(Published in the April 2009 issue of Continuous Improvement Institute’s “Lean Business”)
As a decision maker in today’s difficult business environment, you have to take advantage of every available opportunity to create a competitive advantage. And sometimes those opportunities can be found in unexpected places – including your tax returns.
You have likely just completed and mailed in your 2008 tax returns (unless they are on extension with the IRS). Now is a great time to look back at last year and ask yourself – “Did we pay more taxes than necessary? What could we have done better?”
The checklist below contains twelve questions that you can ask yourself to determine if effective tax planning strategies are being utilized. The answers to these questions will help to determine areas of opportunity and a tax planning action register for 2009.
Question: If your answer is yes. . .
Is there a building in the entity or owned by a related party? Has a cost segregation study been performed to maximize tax deferrals? If the building is owned by the operating company, you may wish to consider transferring it to a Single Member Limited Liability Company.
Have you spent the time and/or money to improve your product or processes? You’ve likely incurred costs that qualify for the Research and Development Tax Credit.
Are you an owner of a C Corporation? Have you performed an assessment of whether you could maximize cash flow with a C to S Corporation Conversion.
Are you self-insured or partially self insured for health and medical insurance? You may be able to accelerate deductions for outstanding medical claims—claims “incurred but not reported” (IBNR)—on federal, and perhaps even state and local, tax returns.
Are you a contractor and have outstanding retainage payable to subcontractors? You may have an opportunity to defer income related to the retainage in the calculation of income under the percentage of completion method of accounting for long-term contracts.
Are you a small business (less than $10 million in sales) not in retail, manufacturing or wholesale trade, or information industry? Are you currently using the accrual method for tax purposes? You may be eligible to elect the cash method of accounting for tax purposes to defer income taxes.
Are you involved in construction or manufacturing? You may qualify for an incentive in the form of a deduction for domestic production activity often referred to as the Domestic Manufacturers’ Deduction (DMD).
Do you currently have a significant amount of prepaid expenses on your balance sheet? Some of those prepaid expenses may be deductible if you elect an accounting method change.
Do you pay a significant amount in property taxes? Have you challenged your property tax assessment?
Are you a manufacturer paying sales tax on utilities? You may qualify for a full or partial utility sales tax exemption.
Do you maintain a significant amount of inventory? It may be to your advantage to defer taxes by electing a LIFO (Last-in first-out) accounting method for inventory. Also, have you challenged your Inventory Costing to determine if you are including the appropriate production and nonproduction costs in your tax basis overhead?
Are you able to save as much as you would like in your company-sponsored retirement plan? There are many, many options in the retirement plan design area that may be better suited to your situation. Take for example the Safe-Harbor 401(k) Plan or Defined Benefit/ Defined Contribution Combination Plan.
Tax planning and deferral can be a part of developing your competitive edge. Identify the opportunities now. Maximize cash flow and avoid paying tax unless you absolutely must. Be sure to discuss these opportunities with your CPA or other trusted business and financial advisors.
