Deferral techniques
A comprehensive tax plan would also review a business’ chosen methods of accounting for revenues and expenses. In the proper circumstance, a change of a business’ current method of accounting may allow recognition of revenues to be delayed or deductions to be accelerated to the current period. These methods are sometimes criticized as simply deferring taxes and not “saving” taxes, but this is a short-sighted approach, especially in the current economic climate.
Tax is cash outlay—a cash expenditure. Therefore, postponing a cash expenditure to a later time (deferral) increases cash balances within a business currently (now). In times of economic stress, all should agree that deferring every expense to a later period may mean the difference between survival and failure. For example, do most businesses pay their vendors immediately upon receipt of an invoice even though the invoice may not be due for 60 days? Or do they pay the invoice on the required payment date? Realizing not only the time value of money but also the needs for cash in a business, most pay on the last possible day. Why should Uncle Sam be any different?
Proper selection of a business’ various accounting methods can significantly reduce the business’ current tax burden and positively affect cash flow. In many cases, a change may be accomplished with a simple attachment to the company’s current-year tax return. While the execution may be simple after confirming a company qualifies for an alternative method of accounting, the results can be striking.
For example, let’s say a business owner acquired a new office building for $2,000,000. A change may be recommended in the depreciation method for the building that could greatly accelerate deductions from later years to the current year. A successful alteration could increase the firstyear depreciation deduction from $25,000 to nearly $130,000, thereby saving the business owner $42,000 in taxes.
Let’s use a Texas company involved in leasing equipment to oil field operators and utilizing the accrual method of accounting as a second example. If the company’s overall accounting method was changed from the accrual method to the cash method, the company’s net income could be greatly reduced. If the tax expense is substantially reduced, greater cash flow is facilitated. A significant addition to cash flow could be enough for this business to weather the economic storm.
During a recession, these techniques remain critical, as even an unprofitable business may benefit greatly from a change in an accounting method. As the IRC allows businesses to carry back current-year net operating losses to claim taxes paid in earlier tax years, a change in accounting method that causes a small loss to grow to a greater loss will allow a much larger amount of taxes paid in previous years to be reclaimed. In combination with the expanded net operating loss provisions of the American Recovery and Reinvestment Act of 2009, a change in accounting method may vastly increase current cash flow.
Employee benefits
Employee benefits, including health insurance and retirement plans, are often eliminated during poor economic times. In some instances, eliminating plans entirely is difficult, as many employees and business owners may rely heavily on these benefits. A comprehensive tax review of a company’s current benefits may allow the essential benefits to be retained but at a lower cost to the company.
For example, health savings accounts and health reimbursement arrangements have been added to the IRC in recent years. Both of these plans provide for substantial company savings through reduced insurance premiums by utilizing a high-deductible health care plan in conjunction with an employee reimbursement account, for example. In many scenarios, the company realizes savings through educed premium costs, even while the employees’ health care costs are reduced.
Moreover, in the event a business wishes to reduce health insurance costs by reducing the amount of the premiums the company bears, a Premium Only Plan (POP) can be implemented to mitigate the impact upon the individual employee. A POP allows employees to pay these premiums with pre-tax (instead of after-tax) dollars. At the same time, because the premiums are paid on a pre-tax basis, the company can realize significant payroll tax savings.
A review of a business’ current retirement plan may also result in substantial savings to a business. A variety of retirement plans are available to small- and medium-size businesses. The administrative costs and mandatory company contributions also vary wildly among plans. A change in plans can result in reduced administrative costs and/or company contributions, which can be necessary when the business’ survival is threatened.
