If you utilize the ROBS structure for your business, there are several things you need to do before the end of the year. ROBS tax planning is an essential part of your business so that you remain IRS-compliant. In the following, we will discuss all the items you need to take care of before December 31.
For those considering ROBS, let’s take a brief look at exactly what it is. ROBS stands for Rollover for Business Startups. Basically, you can use your existing retirement funds to start a new business or bring in more capital for an existing one. Though it is IRS-approved, ROBS arrangements are generally more scrutinized. It’s important that you work with a qualified provider, such as IRA Financial, when employing the structure.
How Does it Work?
First, you need to to ensure your business is set up as a C Corporation. This is because to use ROBS, you must be able to sell stock in the company, which a C Corp allows. Next, a new 401(k) plan is set up for this business. A custodian is chosen to manage the plan investments. Now it’s time to rollover your existing retirement funds into the new 401(k). Stock in your company is then purchased by the retirement plan. Finally, your company can now use those funds to invest in your business.
Why Use ROBS?
There are many reasons to us the ROBS structure to fund your business. Here are the Top Three:
- You are in control – Instead of guessing on the stock market, you can use your retirement funds to invest in yourself.
- No debt – Since you are using your own money, there’s no need to take out a loan and make high interest payments.
- 401(k) plan – The ability to offer prospective employees a retirement plan option will give you a larger pool of qualified workers.
Of course there are risks when using ROBS. The biggest one is the risk of failure. If your business fails, you risk putting your retirement in jeopardy. It’s important to work with a financial planner to ensure the risk of your new business is mitigated.
ROBS Tax Planning
Just with any business, there are items that must be checked off at the end of the year. It’s doubly important when using ROBS so that you stay within the rules set forth by the IRS. Don’t forget these important steps, especially if this is the first year of your new business. It can be quite to forget about the reporting requirements while getting your business off the ground.
First thing’s first, it’s essential to work with your ROBS provider. They will take care much of the items needed for your ROBS tax planning. However, there are things you need to take care of personally. IRA Financial can help guide you every step of the way. You, as the business owner, are the plan administrator. IRA Financial (or another administrator if you have one) handles the plan administration. Only working in tandem will ensure you stay within the IRS and Department of Labor (DOL) rules.
The most important is IRS Form 5500. The size of your business will decide on which form you need to file. Assuming you have less than 100 employees, you can generally file Form 5500 SF, while others may have to file the general 5500 form. Usually, your provider will file this form on your behalf. You will need to provide them with the details of your 401(k) plan. These may include (but not limited to) employee information/number of participants, profit and loss, and balance sheets, and 401(k) contributions. Your provider will assist you in correcting and mistakes they may find with the form.
ROBS Tax Planning You Need to Take Care Of
Every year there are certain requirements for your 401(k) and C Corporation. First, your 401(k) is considered an Eligible Individual Account Plan. The plan must show that all eligible employees can share the benefits of the 401(k). For example, if you offer a match to employee contributions, every employee who contributes must receive this match.
As mentioned previously, the Form 5500 must be submitted to the IRS. This is an informational form to determine the value of the plan assets. This includes the stocks you purchased to start the business, in addition to any assets the corporation owns. Further, each participant of the plan must have a value of the assets he or she holds.
You, as the business owner using the ROBS structure, must take an annual salary. You must begin doing so as soon as the business can afford it. Also, you should work at least 1,000 hours per year and be paid at least minimum wage in your state. It’s also wise to contribute at least one percent to your 401(k) plan. This serves as a “best interest” for the plan.
Next, you need to ensure you have an ERISA Fidelity Bond at all times. This provides insurance to losses to the retirement plan used with ROBS. Your bond, which is required by ERISA, must be the lesser of $500,000 or ten percent of your plan assets. This is an important ROBS tax planning requirement to ensure compliance.
C Corporation Requirements
In addition to the 401(k) plan requirements, there are certain things you must do with your C Corporation as well. Most importantly, you need to file taxes for your business. This is different than the Form 5500. Failure to file your taxes on time will lead to penalties from the IRS. Further, it’s important to check your state laws in regards to your corporation. States require different rules for maintaining your C Corporation. Don’t forget to sign all documents as well! Your provider cannot do this for you.
Next, you must ensure your business is an operating company. Essentially, you need to sell goods or a service to meet the definition. Day traders, investment advisors and some real estate investment companies are not examples of operating companies. It’s crucial that the company you use your retirement funds to invest in fits the criteria.
Lastly, your ROBS business must always be a C Corporation. If you try to create another type of company, such as an LLC or S Corporation, you run the risk of a prohibited transaction which may disqualify the plan. Further, it could lead to stiff tax penalties. Always work with legal professionals, such as a lawyer and CPA, to make sure you are abiding all rules and laws.
ROBS Tax Planning – a Review
While many things do not have to be done by the end of the year (such as filing taxes), many items outlined should be done as quickly as possible. The rules of navigating the ROBS structure is quite complicated. You, as the owner of the business, have a lot of responsibilities. Neglecting any of these may lead to severe financial consequences. If you are working with IRA Financial, know that we are there every step of the way and are just a phone call away!