9 Surprising Things You Can Claim On Tax

H&R Block director of tax communications Mark Chapman advises retailers what they can and can’t claim.

Running a business is hard enough without getting caught up in the complexities of the tax system.

So, to make things simpler, here is a beginners’ guide to the tax deductions all retail businesses should be looking to claim.

Purchases of stock

Everything that you purchase to sell in your store is tax deductible as a cost-of-sale. In addition, you can also claim for associated costs of getting stock delivered from suppliers as well as other costs of sale such as delivery charges to customers (if you pay them rather than the customer), packing, etc.

If you travel to trade fairs to examine new products, those costs are also deductible.

Write-off any lost, damaged or obsolete stock before the year end in order to claim a tax deduction.

Immediate write-off of capital purchases

Through until 30 June 2018, your business can claim an immediate tax deduction for all capital purchases which cost less than $20,000, rather than writing off the cost over several years. That could be a great way to refresh your store and generate some extra cash flow. To qualify, your business must be a small business (ie, with an aggregate turnover or less than $10 million.

Amongst the items you could look at claiming are the following:

Cash registers and other POS devices
Delivery vans
Store fittings and fixtures
Computers, laptops and tablets
In store security systems
Accounting software

Advertising and marketing costs

Advertising and marketing to sell stock, gain publicity and hire employees is all tax deductible. Costs incurred in entertaining clients and suppliers, sadly, are not deductible.

Property costs

Rent, mortgage interest, rates and land tax for your business premises are all tax deductible.

Salary and superannuation expenses

You have to pay staff wages and you also need to contribute compulsory superannuation payments for everyone on the payroll. All those costs are tax deductible. If you can get your June quarterly super payment in before 30 June, you might be able to accelerate that deduction into the current tax year (the actual deadline is in July, after the next tax year has started).

Tax expenses

All tax and accounting related expenses should be tax deductible, including the cost of hiring a bookkeeper prepare your business records, having tax returns or BAS prepared and costs associated with attending to an ATO audit or objecting to a tax assessment which you think is incorrect.

Fringe Benefits

Employers can generally claim an income tax deduction for the cost of providing fringe benefits and for the Fringe Benefits Tax (FBT) they pay on those benefits. A fringe benefit is a benefit provided to an employee (or their associate) because that person is an employee (or a former or future employee) and can include items such as cars and car parking spaces.

Business Insurance

Premiums you pay for business insurance are generally tax deductible provided they are connected to your business’ capacity to earn an income or to protect its assets.

This means that premiums for workers compensation insurance, professional indemnity insurance, fire damage, theft cover, public liability insurance, loss of profits and commercial motor vehicle insurance are all tax deductible.

Premiums for key person or key man insurance, a type of policy which offers a benefit payment when an important company employee is incapacitated and no longer able to work, can also generally be claimed as a tax deduction provided the key person cover is was taken out to protect your business’ revenue.

Reorganising your business tax-free

Not a tax deduction as such, but a tax relief that applies to small businesses, the government has recently introduced new measures which allow businesses to reoganise themselves without incurring unexpected income tax consequences, such as capital gains on asset transfers. This is particularly valuable for new and expanding businesses which are looking to change their legal form to allow greater asset protection for the owners or greater freedom to expand, for instance by changing from a sole trader to a trust or company.


Business owners well-advised to formulate a transition plan

The short-term demands of running a business often distract business owners from the long-term importance of developing a comprehensive transition plan. This includes proper planning for protecting and preserving the future of their business.

For business owners, the goal of preserving wealth is not enough. Business owners must prepare their businesses for the legal and financial aftermath of their retirement or death. If they do not, they are exposing their families to increased tax liabilities and their businesses to undesired acquisitions, disputes of business ownership and/or failure.

Transition planning should begin as early as possible. According to the Small Business Administration, some transition consultants recommend a three- to five-year plan, while still others counsel owners to create a 10- to 15-year plan. By allowing sufficient time for planning, business owners can evaluate potential successors in various roles and determine whether these individuals have the commitment, maturity and drive necessary to succeed.

Owners should consider the following when preparing the plan:

  • Can the business be transferred?
  • To whom should the business be transferred?
  • When should the business be transferred?
  • How should the business be transferred?

To ensure continuity, business owners must have a well-thought-out plan that considers taxes and insurance.

Owners can consider timing the transfer of a business during their lifetime. This option allows the opportunity to consult with the successor—and may help reduce the risk of a discounted sale of the business. In addition to starting early and communicating openly and clearly about the transition plan, business owners should seek professional support. They should involve a strong professional advisory team consisting of an attorney, a certified public accountant and a banker. This team can provide the business owner with information about the various transfer options that exist, including:

  1. Gift of the business to:
  • Family limited partnership or LLC; or Delaware Directed Trusts.
  1. Sale to third party options, which can entail:
  • Outright sale;
  • Installment sales;
  • Sale to defective trust;
  • Self-canceling installment notes; and
  • Sale in exchange for private annuity.
  1. Sale to employee, which may involve:
  • Outright sale;
  • Installment sale; or
  • Employee stock ownership plans.
  1. Sale to co-owner. These agreements are often called buy-sell and are triggered by certain events such as death, disability, divorce or retirement. They include:
  • Cross-purchase agreement (with or without escrow or trust);
  • Entity purchase plan; and
  • Hybrid (wait and see) approach.

Role of insurance

Another option for owners is to have a potential successor in mind to operate the business should they become unable to do so. If the business has one or more co-owners, a buy-sell agreement is a consideration. This agreement states that upon the death of any owner, their interest is automatically purchased by the other owners. This arrangement can ensure that beneficiaries of the deceased owner (including spouses or other family members) don’t unintentionally become owners. Key person life insurance can be purchased as a way to fund a buy-sell agreement and provide the necessary liquidity.

In the event a business owner dies, key person insurance provides a tax-free death benefit. This helps businesses fund the recruitment, hiring and training of a new key executive, as well as remain solvent during the transition to new leadership.

Key person insurance assures customers and creditors of business continuity. The corporation purchases the insurance policy on the key employee’s life, becoming the owner, beneficiary and payer of premiums. After the death of the employee, the corporation receives the total death benefit, tax free.

Long-term care insurance can also protect a business owner’s assets when the owner can no longer be independent. This type of insurance may be less costly for a business owner under a group discount plan than when purchased individually. Purchasing this coverage through the corporation may bring a significant tax advantage.

Estate planning

Planning for taxes is also an essential part of any strategy as estate taxes are among the steepest and most severe taxes levied. In 2017, the federal tax rate on estates is 40 percent after the lifetime exclusion of $5.49 million for an individual and $10.98 million for a married couple.

Trusts are often effective vehicles that allow you to reduce the value of your taxable estate and save tax dollars. Some options include but are not limited to the following:

  • Irrevocable life insurance trust;
  • Grantor retained annuity trust or grantor retained unitrust; and
  • Charitable remainder trusts.

No single option exists to transfer the control of your assets or to help minimize the tax burden on an estate. Trust officers, financial planners, attorneys, accountants and insurance agents with many years of estate planning experience should work as a team to help you develop a plan that fits your family’s future needs and your wishes.

When it comes to estate planning, Benjamin Franklin’s adage “nothing is certain except death and taxes” couldn’t be more appropriate. Business owners who establish a comprehensive estate plan not only secure their wealth and the wealth of their heirs, they also secure the legacy and future of the businesses they have worked so hard to establish.

James Barger is president of KeyBank’s Rochester Market. He may be reached by phone at (585) 238-4121 or email at james_r_barger@keybank.com.

Ghana news: Who ensures the President is insured?

This news led to an unusual quiet in the national capital with activities in other commercial and administrative parts of the country virtually grinding to a halt! The effect of this news on productivity of the entire nation cannot be quantified!

Indeed, the sad memories of this loss have set the tone for this week’s write-up which seeks to discuss the importance of the most important person in every organisation from the perspective of the State and how to financially protect such a person using keyman’s insurance.

Who is the CEO?

In every civilised society (i.e. countries, organisations, etc.) there is a Chief Executive Officer (CEO).  

This may even cascade further down to families, with the family head being the CEO. CEO in other contexts could also apply to Heads of Departments in organisations who play key roles to ensure the objectives of the organisation are achieved! Please note that in this write-up, the ‘organisation’ also refers to the State contextually.

Undoubtedly, the sudden loss of these individuals either through incapacitation, accident, injury, terminal illness or death, often creates uncertainty.

For instance, the untimely demise of  Presidents Mills of Ghana, Ya’radua of Nigeria, and Hugo Chavez of Venezuela are somehow still fresh on our minds. Indeed, the world also spent some time mourning the late King Saud of the Kingdom of Saudi Arabia, who also died while in office.

It is not something that crosses our minds easily as somehow we think they are super-human but the sudden demise of a sitting President or King can daze anybody with emotions! Notwithstanding the momentary tensions in some cases, however, these great personalities were almost immediately replaced as per the dictates of the customs and constitutions of their respective countries.

Juxtaposing Corporate Institutions Keyperson’s Insurance to the State’s

Unlike many governments, sad to say though, that the same cannot be said about our corporate entities, many of which are starving of good corporate succession plans; hence would require ample time to headhunt for the right replacement for a lost key staff. In this regard, Keyman Insurance policy is imperative to provide compensation to the organisation upon losing key staff, either through death or incapacitation.

What is Keyman Insurance?

Keyman (or keyperson) insurance policy is an insurance policy taken by an organisation to cover its essential or key staff so that in the unfortunate event of losing them, compensation will be paid to the organisation. Thus, the policy indemnifies an organisation against financial losses and other negative effects of the sudden loss of key staff, either arising from death or protracted incapacitation. The payout, therefore, facilitates the organisation’s quest for an appropriate replacement in order to save the business from going down. Typically, the policy term does not extend beyond the period of the key person’s usefulness to the organisation (i.e. term of office).

Who is key?

It is needless to suggest that as a country, the President is the number one most important individual. Just like the State, every organisation has a number of key staff who drive the growth and sustainability of that organisation.

These individuals (e.g. CEO, Chief Finance Officer (CFO), Chief Marketing Officer (CMO), Chief Engineer, etc often have such unique and indispensable skill sets that remain critical to the survival of the organisation. The organisation may, therefore, take out a Keyman Policy on the lives or health or continuous welfare of such individuals in order to offset the costs of recruiting a desirable replacement or even hiring ad-hoc help prior to recruiting a desirable successor.

The concept

Key person insurance was designed during an era when top executives typically stayed with one organisation for their entire working lives. These policies built up cash value combined with a deferred benefits plan, offering an attractive incentive package for the executive in order to retain them and thereby prevent them from conceiving ideas of starting their own business or quitting for a competitor.

Insurable losses

Generally, there are four (4) categories of loss for which keyperson insurance may provide compensation:

i.    Losses suffered during the period when a keyperson is unable to work, temporary and, if necessary to finance the recruitment and training of a replacement.

ii.     Losses resulting from the delay or cancellation of any business project the keyperson was involved in, loss of opportunity to expand, loss of specialised skills or knowledge.

iii.    To protect shareholders/partners’ interests, where other shareholders or partners interests are purchased by existing shareholders or partners.

iv.    For anyone involved in guaranteeing business loans or banking facilities.

Ownership of the policy

Keyperson policies can be owned in many ways depending on the business’ needs. The policy is owned by the organisation and receives claim proceeds arising therefrom, hence, the Government of Ghana can do same.

Some sticky exclusions in contemporary business

• If an organisation takes out keyman for the CEO and s/he resigns afterwards to join a competitor, while the policy is in force, it is almost impossible for the policy to be cancelled by the organisation.

• The policy will compensate a collapsed organisation, if the CEO, credited for the company’s previous success, passes on and the company loses considerable revenue as a result.

The Challenge of Resignations

The current challenge of key persons exiting organisations or being re-assigned to different departments (within the same organisation) where they are no longer so crucial is a source of worry, somehow, as the organisation would have already paid premiums on the policy. The only option would then be to modify the policy for a pro-rated premium refund, albeit negligible. One can relate this with the quite recent resignation of British Prime Minister, David Cameron.

The Way Forward

Granted that the management of a country is a broader basis on which many business interests are managed, having a keyman insurance policy for our sitting presidents would certainly not be out of place. Similarly and understandably so, because fewer people stay with only one organisation these days, this type of policy needs to be modified to cater for possible resignations, being terminally ill or exit in any form.

Fortunately, many insurers in Ghana already have these policies available. Sadly, the policy is rarely patronised by government officials who are in key positions in various capacities. If we really cherish our key leaders, let us make it a point to ensure that they are adequately protected, financially. Let us also look at how the Keyperson insurance works in the corporate world and modify the features and benefits to suit one for our political leaders starting from the president.

In spite of the constitutional provisions and / or dictates that make it easy for the almost immediate replacement of a sitting president, the question still remains: does the current President of the Republic of Ghana have this type of insurance policy or anything similar to it and who ensures that this is done?
Until next week, “This is Insurance from the eyes of my mind.” — GB

A Trust For Every Asset

Modern trust laws make possible much of what clients want out of their estate plans, such as keeping some degree of flexibility and control while minimizing taxes, protecting the assets, furthering family values and legacy wishes and, of course, retaining privacy.

Often, the plans are more limited by a failure to diversify the estate’s assets and coordinate the appropriate trust structure or administration for each component. Whether that is because a trustee doesn’t want to risk a fiduciary breach by getting it wrong or doesn’t have the expertise to craft an optimal investment strategy for the assets funding the trust, the end result is a non-diversified estate plan that’s not as optimal for a family client as it could be.

Asset Diversification and Trust Laws

Like all investors, family offices view asset diversification as a key to both increasing return and reducing risk. But for high net worth clients, the portfolios get complex, and will typically involve cash, a portfolio of domestic and international equities and fixed-income securities, hedge funds, real estate, private equity (directly invested or through a fund) and natural resources (see “Average Global Family Office,” below).

Many of these investments can pose issues for trustees based on how the trust is administered. A trustee is subject to very high standard of fiduciary liability, as well as personal liability. A trustee can delegate the duty, but not the risk.

The Uniform Prudent Investor Act (UPIA) requires trustees to pursue an overall investment strategy considering various factors when formulating an investment program, including the size of the portfolio; the likely duration of the trust; liquidity and distribution requirements; the economic environment; tax consequence of investment and distribution decisions; expected total return; and the role of individual investments in the portfolio. It holds professional trustees to an even higher standard – so it’s no surprise that many trustees, often out of a lack of expertise, hesitate to implement as asset diversification plan on an estate.

Large institutional trustees run into similar issues. They are generally hired to provide full service trust administration. But many of these institutions may be reluctant to invest in anything but their own firms’ investment products that they’re familiar with and can easily monitor. They are reluctant to delegate investment management to outside providers, even though they can, out of fear of possible liability.

Non-Diversification of Trust Assets

But there may also be issues if the trust’s assets aren’t properly diversified. The UPIA provides for a general duty to diversify trust assets unless the purpose of the trust is better served without it (maybe the sale of low cost-basis assets would trigger a tax gain, or there is a large interest in a family business.) There are numerous cases indicating that holding an investment asset in a trust, even if mandated to do so, could result in trustee fiduciary liability.

Directed Trusts

Directed trusts are the most popular way to address these concerns. A directed trust generally trifurcates the traditional trustee role into an investment committee, distribution committee and directed administrative trustee. A directed administrative trustee has no discretionary investment duties regarding the trust. The selection of asset allocation, investment management and monitoring is generally the responsibility of the investment committee, which is usually run by the family and the family’s advisors. The members of the investment committee are typically subject to a gross negligence/willful misconduct standard of liability for serving in this role. This is a much lesser standard of liability than serving individually as a delegated trustee in most states. To further insulate the investment committee, a trust protector may be added with the power to approve and/or veto trust investments.

Investment Management LLCs/FIPs

Investment management limited liability companies (LLCs) are another modern trust administration concept that can be used in combination with a directed trust to limit liability and allow for creative diversification and investment of a trust’s assets. An LLC that’s owned by the trust can handle the investment management, and a family member or family advisor can be named as the manager of the LLC.

Some families also use family investment partnerships (FIPs). The investment management for a family is frequently done within one or more of the investment partnerships, with the partnership units then allocated to the family trusts. Generally, these FIPs also work best with a modern directed trust structure.

Many families go further and use separate investment management LLCs and/or FIPs for each type of asset class in the estate. Additionally, the investment management LLC may be of interest to families desiring an administratively convenient account to do their own trading within a trust. (Generally, this isn’t recommended, but sometimes required due to the family dynamic or circumstances.)

Life Insurance

There are several trust-owned life insurance services and programs to monitor insurance companies and policies. Whole life, universal life, variable life and term insurance are frequently purchased—generally within an irrevocable life insurance trust structure—to pay estate taxes and debts, survivor income, and fund key person insurance or buy/sell agreements for family businesses.

Generally, these types of insurance policies are structured to maximize death benefits and minimize cash value and require both due diligence on the insurance company and the policy, as well as ongoing monitoring by the trustee or investment committee.

Alternatively, private placement life insurance (PPLI) is generally structured to minimize the death benefit and maximize the cash value. PPLI is purchased to provide a tax-efficient wrapper for investments such as publicly traded securities, alternative investments, hedge funds and private equity, many of which are tax inefficient – the PPLI policy wrapper can eliminate taxable interests on the investment income and capital gains.

Residential Real Estate

Qualified personal residence trusts (QPRTs) are popular estate-planning vehicles for residential real estate (primary and secondary homes). Additionally, many families use trust funds to purchase residential real estate for the beneficiaries. The beneficiaries can use the home tax-free, and the home is protected from creditors. If the home is going to remain in trust for several generations, families may consider establishing a family time share. Revocable trusts are also used for privacy purposes as well as avoiding ancillary probate.

Other Assets

Many other types of family assets, such as pets, gravesites, antiques, cars, art, jewelry, memorabilia, royalties, digital assets, land, property and buildings, may be best suited for a purpose trust. Purpose trusts first gained popularity with pets, which are considered “property.” Purpose trusts don’t have beneficiaries. They have a trust enforcer to enforce the purpose, as well as a trust protector to oversee the trust and administrative trustees. Their sole purpose is to care, protect and/or preserve an asset. The trust protector can convert the trust to a beneficiary trust at some point in the future, after the trust’s purpose is served. Also, family members can use the assets of a purpose trust if structured properly.

Aligning a diversified estate’s assets with the proper trust structure for each component can help trustees and administrators avoid fiduciary liability while enhancing the effectiveness of the estate plan for its beneficiaries.

This is an adapted version of the authors’ original article in the August 2017 issue of Trusts & Estates.


The most valuable asset you probably haven’t insured

People go into business for many reasons, but chief among them is security – for themselves and their families. But what happens to that security if you or a business partner become incapacitated, or worse?

Car insurance  check. Home insurance – got it. Life insurance…

It’s very easy to take stock of our tangible assets and guarantee they’re insured to the value of their worth.

For example, if your car is damaged in an accident, car insurance reduces the hit to your back pocket, and you’re back on the road as soon as possible. Or if your house burns down, home and contents insurance means that you can focus on rebuilding your life, safe in the mindset that your costs are covered.

Basically, insurance means that if something unexpected or unfortunate occurs, we are compensated and the financial loss is minimised or eradicated.

So why do so few of us not insure ourselves?

iSelect research found that less than half (46 per cent) of Australians say their family would have adequate financial support in the event that they or their partner passed away or could not work for some time.

While often a topic that is avoided due to its morbid connotations, it is important to plan for the worst and have those tricky conversations with your family when it comes to securing life insurance.

There is, however, some confusion surrounding life insurance in terms of what it can provide and who it can benefit.

Once you are able to discern between the different types of cover, it becomes easier to select the best option for both your personal needs and those of your business, assisting with financial hurdles that could be faced in the case of sudden trauma or disability.

The different types of life insurance

It is a common misconception to assume that life insurance refers to a lump sum payment in the event of someone passing away. Actually, it includes a number of products designed to provide different types of financial security.

Many types of life insurance are often provided through your superannuation, however it is important to take the time to properly understand what level of cover your super fund group policy actually provides, and knowing in what instance your policy will pay out and when it won’t.

Depending on the level of cover included in your super, you may also want to consider an additional level of financial security in the form of an individual life insurance policy.

Should something happen to you beyond your control, life insurance ensures that your family will have financial stability.

The four main types of life insurance are as follows:

• Life cover: a lump sum payment on the death of the insured person. This can be paid through your super via pre-tax income.

• Income protection: provides up to 75 per cent of your income for a period of time if you cannot work due to illness, and helps ensure mortgages and bills can still be paid. This can also be paid through your super via pre-tax income, however should you choose to pay for it yourself, it is generally tax deductible.

• Total and Permanent Disability Insurance (TPD): provides a lump sum payment if you become permanently disabled and will never return to work. This financial support can help provide necessary medical support and care, as well as a long-term income replacement. TPD can also be paid through your super via pre-tax income.

• Trauma insurance: a lump sum payment for specific medical conditions, (i.e. cancer or heart attack) which can be used to help with treatment and rehabilitation costs. Trauma, unlike other forms of life insurance, cannot be paid via your super.

The “life insurance” your business can benefit from

While it is important to ensure that your family is protected in the case of unexpected trauma or illness to yourself, it’s equally as vital to secure a plan for the future of your business.

Life insurance can also benefit your business, whether you are self-employed or otherwise. Taking out cover encourages you to think about whether or not the business could continue without you and what debts will need to be paid off.

There are two main forms of business insurance – key person insurance and business expense insurance. Both can be a tax deduction for your business.

Put simply, key person insurance protects against lost revenue, while business expense insurance keeps the business afloat.

Key person insurance is taken out by the business in the event that a “key person” passes away, is unable to work again or suffers a serious trauma. A ‘key person’ is an employee or working director whose absence would result in a negative financial impact on the company, for example: lost revenue as a result of the key person being unable to work.

Key person insurance typically pays a lump sum benefit to the business to help protect against the impact of these unexpected costs.

The price of this depends on the individual situation, and premiums are based on a number of factors including the level of cover desired as well as the key person’s age, health, occupation and their smoking status.

There are two types of key person insurance (revenue and capital) and it’s important to choose the type better suited to your business.

Business expense insurance, meanwhile, is designed specifically for self-employed individuals to cover the regular, ongoing business costs which still need to be paid if they are not able to work due to illness or injury.

This is generally attached to a personal income protection policy, and is designed to keep the business going by covering short-term costs, such as hiring a locum, while you are off work.

If you are unlikely to return to work, it’ll help cover your expenses while you decide what to do in the longer-term.

Laura Crowden is a national spokesperson for comparison site iSelect.

Michigan Life Insurance – Key Man Life Insurance

Within most small businesses here in Michigan, their are some employees that would be considered “important”.  Employees that if a death were to occur, the business itself would take a financial hit.

This is the reason why small business owners should consider a key man Michigan life insurance policy.  With this type of life insurance policy the company is the beneficiary, and obviously pays the premiums (talk to your local accountant about any tax advantages).  The insured most agree to be covered under the policy.  Proceeds from the death of the key-man are usually tax free, and allows the business to stay above water as they train a new hire.

What types of life insurance policies are typically used for key man policies?  Usually term life insurance policies due to relatively low price for a considerable death benefit.  Premiums are based on usual life insurance questions.  This includes age, height, weight, smoking habits, past health concerns, etc.

When considering a death benefit on your key man employee, you must consider numerous factors.  What will it cost to rehire a new employee?  How much of your time as a business owner will be lost as you train your new hire?  Almost as important, how much in lost revenue are you going to lose if your key employee was gone from the company?

The major question is who should be insured?  Besides the owners or partners, some businesses depend upon their management team for their ongoing business success. Without their expertise, the company may suffer financially. In that case, the contributions of each team member should be considered to be insured.

Even lower-level employees may be candidates for key person insurance, especially those who are highly skilled, have specific expertise, or those who have developed personal contacts with customers or suppliers that generate a substantial share of the business’s revenues.