasing insurance is a bit like purchasing a lottery ticket. If you don’t win (or in the case of insurance, experience an adverse event resulting in a claim), your money is gone with nothing to show for it. With a captive, this simply isn’t the case. Profits in the captive, defined as premiums collected less claims paid, belong to the captive owners.

Addressing Liquidity Destroyer 2 – Taxes

Over time, businesses, owners and CFOs can build up a substantial war chest with ERM and a captive insurance company. This war chest is available to pay insurance claims the business may have. And, it can also be accessed should the owner or the business require liquid funds. Assets accumulated in a captive almost always outpace retained earnings or a business’ “rainy day fund.” Because the captive is a formal form of self-insurance, it benefits from insurance law and favorable tax treatment. Hence, it is able to accelerate asset accumulation for two main reasons.

First, premiums paid to the captive receive favorable tax treatment. Premiums paid to the captive are an expense to the parent company. This lowers the parent company’s taxable income. As, the captive takes in premiums, it is taxed as an insurance company on its underwriting profits (typically defined as premiums less reserves to pay future claims). For large insurance companies, underwriting profit is actuarially determined. However, small insurance companies can make an 831 (b) tax election, resulting in a tax rate of 0% (that’s zero percent) on their underwriting profit. A small insurance company is defined as receiving premiums of $1.2 million or less per year.

Second, the captive is able to invest and grow larger pool of assets. Large commercial insurers have entire staffs whose sole purpose is to invest reserves (that have not been taxed).
For these reasons, ERM with a well-run captive insurance company will typically double liquid capital. And, the same claims that would be paid by the captive would have to be covered out of retained earnings anyway if the captive weren’t in place.

The Long Term Benefit Of Defeating Destroyers 1 & 2

When business owners are ready to sell their business or retire, they keep the war chest. A successful captive amasses wealth for its owners that can be accessed and enjoyed in the future. This unique ability to improve risk management and simultaneously stockpile wealth makes ERM with a CIC The Most Efficient Approach For Businesses To Build Liquid Reserves.


My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Attorneys and Information Technology Professionals. We specialize in Corporation and LLC filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts. We are not simply a document filing service, we are here to help you with the part of the business that you have to do, so you can focus on what you love to do. For more information visit our website www.myprofessionalcfo.com Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients. Email us with any questions. Call us at: 1 (800) 517-0CFO 1 or (800) 517-0236 Captive services powered by: image

Advanced Strategy To Transition From Creating A Successful Business To Creating Wealth

It is not uncommon to come across successful and profitable businesses that generate little meaningful wealth for their owners. For starters, businesses often face an array of expenses in addition to operating costs that sap revenue including administrative costs, leases and insurance. What profits remain are typically ravaged by taxes, weakening the business and hampering wealth accumulation by the owners.

Advanced strategies to outrun these challenges often include starting or acquiring a second business that serves their primary business. This is often described as vertical integration, and it is often effective because a supplier or service provider is already making a profit serving the parent company.

Consider a successful business owner that chooses to stop leasing a facility in favor of purchasing a facility inside a new company owned by the business owner. In this situation, the business owner can now earn a profit on two companies and can depreciate the real estate asset in the second business to reduce taxable income as well. This strategy enables the business owner to build meaningful wealth in real estate and equipment.

Or, consider a manufacturer that purchases or starts a business in its supply chain. This manufacturer is now able to earn profits on both businesses and gain better control of risk…specifically, the risk of a key supplier folding or choosing to sell to a competitor.

As Advanced As It Gets

For many successful businesses, there is a highly advanced strategy to form a second, profitable business that can facilitate significant wealth creation for its owners. The advanced strategy is to start its own insurance company, known as a captive insurance company.

What Is A Captive Insurance Company?

A captive is a unique insurance company. It includes its own corporation, insurance license, reserves, policies, policyholders, and claims. It is a sophisticated way to self-insure and is generally formed to insure the risks of its owners and related or affiliated third parties.

A captive insurance company can serve as the backbone of an Enterprise Risk Management strategy (ERM). ERM is a more sophisticated approach to risk management that holistically expands its risk management approach in 2 dimensions – time and space. In the time dimension, a company implementing ERM shifts from managing risk year-to-year to managing risk over a 10 to 50 year horizon. This is possible because an ERM strategy with one or more captive insurance companies in place will usually accumulate loss reserves, providing increased risk management flexibility in the future. In the space dimension, an ERM approach results in a wider risk management and insurance umbrella. This occurs because the business conducts a broad risk assessment of all threats the business faces. An ERM strategy is developed and includes broader (or more) lines of insurance coverage. Typically, this larger insurance umbrella includes a blend of third party commercial insurance coverage and insurance coverage provided by the captive insurance company.

How Does This Advanced Strategy Protect & Grow Wealth?

First, the parent company is now able to insure risks that were previously uninsured. The added insurance protection provided by the captive plugs gaps in commercial coverage and addresses operational and existential threats that can threaten the very survival of the business.

Second, Enterprise Risk Management with a captive can create wealth by reducing third party insurance costs. As the captive matures and builds up loss reserves, it can help lower commercial insurance costs by taking over a portion of the core risks faced by the business. One approach is to increase deductibles on commercial policies and purchase deductible insurance from the captive. As the business and captive develop a reliable loss history and the captive builds loss reserves, the captive can also be in a position to provide “first dollar” coverage to the business for core risk. In these cases, the captive will likely purchase reinsurance.

Third, the overall (or aggregate) wealth of one or more companies with a captive insurance company is higher than the overall (or aggregate) wealth of one or more companies without a captive insurance company. This occurs for two primary reasons. First, the parent company takes an expense as it pays its insurance premium to its captive. This lowers the parent companies taxable income. And, the captive may make an 831(b) tax election if it qualifies as a “small” insurance company, so that its underwriting profits are taxed at a rate of 0%. A “small” insurance company is defined as an insurer that receives less than $1.2 million in premiums annually. Second, the captive is able to earn a return on its reserve pool (or assets). And, the captive’s asset pool has been amassed with pre-tax dollars, enabling asset growth on a larger starting base.

How Does a Captive Insurance Company Increase Total Wealth?

A captive provides many benefits to its parent company or business owner including risk mitigation, asset protection, security from creditors and increased profits. As such, a captive can form the backbone of a comprehensive ERM approach as outlined above. A captive primarily insures its parent company or related companies. Hence, the parent company is able to purchase insurance from its captive. In the early years of owning a captive, a business can insure risks that third party insurers will not insure or risks where the cost to insure with a third party is prohibitive.

These are risks that many businesses regularly face and informally self-insure. Which means that if an event occurs, the business “bites the bullet,” often taking a loss, laying off workers and possibly facing partial or total closure. With ERM and a captive insurance company in place, businesses can formally insure risks not normally insured by third party insurers.

Premiums are paid from the parent company to the captive with pre-tax dollars (up to $1.2 million annually if the captive makes an 831 (b) tax election). Captive reserves can be translated into virtually any other type of asset (some domiciles have restrictions). Hence premiums paid to the captive are in effect a “transfer of wealth” and are protected from the parent company’s creditors and lawsuits. For this reason (tax savings and reserve accumulation), a captive insurance company is an advanced strategy that helps successful businesses transition into successful wealth engines.

The Window For Successful Businesses To Implement The Advanced Strategy Of Forming A Captive And Paying Premiums In 2015 Is Closing.

It takes 60 to 90 days to form a captive insurance company. Call us to discuss whether or not a captive insurance company or additional captive insurance company is the right move for your business.


My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Attorneys and Information Technology Professionals. We specialize in Corporation and LLC filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts. We are not simply a document filing service, we are here to help you with the part of the business that you have to do, so you can focus on what you love to do. For more information visit our website www.myprofessionalcfo.com Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients. Email us with any questions. Call us at: 1 (800) 517-0CFO 1 or (800) 517-0236 Captive services powered by: image

Game Changing Business Strategy That Turns Sunk Costs Into Sunk Profits

2015 CAPTIVE COUNT-DOWN:

There are 31 Days remaining to start the process to form a captive and pay tax-deductible premiums in 2015!


 

Today’s economic climate is challenging and earning (and holding onto) profits is not easy, making wealth accumulation and long term business survivability more daunting tasks. For this reason, business owners, CFOs and advisors including CPAs, Property & Casualty Brokers, Wealth Managers and Attorneys owe it to themselves to be vigilant in pursuing strategies that will safeguard the viability and wealth of the business and its owners. The sort of vigilance in view often requires rethinking business paradigms to look for “both – and” versus “either – or” solutions. “Both – and” thinking seeks to avoid trade-offs, equivalent to “having your cake and eating it too.”

For example, an old paradigm in the automobile market was the assumption that large, heavier cars were inherently safer. Hence, moves to improve fuel efficiency would likely come at the expense (or trade-off) of safety. The automobile industry has rejected “either-or” thinking and produced innovative vehicles that make great strides in both safety and fuel efficiency. The development of lower weight, energy absorbing auto bodies, aerodynamic designs, air bags, computer controlled engines and hybrid electric engines have combined to produce “both-and” results.

“Both-And” Thinking For Mid-Size And Small Businesses

For small and medium sized business owners in a challenging economy, a particular area the demands “both-and” thinking is insurance. Insurance is often viewed through an “either-or” lens. A well- conceived risk management and insurance strategy is a necessity. However, insurance is almost always a sunk cost. It is certainly a necessity and often critical to the survival of a business, but it remains a sunk cost. Each year, precious dollars spent on insurance premiums are gone. It is a mere cost of doing business. And, while most businesses would benefit from purchasing a broader range of insurance coverages, many don’t, because more insurance coverage means less money in the business and less wealth at the disposal of the business owner or CFO.

The Power of “Both-And” Thinking = More Insurance Protection and Significantly More Wealth

The paradigm shift required to overcome this “either-or” scenario is for business owners to make the choice to own their own insurance company. Specifically, a business can set-up and operate what is known as a captive insurance company. Large corporations have been utilizing captive insurance companies for decades, and recent laws favoring “small” captives and competition among domiciles have made captive ownership a powerful and accessible risk management tool and financial vehicle for a growing number of small and mid-size businesses. Such a decision propels a business from “either-or” to “both-and” thinking because a business that owns its own insurance company can benefit from both more insurance coverage and more wealth at its disposal simultaneously.

“Both-And” Benefit: More Insurance Coverage

Most businesses are under-insured. If a business owner, CFO or risk manager were to take an hour or so and write down every threat to the business, it is likely the list would fill up several pages. And in most cases, businesses purchase third party commercial insurance for a fraction of the risks they face. The reality is that it’s not practical or remotely affordable to purchase third party insurance for many of the threats a business faces. However, by choosing to formally self-insure many of the risks facing a business through a captive insurance company, a business owner is able to provide a much broader umbrella of insurance coverage. This improved risk management approach does not require the business to replace existing third party commercial insurance policies, although a captive can be used to replace third party coverage if it is prudent and expedient to do so. For small and mid-size businesses, the best risk management approach is usually achieved by blending third party commercial insurance with broad lines of insurance coverage afforded by one or more captive insurance companies.

Captive insurance companies have the unique ability to write customizable insurance coverage. So, they can write policies that are specifically tailored for the specific needs and challenges faced by the parent company. It is often difficult and inefficient for third party commercial insurers to write customized policies. This reality often renders customizable coverage unaffordable or impossible to acquire. Another benefit of providing insurance coverage via a captive arrangement is that captive policies do not have to include the exclusions that characterize most commercial insurance policies. In this sense, policies issued by a captive can be “wide open,” which is particularly important when a business has a loss and needs the money. Also, claims approval and processing for captive claims is simpler, more timely and more certain. For these reasons, a captive insurance company is a powerful vehicle to:

– Provide blended insurance coverage with existing third party insurance coverage

– Fill gaps in existing third party insurance policies including covering exclusions

– Insure risks that were previously uninsured

“Both-And” Benefit: Significantly More Wealth

By choosing to own a captive insurance company, a business owner or CFO is also choosing to enjoy some of the benefits of insurance law and taxation. It’s no secret that most insurance companies are very profitable. The skylines of most major cities in America are dominated by stadiums, banks, and… you guessed it, insurance buildings. Large commercial insurance companies receive millions of dollars in premiums, and in return, issue policies promising to pay in the event an insured adverse event occurs. Large insurers use actuarial calculations to reserve a large portion of premiums collected for future obligations or claims. It is important to note that these reserves are not taxed. Insurance companies are taxed on their profits, essentially computed as premiums received plus investment income less reserves for future losses, less expenses. Expenses essentially include operational, administrative, marketing and sales costs of doing business. At their core, large insurers are a lot like banks. They have a large pool of untaxed assets to invest and grow.

Small captive insurance companies are quite similar to large insurance companies as described above. However, small captive insurance companies can benefit from an addition to the tax code that was added in 1986 by Congress and signed into law by President Reagan. Small captive insurance companies can make an 831 (b) tax election if they receive $1.2 million or less in annual premiums. When a small captive insurance company makes an 831(b) election, it is taxed at a rate of zero percent (0%) on its underwriting profits. Hence, premiums received less claims paid, less expenses result in underwriting profit which is taxed at zero percent. Similar to large insurance companies, small captives will almost always have a large pool of assets to invest and grow.

The parent company or companies deduct insurance premiums paid to the captive insurance company as a business expense. This lowers operating profit and reduces taxes paid by the parent company or business owner. Also, a captive insurance company may be owned by the business, the business owner, related parties, key employees or heirs. By complying with insurance law, a captive enables a business owner to achieve the “both-and” benefit of retaining and controlling more wealth.

Paradigm Shift: From Sunk Costs To Sunk Profits

“Both-and” thinking can transform a business’ total insurance portfolio from a “sunk cost” to a “sunk profit.” As an example, consider a profitable business that spends $250,000 per year on commercial insurance policies covering general liability, property and auto. In a year with no claims, the $250,000 spent on insurance premiums is a “sunk cost.” Now consider the same company with an improved risk management strategy and a captive insurance company in place. The business still pays $250,000 on commercial policies for general liability, property and auto.

However, the business also pays $1,000,000 in premiums to its captive insurance company to acquire a wide range of additional coverages including reputational risk, administrative actions, legal expenses, cyber breach and data loss, loss of key employee, loss of key account, supply chain, directors and officers, employment practices, terrorism and a large umbrella policy. Assuming a year with no claims, the business owner or business ends the year with $1,000,000 in his or her captive insurance company. The parent company deducted $1,000,000 in insurance premiums and reduced taxes paid by the owner by $500,000 assuming 50% combined state and federal income taxes. The $500,000 in tax savings less $250,000 in third party commercial insurance premiums nets $250,000 in additional wealth retained and controlled by the owner in the total insurance portfolio strategy for the business.

By choosing to own a captive insurance company and applying “both-and” thinking, a business owner can turn risk management into a profit center, transforming sunk costs of third party insurance into overall sunk profits in a captive owned and controlled by the business owner.


My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Attorneys and Information Technology Professionals. We specialize in Corporation and LLC filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts. We are not simply a document filing service, we are here to help you with the part of the business that you have to do, so you can focus on what you love to do. For more information visit our website www.myprofessionalcfo.com Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients. Email us with any questions. Call us at: 1 (800) 517-0CFO 1 (800) 517-0236 Captive services powered by:

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Did You Or Your Business Just Write A Large Check To The IRS?

2015 CAPTIVE COUNT-DOWN

There are 60 Days remaining to start the process to form a captive and pay tax-deductible premiums in 2015.

A better question might be, “Did you just weaken your business by sending a large check to the IRS?”

And, if you answered, “yes” to that question, would you instead like to strengthen your business by sending far smaller checks to the IRS?

If you can affirmatively say, “yes” to the following statement, “I want to make my business stronger and more survivable by sending smaller checks to the IRS,” then this article is for you.

At the outset I want to be very clear that I am not advocating tax evasion. CLICK HERE to read Tax Avoidance Is Perfectly Legal, But Tax Evasion Is Against The Law.

I am advocating one of the most responsible strategies that small and mid-sized business owners can implement to ensure the long-term survival of their enterprise. This strategy has legitimate business purpose, provides significant tax savings, and is encouraged by Congress. CLICK HERE to read Congress Wants You To Own A Captive Insurance Company.

What is this responsible strategy that is also a financial game-changer? Well, I partially tipped my hand in the link provided above. This wealth-preserving, business survival strategy is Enterprise Risk Management Utilizing A Small Captive Insurance Company.

BACKGROUND: Congress And Small Captive Insurance Companies

Over time, taxes can take a heavy toll on a business and its owners. Year after year, profits are stripped away to pay taxes often resulting in a business that is less prepared for the challenges and risks it may face in the future. Congress doesn’t want small and mid-size businesses and business owners to be hollowed out by excessive taxation either.

In the mid-1980s, Congress passed legislation creating the 831 (b) “small” insurance company tax election. A small insurance company is defined as an insurance company that collects $1.2 million or less in premiums. In most captive insurance company arrangements, premiums are paid by the parent company to the captive insurance company. In return, the captive provides insurance policies to the parent company. The 831(b) tax election allows small insurance companies to be taxed at a zero percent (0%) tax rate on underwriting profit. Underwriting profit is simply defined as premiums collected less claims paid. Hence, a small business could pay up to $1.2 million in premiums to its captive insurance company and the captive would pay no taxes. The captive can be owned by the business, the business owner, business owners, heirs or other related parties. Depending on claims, a captive can save up to $600,000 per year in taxes.

It’s worth noting that “small” captive insurance company legislation was a bi-partisan effort passed by a Democratic controlled Congress and signed into law by Republican President, Ronald Reagan. This issue united both sides of the political aisle in America because small captive insurance companies are good for small businesses, good for long term business sustainability and good for America.

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How Is Enterprise Risk Management With A Captive Insurance Company A Game Changer?

The illustration below shows why captive ownership is so often good for businesses and good for business owners. A captive can serve as the backbone or chassis of an Enterprise Risk Management (ERM) approach. ERM addresses risk holistically, expands insurance coverage to the business, takes a long-term approach to risk management, and simultaneously puts more wealth at the disposal of the business owner.

The illustration below compares the status quo on the left with ERM implementation and captive ownership on the right. This illustration covers a 10 year period and assumes a 4% rate of investment return for both scenarios. Both businesses have third party insurance coverage in place to insure core risks. The business on the right which implemented ERM with a captive insurance company has more insurance coverage and more money. In fact, over a ten year period, the business on the right has almost 80% more wealth than the business on the left.

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Clearly, the business that implemented ERM with a Captive Insurance Company is better prepared for the future. Remember, small insurance company legislation united both sides of the political aisle in America because small captive insurance companies are good for small businesses, good for long term business sustainability, good for employment, and good for America. Don’t just pay more taxes if your business would benefit from owning its own insurance company!

What Is Enterprise Risk Management (ERM)

ERM is the discipline by which an organization in any industry assesses, controls, exploits, finances and monitors risks from all sources for the purpose of increasing the organization’s short and long-term value to its stakeholders. Beginning in the mid-80s, many businesses continued down an entrepreneurial path and shifted their mindset from risk management simply as a form of cost containment to risk management as a profit center. Indeed, a more mature approach to risk management can be quite creative and entrepreneurial. Making a paradigm shift from viewing risk management purely as a cost center to viewing risk management as a profit center and strategic pillar of the business can be very rewarding from a financial standpoint.

ERM is the paradigm shift that transforms risk management from a cost center to a profit center. Large corporations have employed ERM for some time, and this mature approach to risk management can also be adopted by small and mid-size companies. The chassis of an ERM approach is a captive insurance company (or companies). Captive insurance companies give business owners or CFOs the ability to take an active versus a passive approach to risk management. ERM increases depth of coverage and is a forward-looking approach to risk management. Furthermore, as a company’s ERM strategy matures, risk management can transition from being a cost center to serving as an entrepreneurial profit center.

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Ownership of one or more captive insurance companies makes ERM possible, because a business is able to both:

– Increase depth of insurance coverage
– Increase the time horizon of its risk management approach

Increase Depth Of Insurance Coverage

When employing a mature ERM model, business owners can categorize risk as core risk, operational risk and strategic risk. Most businesses and individuals simply insure core risk and usually do so via third party commercial coverage. Utilizing an ERM approach, a captive insurance company, in its formative years, gives businesses depth of cover by addressing the second and third layers of risk management (operational risk and strategic risk). As the captive matures and amasses reserves, it can also play a role in addressing core risk. It’s worth noting that many non-core risks evolve into core risks. Examples include: cyber, supply-chain risk, extended warranties, administrative action, terrorism, receivables, key contracts, key employees and employment risk. Operational and strategic risks and the existential threat that can pose to small and mid-size business owners are outlined in detail at FEMA’s Ready.Gov web site (CLICK HERE to read more).

Increase The Time Horizon Of Risk Management

Another characteristic of a mature risk management approach is taking a forward looking stance. A short term approach to risk management typically buys insurance from year-to-year with the goal of keeping costs as low as possible. Each year, all premiums paid for third party commercial coverage are a “sunk cost.” At the end of the year, if there are no claims, the money is gone. Because a captive insurance company is owned by the business owner(s) or the parent company, premiums paid to the captive insurance company are retained after claims are paid. Wealth accumulates in the captive as insurance reserves and provides flexibility to the business in its risk management in future years. A captive facilitates an ERM strategy because it enables a multi-year approach to risk management.

Summary: Financial Impact Of ERM With A CIC

Adopting an ERM approach with a captive insurance company as the chassis can be a financial game changer for business owners. Because the business owner and/or company can reap additional profits from its captive insurance company, the organization will inevitably make risk management and risk mitigation a higher priority. Furthermore, as the CIC grows its reserves, it is in a position to help reduce total reliance on third party commercial cover for core risks. This can often be achieved by reinsuring deductibles and insuring additional potential losses not covered by commercial insurance (including losses above third party insurance policy limits). Finally, CIC ownership enables the business owner or owners to capitalize on the favorable tax treatment that insurance companies receive on their reserves set aside for future claims. As noted already, a well-structured ERM strategy with a CIC can save a business owner up to $600,000 per year in taxes.

Because a captive insurance company is owned by the business owner(s) or the parent company, premiums paid to the captive insurance company are retained after claims are paid. Wealth accumulates in the captive as insurance reserves and provides flexibility to the business in its risk management in future years. A captive facilitates an ERM strategy because it enables a multi-year approach to risk management.

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ERM with a captive insurance company is particularly powerful, because this approach enables a business or business owner to capitalize on insurance law. Fortune 500 companies and other large company CFOs have been capitalizing on insurance law and tax treatment since the 1950s. The exact same strategies are available to small and mid-size companies. As part of its ERM, a business can purchase insurance from its captive insurance company (ies). Premiums paid to the captive are a tax deductible expense to the parent company. The captive insurance company receives the premiums in a tax-favored manner as a large portion are set aside as reserves for future claims.

Reserves are not taxed, hence the insurance company is able to invest and grow a large pool of money. Insurance companies amass wealth by investing large amounts of pre-tax reserves. As already covered, if the insurance company qualifies as a “small” insurance company (defined as receiving annual premiums of $1.2 million or less), it can make an 831 (b) tax election and be taxed at a 0% (zero percent) rate on its underwriting profits. Hence, a well-structured ERM strategy with a CIC can save a business owner up to $600,000 per year in taxes. Most importantly, rather than being weakened by taxation, the business is strengthened and better prepared for long term survival.


My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Attorneys and Information Technology Professionals. We specialize in Corporation and LLC filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts. We are not simply a document filing service, we are here to help you with the part of the business that you have to do, so you can focus on what you love to do. For more information visit our website www.myprofessionalcfo.com Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients. Email us with any questions. Call us at: 1 (800) 517-0CFO 1 (800) 517-0236 Captive services powered by: image