Meet the Client
THE CLIENT: The client’s company was incorporated on April 11, 1977. It is taxed as a C corporation under the Internal Revenue Code (IRC). Under these provisions, the company pays corporate income tax on its taxable income at the corporate level directly. The client is the 100 percent shareholder of the company. It was previous owned 50%/50% between husband and wife, but he retired and transferred his shares to her.
The company is located in Everett, Washington and is engaged in providing care services to assisted living, psychiatric care, and substance abuse rehabilitation facilities.
The services provided include:
- Offering adult family homes for clients with support needs;
- Behavioral health services;
- Caregiver training;
- Geriatric transition programs; and
- Chemical dependency and recovery services.
The company operates on a calendar year for tax and accounting purposes, and for the calendar year ended December 31, 2017, it reported the following:
- Accrual method of accounting;
- Total assets of $10,177,998;
- Gross receipts of $33,975,266; and
- Taxable income of $430,178.
In discussions with TAVAS, the company is projected to report $34 million in revenue and 1.5 percent in net margins ($510,000 in net income).
The company has 860 – 900 employees. The company provides its employees with the following benefits:
- Health insurance (Sunrise Services pays 80 percent of the premiums);
- Group life insurance;
- A §125 plan (for the employee pre-tax payment of health insurance premiums);
- A 401(k) retirement plan; and
- Accidental death and disability insurance.
THE CLIENT’S GOALS FOR THE TAX PROJECT:
- Ensure that she is using all of the relevant strategies she can to minimize her business and personal taxes;
- Develop a comprehensive entity structure to shield business and personal assets from future liabilities that may arise from the company’s operations;
- Review her current estate plan, and recommend modifications to the plan and additional strategies that will minimize estate taxes and avoid the cost and burdens of probate;
- Provide tax efficient employee benefits and deferred income for her and any designated key employees; and
- Present succession planning strategies to her that will minimize taxes on the transfer of her interest in the company.
HOW TAVAS ACCOMPLISHED THE GOALS:
After analyzing the client’s financial statements and tax returns, TAVAS identified a huge benefit that the Tax Cuts and Jobs Act provides for companies in the same industry. The utilization of this one new strategy provided more than $330,000 in tax savings for the client.
While the book value of the company’s assets is $10.1 million as reported on the tax return, the actual fair market value is $15 million. TAVAS recommended a multiple entity structure that shields the valuable business assets from liabilities that may arise in the future. Additionally, TAVAS was able to identify (for this project) that the sales tax on the transfer of the fixed assets would be avoided.
The client and her husband executed Last Will and Testaments that provided provisions that would allow them to utilize their marital credits. However, provisions that would ensure the optimal utilization of the credits were not found in the estate planning documents. Moreover, the client’s estate would still be subject to the expensive probate process. TAVAS recommended a comprehensive plan that ensured their credits would be utilized and that they would avoid probate at death.