Seven steps to overcoming unnecessary tax burdens.

Another new tax law--The Jobs and Growth Tax Relief Reconciliation Act of 2003, also known as JGTRRA--has recently appeared. This law comes just two years after President Bush's 2001 Tax Bill (EGTRA). So, continuing to phase in changes from this bill, along with the new JGTRRA changes, and taxpayers find they are spending more time trying to keep track of just what it all means for them personally, for their businesses and for their families.

In order to overcome unnecessary tax burdens, he are seven key steps every business owner can take:

Step One: Identify and Isolate the Problem

First and foremost, break down the tax issue to its simplest form. Determine whether the tax issue is a one-time event or an ongoing one. Decide whether the real problem stems from being subject to a higher income tax rate. Or is the problem a result of losing current deductions? Without knowing the answers to these questions, it will be difficult to tackle the problem.

Also keep in mind, the questions may change because Congress has been trying to fine tune tax receipts against the needs of the country. With record deficits representing the norm, expect change and all the problems that tend to accompany change. The degree to which any type of change can make its mark on a business owner in a single year is the best example to use when emphasizing how critical it is to deal with tax issues every year.

Step Two: Re-characterize the Tax Liability

In other words, can the tax treatment be shifted from ordinary income to more favorable long-term capital gains? Or, can a potential tax liability be exchanged for a future one, thus postponing recognition for perhaps 10 years or longer? Qualified Replacement Property achieves this as one example. And yes, certain liability can be re-characterized legally if done in advance of exploring all the options.

Step Three: Offset the Liability with an Asset Strategy

Sounds a lot like Accounting 101. Nonetheless, matching liabilities with assets, and more importantly, matching respective recognition of taxable events is an art utilized by the best of companies. It appears complicated, but in this case, good CPAs are worth their weight in gold. Give them a chance to tackle this important strategy.

And, remember there are many Qualified Retirement Plans available. EGTRA 2001 made dramatically positive changes to help business owners set up profit sharing plans, pensions, 401 (k) plans and an assortment of deductible strategies. Many of these can be customized to maximize benefits, chiefly for small business owners. A retirement plan is a time-honored benefit that is really in vogue now and is a must to explore for every successful business.

Step Four: Consider a Change in Business Structure

With the recent introduction of the LLC (Limited Liability Company) and LLP (Limited Liability Partnership), a "hybrid" company can now be created--mixing and matching the best of a C Corporation, S Corporation, partnership and the like.

Depending upon the circumstances, this may be just the ticket to savings. Or perhaps the structure of a new complimentary company--a service or sales company--will allow business owners to shift depreciation or expenses around, in a more tax-advantaged way. This may sound like a lot of work, but it is not. And, these benefits may better align with specific business models for success.

Step Five: Anticipate Future Income

The degree to which business owners can do this is the $64,000 question. In general, if a payment or expense is for an employee benefit, supported by Statute, the Internal Revenue Service seems to try to leave those as is or make them better. "Grandfathering" pensions, salary continuation plans and other programs are much more the norm. However, the last two tax laws have taken a new approach--phasing in new provisions of tax law, then in many cases, having them expire at different times. This makes for very challenging planning! However, do not give up. Doing a pro-forma at least for the current year plus the next two ones, should be automatic for every business owner. CPAs can help here also. Modeling and "what if" contingency planning with a financial advisor are worthwhile and offer insight to help business owners identify and select options.

Step Six: Control the Liability

In our litigious society, asset protection strategies are simply a must for every business owner. And yes, through the judicial use of individual entities and trusts, a person's affairs can be arranged in such a way as to reduce liability exposure as much as possible. Here the value of an attorney schooled in asset protection strategies and structure is critical to measure exposure to any lawsuit and all the attendant tax issues that come with that.

Step Seven: Set Goals and Objectives

Goals and objectives may seem passe', but they are critical to achieving tax focus success. Budgeting may be difficult, but it is a necessary activity. Actively looking for and utilizing tax-advantaged strategies will offset Congress' tendency to change its tax locus every year. This inclination will continue, so just expect it. Business leaders, who focus on where they want to take their business models, can tweak their plans as the tax Jaws change. If top executives do not take the time to plan, however, tax law changes may seem unfair and even insurmountable.

Peace of Mind

Once in place, these tools offer business owners peace of mind that allow them to concentrate on what they do best run their businesses. While some of these steps may seem overwhelming and sometimes confusing, a qualified strategic team of advisors can evaluate the situation, explore meaningful strategies, research options, model their impact on the business model and then take action. The result: in most cases, business owners can experience an immediate positive impact on taxes. More money can be saved because less in taxes is being paid.

Richard Linsday, CLU, AEP, ChFC, RFC is President of Planned Estate Services, Inc. in Westlake village.