This section provides a brief introduction to the multitude of tax issues that affect you as the owner of a business. Taxation impacts the day-to-day runnings of a business and can have a significant impact on the long-term success of your business as well. Income taxes, Social Security and Medicare, for example, are directly related to the daily operation of your business. Income and estate taxes are critical factors to consider when implementing a business succession plan or designing an executive compensation plan.

Your Northwestern Mutual Financial Network Representative will help you sort through the tax issues involved with different benefit programs, buy-sell arrangements, estate planning techniques and financial products.

Income tax is certainly one of the most visible and "planned around" types of taxes. Most businesses pay state and federal income taxes on a regular basis—generally quarterly.

• C corporations can find themselves in a top marginal federal tax bracket of 35%.

• Professional service corporations pay at this rate beginning at the first dollar of net income.

• Sole proprietors may be subject to a top rate of 39.6%.

The amount of income tax you, your business and your key executives pay can be reduced by:

• Claiming deductions for employee compensation and for certain employee benefits, such as qualified retirement plan contributions or the cost of group health benefits.

• Key executives may be able to defer additional amounts of their income, and the corresponding income taxes, through the establishment of a nonqualified deferred compensation plan. Whether you as the owner of a business can also benefit from such a plan depends on the relative tax bracket of the business entity versus your individual tax bracket, and assumes that a flow-through entity is not involved.

• There are also unique income tax aspects to life insurance and annuity contracts. So in nearly every area of business planning, income tax aspects must be considered.

Capital gains tax comes into play when an investment or business asset (other than inventory) is sold at a gain (the amount by which the sales price exceeds the adjusted cost basis of the property). Both individuals and businesses are subject to capital gains tax. Depending on how long the property was held and certain other factors, capital gains rates can run between 8 and 20%.

For a business owner, the asset that is most likely to incur a substantial capital gains tax liability is the business itself. This generally occurs when the business is sold for a profit during the business owner's lifetime.

Individuals who receive property through a transfer at death—when a child inherits a business from a parent, for example—receive a "stepped up" basis in that property, minimizing that recipient's capital gain tax exposure into the future. In other words, the recipient's tax basis for purposes of determining capital gains tax liability will be determined based on the value of the property at the time of the original owner's death. In essence, a lifetime accumulation of capital gain potential can be eliminated if the asset is held until death. Keep in mind, the estate tax implications of holding the asset until death must also be taken into consideration.

When a business has multiple simultaneous owners, certain forms of funded business continuation plans—specifically cross-purchase agreements—can reduce the potential capital gains taxes of surviving owners. A plan that is properly set up and funded by life insurance can reduce the capital gains hit (as compared to other arrangements) for the second, third, etc., owners who sell their interests after the death of the first owner. This potential tax savings is just one factor to consider when designing and implementing a business continuation plan.

Due to their potential magnitude, a great deal of time and effort is involved in attempting to avoid or minimize estate taxes. Minimum estate taxes are charged at a rate of 37% and can be as high as 55% once a person's estate exceeds the applicable exclusions. Giving assets away during one's lifetime does not automatically avoid the imposition of this tax as the gift tax and the estate tax are part of one unified transfer tax system designed to tax the transfer of wealth no matter when it occurs.

Since business owners generally wish to retain control of their business until death, the estate tax poses a particularly difficult obstacle to passing on a business intact to future generations. However, through proper preparation that includes lifetime transfers, discounting techniques and life insurance funding, the overall results can be achieved. Your Northwestern Mutual Financial Network Representative can assist you with a variety of techniques and ideas to ensure your life's passion is passed on to the intended beneficiaries, with minimal business disruption.

All employers and self-employed individuals are required to pay Social Security and Medicare taxes.

• Self-employed individuals (which generally include the owners of an operating partnership or a limited liability company) pay a 15.3% combined Social Security and Medicare tax up to a designated limit (the maximum amount of 1999 wages subject to the 12.4% Social Security tax is $72,600—upwards of that, only the 2.9% Medicare tax applies). A deduction is allowed for one-half of this tax when determining your business's income for income tax purposes.

• Employees pay a 7.65% combined tax rate—that is, 6.2% in Social Security tax and 1.45% in Medicare—up to the designated limit. You, the employer, must match each of your employees' contributions dollar for dollar.

Deferred compensation plans may include certain provisions that minimize the impact of these taxes over the long term. Additionally, the rules for these taxes need to be taken into account when considering qualified retirement plans, cafeteria plans and other group benefits.

Businesses, particularly C corporations, may also be subject to the accumulated earnings tax and/or the alternative minimum tax. Each of these taxes should be considered when designing either an executive benefit plan or a business succession plan.

Contact a Northwestern Mutual Financial Network Representative near you—who, in cooperation with your attorney or accountant, can help you determine how these taxes and others may impact your business.