Perfect Investment--VEBA

Over the years we have talked about creating the perfect tax fantasy: A strategy that would hit several tax home runs at one time. Here it is.

I wish I could take the credit for creating the voluntary employee's beneficiary association (VEBA). It is a real, being-done-everyday tax strategy.

VEBAs have been around for years, but for most of us a VEBA is the new kid on the block. In a nutshell, a VEBA is a way for an employer (you) to buy life insurance for you and valued employees and deduct the entire premium. Instead of you or your company buying the insurance with after-tax dollars, the VEBA allows your company to deduct the premiums.

Yes, a VEBA is not a retirement plan. In fact, you can have a VEBA in addition to a traditional retirement plan (like a 401(k) profit-sharing plan). Simply put, a VEBA is a tax strategy, in the form of an employee benefit plan.

Someday you will go to the big business in the sky. Say the VEBA established by your company owns a $2 million (it could be more or less) life insurance policy on your life. Death brings the $2 million policy proceeds to your beneficiary. The guaranteed profit (the difference between the total premiums paid and $2 million) is free of the income tax. When a VEBA plan is properly structured, your heirs will not pay estate tax on that $2 million.

In practice, your VEBA plan would be tailored to fit your individual needs and your company needs. For example, you could vary the premium costs, which are always deductible. Vary the amount of insurance coverage. Vary the employees included in the plan. And vary the amount of insurance coverage for their benefit.

If you need life insurance to create tax-free wealth, to protect your family, to pay estate taxes or to fund a buy-sell agreement, a VEBA is the best combination of economics and tax advantages available for the owner(s) of a closely held business.

VEBAs are very popular with professionals: lawyers, CPAs, doctors and others. Why?...40 percent of the insurance premiums are paid by the IRS (because of the deduction) and 100 percent of the proceeds are income and estate tax free.

Yes, You Can Deduct Every Dime Of Your Company's Holiday Party 

Like it or not, this is the tax law: Your company can deduct only 50 percent of its costs for business entertainment. Business meals also are slammed by this tough 50 percent rule. And, of course, there is no deduction at all unless there is a bona fide business discussion (you meet and actually—for example, with a customer—talk business) before, after or during the entertainment.

But wait. There is a big exception. A social activity for your company's employees is exempt from the business entertainment restrictions. Just make sure that both rank-and-file employees are invited along with top management.

A social activity includes such events as a Christmas party, a Memorial Day picnic, a tenth anniversary (of the company) party or another party celebrating some other company milestone.

For example, suppose your company holds a Christmas bash for all your employees and their families. If the party costs $6,800, your company is not limited to a $3,400 deduction. The entire $6,800 is deductible.

Millions of dollars in entertainment and travel expense deductions are lost every year by closely held businesses because they did not know the rules or how to get around the rules...legally.