Category: Construction

Posted on Jul 31, 2016

Safety First

Like the saying “You gotta be in it to win it,” many construction firm owners submit many bids for local jobs to be in it.

But to thrive and survive, you need to do more than just be in the bidding process. Your firm must be able to submit bids that have a reasonable chance of approval. And your firm must win often enough to thrive.

There’s no foolproof method for developing and submitting winning bids. Still, by following some basic principles, you can improve your chances.

Bidding is an art, not a science. Usually, the bidding process is reserved for the general contractor, but the architect and others might participate.

Although contracts may be awarded to the lowest bidder, the process often involves more than just cost. It also may involve the qualifications of the firm making the bid. Having an excellent reputation for quality and timely work may be just as important, if not more so, than offering the lowest price.

Use of Construction Bid Software

To help develop more successful bids, your firm might consider using some of the many bidding software programs available. Typically this software is used as part of the cost estimation and budgeting process. You also may subscribe to a database of construction costs, updated monthly. Although your firm may choose to maintain its own database to better reflect local pricing.

Materials and labor costs are critical parts of the equation. The software defines the materials and labor hours for a particular project and then calculates the job cost from the database. All you need to do is find a job defined in the database and the software does the “grunt work.” This reduces the possibility of leaving out some costs.

The software also lets you compare final job costs to the initial bid and fine tune your final bid by, for example, inserting lower or higher costs for materials and labor.

Construction bid software is relatively inexpensive. Most programs range from between $50 and $250, depending on the features. Usually, the program will be designed to work with Excel spreadsheets, although some are stand-alone.

Among the multiple benefits of this software are that it:

  • Helps general contractors keep track of financial data on a daily or even hourly basis,
  • Stores budget information in one location for easy access, and
  • Reduces to near zero the chances for errors in mathematical computations that can often crop from the human factor.

Five Steps of Bidding

Once you have acquired estimating software and become proficient at using it, you’ll be better equipped to submit bids. Although the process may vary, partly because of regional differences, there are essentially five important steps.

  1. Assess the location and conditions of the job you’re bidding on. Notably, you must learn to say “no” to jobs that don’t make sense for your firm for such reasons as distance, extreme heat or cold or hazardous conditions. To be financially successful, you must know when to walk way from jobs where you’ll almost certainly lose money.
  2. Itemize the materials that will be needed. Normally, you should figure on a 10% to 15% add-on for waste and service charges. If you acquire the materials yourself, it cut into your profit margin, but it may be necessary to secure the job.
  3. Compare the work with jobs your firm has previously completed. This is where experienced construction firms gain an edge. For those just starting out, it’s inevitable that you will bid too high or too low for some jobs. Chalk it up to experience and learn from it. Over time, you should be able to work more expeditiously and efficiently, which will make it easier to estimate the time and costs required to complete a job.
  4. Multiply your hourly rate by the hours estimated for the job and add the cost of materials. Tack on a percentage for overhead expenses such as insurance, licensing and transportation. Determine if your result makes sense from a client’s perspective. If your instincts tell you that the final number needs adjustment, take another look.
  5. Submit the bid along with a detailed schedule. Most important, the client will want a firm completion date.

Best Position

Bidding can mean the difference between a successful business and going under. By using the latest software and other tools at you disposal, you can position your firm for the optimal opportunities.

Seven Popular Bidding Programs

The number of software programs available can be overwhelming. The following is a list of seven that are currently popular:

  • Quick Bid
  • Prebuilt ML
  • B2W Estimate
  • Co-construct
  • Stack
  • Clear Estimate
  • Plan Swift

For reviews of these and other products, go here.

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Posted on Jun 29, 2016

Safety First

“Safety First” should be your corporate mantra. Focusing on the safety of your products as you make them can help avoid complaints and litigation, give you a marketing edge and raise the bar for other manufacturers, according to the Consumer Product Safety Commission.

10 Quick Manufacturing Safety Tips

1. Build safety into product design.

2. Test products for all foreseeable hazards.

3. Stay up to date on manufacturing safety developments.

4. Educate consumers about product safety.

5. Track and address your product’s safety performance.

6. Fully investigate safety incidents.

7. Report product defects promptly.

8. If a defect occurs, quickly start a recall.

9. Work with the Consumer Product Safety Commission on any recall.

10. Learn from your mistakes — and others.

The two companies took a proactive approach rather than waiting for an industry standard to address the problem. They developed a method to “pinch-proof” the hinged joints between the doors’ panels. Their leadership challenged other manufacturers to meet the same high standards.You don’t have to be a huge corporation to come up with safety innovations. For example, Martin Door Mfg., a small Salt Lake City firm, and Wayne-Dalton, a larger company in Mt. Hope, OH, were both confronted with a safety issue in the garage doors they made — a large number of crushed or amputated fingers were reported after using their products.

Taking the lead is the key to improving manufacturing safety. There are several steps you can take — even before a problem develops:

Investigate your customer base. Who will use your product? For example, will a ladder hold a 300-pound person painting a house? How about a 350-pound person? If the ladder could collapse under a certain amount of weight, warn the consumer.

Study how customers will use your product. Back to the ladder. Although it may be intended as a means to climb, some people are apt to use two ladders and a plank for makeshift scaffolding. Warn the consumer if a product isn’t safe when it is used in ways you didn’t intend.

Stay informed about product safety developments. For example, stronger materials may become available for the ladder.

Keep up with safety regulations, as well as safety precautions taken by other companies. When the garage door manufacturers realized they had a problem, there were no state or federal regulations regarding it. But both firms recognized that safety made good business sense.

Fully investigate reports of injuries and accidents. A problem could stem from unintended use, but it could also result from a manufacturing or design flaw. An inquiry can help you determine the cause, guide you toward fixing any defect, and let you know whether a product recall of the lot or the entire line is necessary. If a recall is needed, the Consumer Product and Safety Commission will work with you to ensure the plan is effective.

An added benefit: Consumers and the media tend to go easier on companies that police themselves and promptly deal with problems. The media can also get safety warnings out quickly, helping you to avoid future incidents and potential lawsuits.

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Posted on Jun 24, 2016

Congress 1200pxLate last year, Congress passed the Protecting Americans from Tax Hikes (PATH) Act, reviving and extending several key provisions that directly or indirectly affect construction businesses.

The changes help bring more certainty and permanency to year-end income tax planning. They also provide more opportunities to use credits and incentives to ease your company’s tax burden. Here’s an overview of seven PATH breaks to consider:

  1. Section 179 expensing. Under this provision of the Internal Revenue Code, you can choose to currently deduct the cost of qualified property placed in service during the year. For 2016, a generous maximum deduction of $500,000 is permanently preserved and will be indexed for inflation in later years.

When the total cost of the property exceeds $2 million, however, the deduction is phased out on a dollar-for-dollar basis. The $2 million threshold will also be indexed after 2016. Also, the deduction can’t exceed your business income for the year.

This provision gives contractors plenty of leeway. It doesn’t matter when during the year you place qualified new or used equipment or machinery into service. You can wait until late in the year and still benefit from the full year deduction.

  1. Bonus depreciation. The law also provides a complementary tax break for the cost of acquiring business property. For qualified new — but not used — property placed in service during 2016, you can claim a 50% bonus depreciation for any cost remaining after the Section 179 election. Unlike the Section 179 provision, however, bonus depreciation isn’t permanent. It will be phased out under the following schedule:
  • 50% through 2017,
  • 40% in 2018, and
  • 30% in 2019.

After 2019, bonus depreciation will expire, unless it’s extended again.

The PATH Act also enhances bonus depreciation by accelerating the use of alternative minimum tax (AMT) credits that may be claimed in place of bonus depreciation. This increases the amount of unused AMT credits that may be used; modifies the rules to include qualified investment property; and permits bonus depreciation for certain trees, vines and plants bearing fruits or nuts. As with the Sec. 179 deduction, property may be placed in service at year end.

  1. Building improvements. Usually it takes 39 years to recoup the cost of business building improvements, though deductions may be front-loaded under complicated rules. The PATH Act makes permanent a faster straight-line write-off period of 15 years for:
  • Qualified leasehold improvement property — any improvement to an interior portion of a nonresidential building made more than three years after the building was placed in service,
  • Qualified restaurant property — any Section 1250 property that’s a building (new or existing) or improvement to a building if more than 50% of the square footage is devoted to the preparation of, and seating for on-premises consumption of, prepared meals, and
  • Qualified retail improvement — any improvements to an interior portion of nonresidential real estate more than three years after the building was placed in service, as long as it’s a retail establishment where goods are sold to the public.

The ability to claim faster write-offs may spur property owners into contracting with construction companies.

  1. Energy-efficient buildings. The PATH Act extends several incentives for energy improvements. One tax break that may indirectly benefit contractors is the deduction for energy-efficient buildings, which was extended through 2016.

A tax deduction of $1.80 per square foot is available to owners of new or existing buildings who make energy-based improvements either to the HVAC, hot water or interior lighting systems, or the building’s envelope. The modifications must trim the building’s total energy and power cost by 50% or more when compared to certain minimum standards.

In addition, a deduction of $0.60 per square foot may be claimed by building owners where individual lighting, building envelope or heating and cooling systems meet levels that would reasonably contribute to an overall building savings of 50% if additional systems were installed.

The deduction is available mainly to building owners, though tenants may be eligible. This may turn into a good selling point to prospective clients who can claim the tax benefits. But keep in mind that the deduction is currently scheduled to expire after this year.

  1. Work Opportunity Tax Credit (WOTC). A construction company may qualify for a tax credit for hiring workers from several target groups. Technically, the WOTC expired after 2014, but it was reinstated for 2015 and extended through 2019. The PATH Act also added a new target group of long-term unemployment beneficiaries, beginning in 2016.

Generally, the maximum WOTC is $2,400 for each full-time worker from a target group. In addition, if your business needs extra help during the summer, it may qualify for a special maximum credit of $750 per worker for hiring certain youths from empowerment zones or enterprise communities.

Now is a good time to hire workers who will qualify for either the regular credit or the special summertime credit. What’s more, transitional rules allow you to claim the WOTC for qualified workers for 2015. But you must act fast: The deadline is June 30, 2016.

  1. Research credit. This credit generally equals 20% of the excess of qualified research expenses for the year over a base amount. Your construction business may claim a simplified credit equal to 14% of the amount by which qualified expenses exceed 50% of the average for the three preceding tax years.

The PATH Act permanently preserves the research credit with a couple of important enhancements that take effect in 2016:

  • A qualified small business (one with $50 million or less in gross receipts) may claim the credit against AMT liability, and
  • A qualified startup (one with less than $5 million in gross receipts) may claim the credit against up to $250,000 in FICA taxes annually for up to five years.

The credit is especially valuable to construction companies that also do design work. Check with your tax adviser to see whether your costs will qualify.

  1. Qualified small business stock. If you invest in qualified small business stock (QSBS) in your company, the tax law allows you to exclude 100% of any gain from the sale of the QSBS after five years as long as certain other requirements are met. This now-permanent tax break is a powerful incentive for contractors to invest in their own businesses. It may also be an advantageous method of securing more working capital from outside investors. (The QSBS tax break isn’t limited to business owners.)

For more information on how your firm can benefit from these tax breaks, consult with your advisers.

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Posted on Jun 2, 2016

Builder's Risk Insurance:

Builder’s risk insurance provides protection for a structure that is damaged during construction. These policies are usually broad. In fact, the coverage is generally extensive enough to include construction equipment and machinery, as well as materials, fixtures and appliances – all vital parts of a completed structure. It can also cover temporary structures, such as office trailers, on a project site.

If a loss occurs, the insurance company will pay to repair the damaged property. However, keep in mind that the coverage is limited to losses that are clearly specified. Claims must fall within the policy’s definition of “covered property.”

Here are some basic features of a typical builder’s risk insurance policy:

  • Most buildings can be underwritten including condominiums, dwellings, warehouses, office buildings, shopping centers and farm structures.
  • A policy can be issued to the building owner, the contractor, or the owner and contractor jointly.
  • The coverage continues until the insured party’s interest in the property ends, the building is sold, or the policy expires, whichever happens first.
  • For an additional premium, some policies extend coverage beyond the expiration date. However, the general rule is that unless the policy expressly states otherwise, coverage ends when the building is either wholly or partially occupied, it has been put to its intended use, or 90 days after construction is completed.

This type of extensive coverage can be expensive, but there are factors that can mitigate the premiums. Here is a rundown of how the rate for a project is typically determined:

  • The carrier begins with the type and quality of the construction. Although any kind of building can be covered, those made of concrete and steel receive a lower rate because they have greater resistance to damage.
  • The carrier considers the type of materials the builder intends to use and the overall quality of the final product. These factors are matched against computerized rate tables to determine the premiums.

Your company can qualify for further discounts by providing security measures such as good lighting and fences around construction sites. If the property is in a particularly high crime area, the carrier may require that your company provide a security guard and possibly a guard dog before a policy is issued.

Premiums can also be affected by whether there are sprinklers in the building and there is sufficient access for fire fighting equipment to reach the site. The insurer may even look at adjoining properties: Do they pose a risk to your structure? And are there natural risks involved, such as high wind or brush close to the building?

Although a great deal of consideration is placed on tangible factors, such as those listed above, there are also intangible concerns that can affect how an insurer determines premiums. The experience, training and supervision of personnel, the builder’s expertise, and the subcontractors might be taken into account, especially when the policy is for a large-scale construction project.

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Posted on Nov 19, 2015

If you are part of the plant production management team, you are always looking for ways to increase throughput and lower maintenance down times. Of course, one of the go-to year-end capital expenditures strategies is to utilize a CAPEX budget in Q4 to purchase machines, equipment, or do a significant retrofit of existing equipment.

In addition to the return on assets analysis requested by the CEO and CFO, you also have to predict an elusive variable of “the potential tax savings implication in 2015.”

Unfortunately, answering this question has become a variable that might be best handicapped by Vegas and not by a production manager.

 

The bad news.

There is no definite bright line that will allow you to know with a high degree of certainty if the Sec. 179 dollar limit for expensing will be $25,000 or $500,000 in 2015.

There is also not a definite way to know if 50% bonus depreciation is available or unavailable by the end of the year 2015.

 

The good news and current status.

In July 2015, the Senate Finance Committee voted to extend bonus depreciation and the enhanced section 179 deduction through 2016. The full Senate has not indicated if or when it will act on this legislation and the House is not scheduled to act on extender legislation until late 2015. However, if passed this will create planning certainty for 2 years.

In addition, in September, the House Ways and Means Committee passed HR 2510, a bill by Congressman Pat Tiberi (R-Ohio) that proposes to go a step further and make 50% bonus deprecation a permanent part of the tax law and not part of a sun setting extender that has to be renewed annually.

There is considerable support for this bill from a strong ally, Representative Paul Ryan. Ryan wields considerable influence in the house as both Chairman of the House Way and Means Committee and as the newly elected Speaker of the House. Ryan has publicly supported the bonus depreciation incentive and its impact on investing in making manufacturers and businesses more productive.

As House Ways and Means Chairman Paul Ryan (R-Wis.) put it at today’s markup, “H.R. 2510 is about small-business people refurbishing their store or manufacturers buying new equipment. They aren’t earning income. They’re investing in our country. They’re investing in our children. They’re creating jobs. This is exactly what our tax code should support.”

So staying fluid and flexible is the name of the game. We are advising our clients to not rely on bonus for 2015, but we give it our personal handicap score of somewhere north of 60% chance of passage over the next 30-40 days before Congress adjourns for the holidays.

 

Maximizing deductions for a year-end acquisition.

(This is an example from the Congressional Research Center using 2014 tax rules and regulations since we do not yet have the new regulations for 2015.)

In the case of assets that were eligible for both bonus and section 179 expensing allowances, a taxpayer may recover their cost in the following order. The Section 179 expensing allowance would be taken first, lowering the taxpayer’s basis in the asset by that amount. The taxpayer then could apply the bonus depreciation allowance to the remaining basis amount, further reducing their basis in the property. Finally, the taxpayer was allowed to claim a depreciation allowance under the MACRS for any remaining basis, using the double-declining balance method.

A simple example from a 2014 acquisition illustrates how this procedure might work. Assume that a company made an acquisition of a new CNC laser cutter system at a total cost of $700,000. Such a purchase qualified for both the Section 179 expensing and bonus depreciation allowances for that year. Therefore, it was permitted to recover that cost for federal tax purposes as follows:

  • First, the company could take a Section 179 expensing allowance of $500,000 on its federal tax return for that year, lowering its basis in the property to $200,000 ($700,000 -$500,000).
  • Then it could claim a bonus depreciation allowance of $100,000 ($200,000 x 0.5), further lowering its basis to $100,000 ($200,000 -$100,000).
  • Next, the company was allowed a deduction for depreciation under the MACRS on the remaining $100,000. Given that the MACRS recovery period for laser cutters is five years and five-year property is depreciated using the double-declining-balance method, the company could claim an additional depreciation allowance equal to 20% of $100,000, or $20,000, using the half-year convention. ( this presumes no mid-quarter convention issues)
  • The company could recover the remaining basis of $80,000 ($100,000 -$20,000) by taking MACRS depreciation deductions over each of the next five years at rates of 32%, 19.2%, 11.52%, 11.52%, and 5.76%, respectively. ( this presumes no mid-quarter convention issues)
  • Thus, the company was able to write off nearly 89% of the cost of the CNC laser cutter in the same year it was purchased and placed in service.

 

Key Points to Remember for Year-end Planning

This is not an all-inclusive list – instead key points to remember before pulling the trigger on any capital expenditure before year-end.

  • Only 50% of cost is eligible for bonus depreciation
  • Bonus is not available for USED equipment
  • Not all states acknowledge or utilize bonus depreciation or Sec. 179
  • Newly constructed or original use property with a recovery period of 20 years or less (real or personal), qualified leasehold improvements, certain computer software, and water utility property is eligible for bonus depreciation. The only new property is eligible for bonus depreciation; used property is not eligible.
  • Qualified leasehold improvements are generally bonus eligible if made under a lease to the interior portion of a building occupied by a tenant and placed in service more than three years after the building was first placed in service.

We generally advise our manufacturing clients during year-end tax planning to avoid making long-term decisions based on tax allowances, but it can be a strong incentive due to the significant cash flow savings in March when the final year-end tax bill is tabulated.

If your current tax advisor hasn’t talked to you this year about bonus deprecation, LIFO, cost segregation or R&D credits and how they could impact your business in 2015 and 2016, then let us help. We’re tax experts.

 

Blog post written by: Gary Jackson, CPA, Tax and Consulting Partner

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Posted on Oct 30, 2015

When you think of robots, you likely conjure up images of C3P0 and R2D2 in “Star Wars,” the cyborgs from the “Terminator” or, closer to reality, the high-tech machines in auto factories.

And now, as costs decline and availability increases, robots are slowly showing up on construction jobs and may soon become commonplace.

It’s About Safety

In the construction industry danger lurks everywhere, whether crews are working on homes or installing girders on skyscrapers. Safety issues are paramount; there are inherent risks every step of the way toward completion of a project.

As a result, industry leaders continually look for ways to promote greater safety, streamline processes and improve efficiency. Enter robots.

According to Inside Unmanned Systems, a magazine that analyzes technology and related developments in construction and other industries, the trend toward robotics in construction can be traced back to the 1990s. At that time, a large Japanese company spent significant amounts of money to develop robots for use in construction. But it had limited success. Consequently, the firm shifted its emphasis to demolition and developed robots that could crush concrete and cut through steel reinforcements.

Improved Demolition Robots

An improved wave of demolition robots recently entered the marketplace. Utilizing new technology, a robot can scan a building, plan for its demolition and essentially flatten it — all without any significant human interaction.

One of the latest innovations is the ERO Concrete Recycling Robot from Sweden. Using water pressure, it separates concrete from rebar and other debris, makes cement slurry, and sends it off to be packed and shipped to concrete precast stations for reuse.

However, these systems can’t autonomously sense, think and act on their own. So the question remains: Can robots be used as independent construction workers?

Taking the Next Step

Many in the construction industry believe that the answer is “yes.” Notably, they point to three new robotic systems:

  1. The Semi-Automated Masonry (SAM) system, developed by Construction Robotics, is generating considerable buzz. SAM is a bricklaying robot that is designed to work with a mason. As the robotic system lifts and places mortared bricks, the mason concentrates on site setup, tooling joints, finishing and quality. SAM can lay roughly 230 bricks an hour and can handle varying brick sizes without difficulty. The machine is being used in the construction of a new high school at The Lab School in Washington, D.C.
  2. FlexBrick, a robotic assembly process for nonstandard brickwork. Developed by ROB

Technologies AG of Switzerland, this device has been licensed to Keller AG Ziegeleien, a Swiss company specializing in structural systems, façades, interiors and tunnels. The machine currently is being used to construct a façade for a winery and three residential blocks in Switzerland, a wall for a stadium in Manchester, England, and acoustically active wall panels for a concert hall in Frankfurt, Germany. ROB Technologies has also rolled out a prefabrication system for masonry façades that is designed to handle every brick differently.

  1. A tiling machine developed by ROB Technologies in partnership with research program Future Cities Laboratory. Future Cities is a part of the Singapore-ETH Centre for Global Environmental Sustainability. The prototype has been tested at a public housing construction site in Singapore. This machine can lay tiles two to three times faster than humans and can increase productivity four-fold because it can work 24/7. FLC says it expects to have a semi-autonomous robotic tiling machine “on the shelves” by the end of 2015. It’s also collaborating with two other partners on a new version of the machine.

Boosting Human Strength

And, of course, there’s the potential of exoskeletons. For an image of a robotic exoskeleton, think of Robert Downey’s “Iron Man” suit or Sigourney Weaver stepping into a power loader in “Aliens.” Exoskeletons are mobile frameworks worn a bit like a suit. They significantly augment a person’s strength.

One exoskeleton is being developed by Ekso Bionics of Richmond, California. It has an unpowered frame that allows it to be used all day (an earlier version could be used only for limited amounts of time due to battery life).

The Ekso product allows the user to lift power tools as if they weigh nothing at all. Similar exoskeletons may be able to be worn by workers in construction jobs that involve extensive lifting, standing and squatting.

As the construction industry grows, the need for innovation and automation increases. With advances in robotics and exoskeleton suits, the industry is likely to become safer and more efficient. Even firms with modest objectives might consider how they could put robotics to good use.

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Posted on Jun 29, 2015

Why are we hearing more about Captive Insurance Companies at happy hours, networking deals and professional conferences? Well, it’s simple… people are more open now to new ideas to lessen their tax burden than they were in 2011.

It doesn’t take an Ivy League education to figure out that out of the top 5% of taxable income earners in America – (the vast majority being hard working successful business owners like you) have watched their effective tax rate increase from the low 30’s to an effective rate of almost 40% in the last couple of years. Between our wars in Iraq and Afghanistan, and the “sucking sound” created by promises in the Affordable Care Act – there is no relief in sight from these higher tax rates in the foreseeable future.

Regardless of the reasons or your political persuasion, – John or Jane business owner operating in North Texas, whether in a growing service business, a construction company, a small manufacturer, or a franchisee with 10 dry cleaners, are getting taxed… and taxed hard.

When these business owners become tax “stunned” they become both more creative, more resilient, and more receptive to ideas to help them save on their tax bill. When that occurs certain ideas that were previously reserved for a few (the fortune 500 or fortune 1000 size companies)…. start having traction with middle market companies that may have revenues of 10MM to 200MM, have a strong cash flow, or a fairly predictable earnings history year over year.

So, enough about the why. How do captives work for the common business owner? What does he need to be aware of?  Where is the sizzle in the steak? And finally… What risks do you need to avoid if you are a 5%-er that wants to explore Captives?

 

How They Work

The operating or income producing company (your company) forms a captive and basically pays annual premiums to ensure against risks and pays the premiums to a newly formed insurance company that you own and/or control…

By paying premiums of $500K and you will receive a $500K deduction. Your insurance company receives the $500,000, pays $70k to $100k in operating expenses, small claims settlements and maintenance costs, and assuming no major claims occur- your insurance company makes a profit of around $400K per year.

A specific code section and available election under Sec. 831b, available only to small closely held captives with premiums of less than $1.2 MM annually, keeps the captive from having to pay tax on the premiums it receives at the insurance company level, and it only has to pay tax on its investment earnings.

Meaning, you are getting a deduction for 500K, and your captive is not paying tax on the $400K on the other side.

If your business does this for ten years with no major claims- then your insurance company and its owners has amassed $4,000,000 inside the insurance company which they can dividend or liquidate at 20 to 24% tax rates to the owners of the Captive (you and your family).

If you and your spouse’s net worth exceeds 10MM, you can also, with careful planning, set up your Captive ownership outside of your estate, saving your family an additional 50% of that 4 million in estate taxes that can be passed on to your heirs instead of the IRS.  Over ten years you have likewise saved $2,000,000 in your operating company from ten years of getting $200,000 a year in tax benefit (500,000 x 40%).

In other words, you are getting a 40% deduction and accumulating wealth on a deferred tax advantaged basis over time, which lets you accumulate faster and achieve greater returns.

So friends that’s where the SIZZLE in the steak comes from – the tax rate arbitrage and the estate planning you can accomplish by having your kids own the shares of the captive. Keeping your captive outside of your estate makes for a nifty tax advantaged structure for building wealth transfer to future generations.

 

So, that’s The Good News. What’s the Downsides- or Things to Avoid?

  1. First and foremost – illegitimate or thinly veneered promoters that are selling captives as promoted tax shelters versus an experienced risk management insurance company or Captive management company that operates in the fairway and will advise you correctly on insurable risks and doing it right, with real actuaries that have been doing this a long time.
  2. Insuring faux (not legitimate) or real risks inside your company. For example, anti-terrorism insurance for a small group of doctors versus real risks like malpractice.
  3. Not evaluating your liquidity needs, knowing what is reasonably possible regarding funding of premiums, and how realistic it will be annually to manage your premium levels and payments. While it is possible to change your risks that you cover to toggle or increase or decrease your premiums actuarially, it may reduce the efficacy of your insurance company.
  4. Making sure under your accounting method you can properly deduct the premiums, kind of a bad deal if you go through all this and then remember your cash basis business has to write a 500K check by 12/31 and it doesn’t have the funds to make this happen.
  5. IRS scrutiny- Captives primarily because of the promoters mentioned in #1 above have received a jaundiced eye by our friends at the IRS, and captives even made the dirty dozen list published by the IRS annually for targeted tax scams.
  6. So there are some of our clients that would not be comfortable with this kid of exposure legitimate or not , and then there are some clients that are ok with it because they have done the right things by having the right kind of advisors and captive operators that don’t deal in the fringe element.
  7. Claims- if your captive is legitimate – you will have claims and occasionally some of those could be expensive. How your operating company manages its risks as well as how your Captive manages its reserves and risk can be a difference maker in this area.

 

So If This Is Something You Want To Explore Further, What Are Your Steps?

First, a business owner through his insurance company, financial advisor, or CPA is referred in to a company that can help him form and organize a new Captive Insurance Company and manage its operations going forward.

The CPA works with the captive management company, the business management team, their existing insurance agents or risk manager to come up with a team approach to risk management and evaluate the overall feasibility of using a Captive as a part of the overall risk management plan of the business.

A captive insurance company is a fully licensed insurance company owned by the business or the business owners. It is a unique entity and is a standalone insurance company with policies, policy holders, risks, claims, and a license to do business in various domiciles – some domestic and some off shore.

What does this cost – well of course it varies – but the set up seems to run somewhere between $50K and $70K – with some variability to this figure if you use a domestic captive (with higher initial capital formation requirement), or a foreign captive that may have less stringent initial capitalization requirements.

Done well, a CIC strategy can be a great tool for tax-advantaged risk management and wealth preservation- the veritable combo pack that most of us are looking for. To learn more about it contact Gary Jackson or Cornwell Jackson’s strategic alliances and advisors in this area.

Blog post written by: Gary Jackson, Tax and Advisory Partner

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