THE RETAINED EARNINGS TRIFECTA
DIscussing the Opportunities
The ideal candidate for the Retained Earnings Trifecta is:
Identifying options and benefits
As the financial representative you must be in a position to effectively discuss the business uses of life insurance. You want to help a business owner achieve their goals and objectives by identifying the most appropriate options for their business. Each option has a clearly defined benefit.
Part of your story needs to include the process of transferring or selling the life insurance policy to the business owner if/when the life insurance needs of the company change. It will be important for the business owner to know the impact this has to their Financial Statement.
How does the One for Three Solution work?
Frequently Asked Questions
Q: As a business owner, what are some of the reasons I might want to purchase life insurance?
A: There are many business uses of life insurance that could help you and your business including:
Q: Is there a way to reduce taxes on retained earnings using life insurance?
A: Yes. If you are a C Corporation with retained earnings above $250,000, or if you are a Professional Service Organization and have more than $150,000 in retained earnings you will be subject to the Accumulated Earnings Tax. If you have a business need for life insurance the premiums the business pays will reduce your business cash account. The cash value of the policy will be reflected on the balance sheet as an asset. To the extent the cash value is lower than the premium paid, the net effect will be to lower the retained earnings in the business.
Q: What are Retained Earnings?
A: Retained Earnings are a percentage of a business’ net earnings not paid out as a dividend, but instead are retained by the company to be reinvested in the business or to pay business debts. Retained Earnings are accounted for under shareholders’ equity on the balance sheet.
Q: How would transferring a corporate owned life insurance policy to the Insured help my business?
A: Transferring a life insurance policy to the insured “once the business insurance needs are fulfilled” may help you:
Q: What is the accumulated earnings tax?
A: A corporation is subject to a penalty tax called the accumulated earnings tax, in addition to a graduated tax, if it accumulates earnings( retains earnings) within the corporation for the purpose of preventing the imposition of income tax upon its shareholders. The tax is 20% of the corporation’s accumulated taxable income (15% for tax years beginning prior to 2013). The tax can be imposed only upon amounts accumulated beyond those required to meet reasonable needs of the business. The corporation must demonstrate a specific, definite and feasible plan for the use of accumulated funds in order to avoid the tax. C corporations are allowed to accumulate $250,000 before being subjected to the 20% accumulated earnings tax. Professional Service Corporations are allowed to accumulate $150,000 before being subjected to the 20% accumulated earnings tax.
Q: How are Retained Earnings calculated?
A: It begins with Net Income: Gross Earnings minus all reasonable business related expenses, minus the cost of Insurance, the balance equals your current year net income (or loss).
You then take the Retained Earnings from the beginning of the year and add to it your Net Income or Loss. The total is your end-of’ year Retained Earnings. .