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Sell receivables to pension plan and get access to cash for your business

Tim Berry

Flow, taxes, and protecting our assets.

For most of us, these are probably some of

the biggest concerns that

we have for our business.

It really boils

down to earning an

honest living, and

being able to keep

more of what you

have earned.

When looking for ways to maximize

your cash flow and yet protect it from the

government and predatory creditors, probably

the last place any one would think of

would be our good friends at the government.

However, one little known ruling

issued by the Department of Labor (the

government agency in charge of pension

plans) could very well hold the secret to

our happiness.

In the DOL’s ruling, the agency said

that under certain conditions, a retirement

plan could factor a business’ accounts

receivables.

Wait! What’s that? One more time: A

business’ retirement plan could actually

factor the same business’ accounts receivables.

Wow!

Now, your business can actually have

access to more cash to help it through

tight times. Not only that, this process

will also lower your business’ taxable

income. Finally, if you ever are hit with a

lawsuit, you can sleep better at night

knowing that your accounts receivables,

probably one of the greatest assets of your

business, are protected from those lawsuits.

How it works:

First, you need to make sure that you

have a retirement plan for your business.

This is crucial because retirement plans,

be it a SEP, SIMPLE, 401k, or even an

IRA, are probably the greatest personal

tax havens allowable in this country. So

long as you operate them correctly, the

IRS is nice enough to not tax the investments

inside your retirement plan. Not

only that, but in many cases the federal

government says that the assets you build

inside your retirement plan are exempt

from the claims of creditors. Tax-free

growth and iron clad asset protection

not a bad combination. In fact, it’s a

wonderful thing.

Next, you need to have a fair-market

appraisal on the value of your accounts

receivables. This is where some folks are

really in for a shock. Most business people

think that they don’t need an appraisal

of their receivables; after all, if the clients

owe $10,000 then the receivables should

be worth $10,000. Right? But it isn’t that

easy.

While you may very well be in love

with your clients, a banker or financier

isn’t going to feel the same about them.

In fact, more than likely, they are going to

believe that not all of your clients are

going to pay what they owe. This means

that if you were to sell your accounts

receivables to the banker, they aren’t going

to give you 100 cents on the dollar.

Instead they may only pay you 90 cents

for every dollar owed, or maybe even as

low as 80 cents on the dollar for your

receivables. Now the banker, not you,

receives the payments from your clients.

Understandably this is the reason most

business owners don’t sell their accounts

receivables due to the large discount

bankers are going to insist upon. A better

solution is to sell your receivables to your

own business’ pension plan.

A simple example:

Let’s say that you sell widgets and that

you have an average profit margin of 20

percent. Your annual gross sales are

$600,000 (for sake of example, let’s say

$50,000 a month, all of it purchased on

credit); you would end up being taxed on

the $120,000 profit.

After hearing about the government

ruling, you decide you would like to have

your company’s retirement plan purchase

the accounts receivables generated. First,

you offer the receivables to your friendly

banker, and offer to purchase your receivables

for 90 cents on the dollar. (This is

your fair market appraisal of your receivables.)

However, you decline their generous

offer and instead offer the receivables

to your pension plan.

Your pension plan now pays your business

90 cents on the dollar, $45,000, for

your current receivables. Your business has

just received a cash infusion and you’ve

lowered your taxable income.When the

receivables are paid in full, $50,000 to

your retirement plan the $5,000.00 profit

is not subject to taxes.

This is a great investment for your

pension. Remember, the pension plan is

buying $50,000 of receivables each month

for $45,000 (90 cents on the dollar) and

when all receivables are paid in full, at the

end of the year, your initial investment of

$45,000 will have grown to $105,000

(Initial investment of $45,000 plus the

$60,000 of earnings from the $5,000 each

month profit on the receivables purchased)

inside your retirement fund for

the year. At the same time, your taxable

income is going to drop from $120,000 to

$60,000 because you’ve reduced your gross

receivables by that amount. It’s like taking

your profit before taxes!

In addition to a great return on investment,

your pension is going to have to file

a UCC-1 naming the receivables as collateral.

So now they are also protected from

predatory creditors.

Of course, details of the ruling make

the example a bit simplistic, but the basics

are there. You can lower your taxes,

increase your cash flow, and protect your

assets.

The ruling by the DOL has a number

of specific requirements such as: you can’t

use more than half of your pension assets

to buy the receivables, the business has to

guarantee the receivables, a third party has

to administer the program, and the receivables

have to be properly collateralized.

Still, the bottom line is that in this

particular situation, if you are willing to

meet the terms of the ruling, you could

dramatically lower your taxes, increase

your company’s cash flow, and protect

yourself from lawsuits. This is one of

those fabled situations where the laws are

actually written in your favor.

Tim Berry is chief executive officer of

The Tax Academy in Reno.


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