Five Tax-Saving Secrets for Jewelers

You probably have a vivid recollection of that knot you felt in your stomach around April 15 or Oct. 15 (for corporate tax returns), depending on the date you or your business paid the “Tax Man.” If you’re like many of your colleagues, you feel you pay far too much in business and personal taxes and would love to find ways to reduce that tax burden—without increasing expenses. This article covers five ways for jewelers to save money in taxes while simultaneously reaping other financial benefits.

  1. Reduce insurance costs and improve risk management and asset protection plans through captive insurance companies (CICs). CICs or “captives” are companies established just to provide insurance for the parent company. CICs enjoy special tax benefits and are great for business owners looking to make annual tax-deductible contributions of $100,000-$1 million in business asset protection and risk management programs. In today’s economic climate, jewelry-store owners are liable for many risks, including claims from employees (e.g., sexual harassment, wrongful termination) and creditor lawsuits as well as economic risks.
    If you want to put away pretax dollars to pay potential future claims or fund economic-type losses, a CIC may suit you. In a CIC, your business receives a deduction for premiums paid to the captive. Then if funds are needed to pay a claim, the business is armed with its own insurance policy. However, if a business never makes a claim, the CIC continues to invest and add to the funds (perhaps even tax-free) and can eventually redistribute them to the owners. Meanwhile, all CIC funds are asset-protected from claims against the jewelry business and the business owners personally.

  2. Get business deductions for implementing an estate plan. In Voluntary Employee Beneficiary Associations (VEBAs) and Welfare Benefit Plans (419s), the government pays 50% of business owners’ and select employees’ estate-planning benefits. A properly structured plan will permit the business to make tax-deductible contributions of up to 60% of its total annual revenues, thus paying for families’ and employees’ life and/or disability benefits with pretax dollars. Assuming a 45% income tax bracket, these plans almost halve the cost of the benefits. Also, the funds in VEBA and 419 plans are fully asset-protected, since they are ERISA-qualified plans. (ERISA stands for the Employee Retirement Income Security Act. If a jeweler’s 419 or VEBA plan is compliant under the terms of this act, assets are safe from lawsuits.) VEBAs and 419s are also great ways to provide benefits to key employees whose benefits vest over 5-7 years.

  3. Get deductions for retirement savings. Retirement and deferred compensation plans can be excellent tools when used correctly. There are many different types of plans including 401(k)s, Keoghs, Defined Benefit Plans, etc. Because these plans are generally ERISA-qualified, most are protected from your creditors. Any contributions, within certain limits, are tax-deductible, and your assets grow tax-deferred inside the plans. Did you know a 51-year-old could potentially deduct up to $150,000 per year for retirement? If you do not have an existing plan or find your current one too restrictive, too expensive to administer, or overfunded, and you want to make additional contributions, consult a deferred compensation expert to avoid tax and regulatory traps.

  4. Get deductions when implementing an employee stock ownership plan (ESOP). An ESOP can be a powerful planning solution for owners of jewelry businesses, especially closely held ones—businesses with 10 or fewer owners. This is because ESOPs create markets for shares where no ready market exists—an important mechanism for making a transition between generations or partners. Though all partners may begin a business with the same goals, it’s common for partners to “burn out” or disagree as time wears on. ESOPs create pretax funds for buyouts at the occurrence of “triggering events” (for example, a partner’s retirement, divorce, or death). In many cases, ESOPs are used in conjunction with buy-sell agreements, which are funded by life insurance policies purchased with pretax dollars.

  5. Share income with lower-income family members through family limited liability companies (FLLCs) and family limited partnerships (FLPs). Both FLLCs and FLPs feature “active” owners (who control the entity) and “passive” owners (who have no control) and enjoy a “pass-through” tax status under which they’re able to pass tax liability down to the FLLC and FLP owners.

Because of this status, FLLCs and FLPs are often used to “share” income tax brackets and reduce income taxes by 12%-25% on income-producing assets, such as investment portfolios. While jewelers maintain 100% control of the portfolio, they can use their children’s lower tax rates on the FLP or FLLC income as long as the kids are over age 14. Jewelers also can use FLPs and FLLCs to hold shares in the jewelry business itself rather than in their own name: Business shares held in the owner’s name are vulnerable to lawsuits and creditor claims, but shares are protected when they’re owned through an FLLC or FLP.