The “Down Economy” and a Change in Focus for the Corporate Tax Department
In the past year, the state of the economy has been a major concern for the American public from both a personal and business perspective.
Starting with the bursting of the housing bubble and proceeding through the collapse of major investment banking firms, the effects have rippled through our economy. Many companies have reported significant layoffs and facility closures and it is expected that more will follow. In an attempt to avoid these consequences, many companies have placed an increased emphasis on reducing costs and maximizing cash flow.
The recent “American Recovery and Reinvestment Act of 2009” provides several tax provisions that may assist companies to reduce their current income tax burden or potentially to obtain refunds for prior income taxes paid. The most significant business related items concern alternative minimum tax (“AMT”), energy tax incentives and debt forgiveness income relief provisions. While these items may be significant for some companies, they are only part of the overall solution to minimize costs.
Historically, many resource-constrained tax departments have focused on high dollar tax saving opportunities, while smaller opportunities have been ignored. With the increased focus on reducing costs, companies are looking for opportunities to reduce federal and state income taxes, international income taxes, sales and use taxes, and payroll taxes.
Federal Income Taxes
While many companies’ income tax burdens may decrease merely due to lower profits, minimizing the remaining burden remains a high priority. For companies with income tax losses in the current year, the focus likely will be on maximizing losses that can be carried back to the prior two years, if profitable, in order to obtain a refund of taxes paid in the those years. A detailed review of a company’s tax accounting methods will often identify more efficient methods and planning, such as:
- Accelerating tax deductions for certain prepaid and accrued items
- Maximizing bad debt deductions
- Deferring revenue recognition
- Perfecting tax loss on abandonment of property
- Accelerating tax depreciation deductions
- Avoiding over-capitalization of repairs and maintenance costs
- Minimizing the effects of cancellation of debt income
- Unwinding transactions with disadvantageous tax consequences
- Investing in energy tax credits
- Earning credits for qualified “going green” initiatives
State Income Taxes
Given troubled state economies, many states have enacted significant law changes in hopes of gaining a bigger piece of the pie, resulting in an even greater compliance burden for taxpayers to keep up with the new laws. In some cases, this creates opportunities for taxpayers as state methodologies change and vary from state to state.
Among the changes are new bright-line nexus standards, inconsistent adoption of conformity to the federal rules, significant modifications in apportionment methodologies, state modifications for intercompany transactions and bonus depreciation treatment, combined filing requirements, state tax incentive credits and new state voluntary disclosure programs. A review of a company’s state tax positions is prudent, and may provide significant savings. In particular many states have created tax credit incentives for increasing employment, training and relocating a business or investing in property that many taxpayers have not pursued. In addition to the above items, the following areas can provide state tax saving opportunities:
- Review of intercompany transfer pricing
- State filing (i.e., nexus) review to identify combined filing opportunities or states in which returns are no longer required to be filed
- Industry specific or elective apportionment provisions
- Use of partnerships or other entity structural modifications (i.e., merging or separating business units into separate legal entities)
- Agreements to voluntarily disclose past filing errors to limit prior year exposure and avoid significant state penalties
International Income Taxes
Changes to the economy may lead to international tax savings opportunities because of the impact of the economy on the fair value of services and currency exchange values. Some general areas that may provide international tax savings are:
- Modification to transfer pricing agreements to reflect current fair market values
- Application of Sec. 987 for foreign currency gains and losses
- Perfecting losses for troubled subsidiaries
- Migration of intangible property to low-tax jurisdictions
Sales and Use
In general, compliance with each state and local jurisdiction’s evolving sales and use requirements and confirming exemptions can be a difficult process for most companies. For many capital intensive businesses, the volume of information to evaluate can be too large to effectively identify sales and use tax opportunities. With assistance from a firm that specializes in this area, a company can perform a “reverse audit,” allowing the taxpayer to self-evaluate its historic filing positions, to identify potential tax refunds, to correct methodologies and avoid overpaying tax in the future.
Payroll Taxes and Compensation and Benefits
For companies performing restructuring or downsizing, there are often opportunities to reduce the payroll tax and income tax burdens. Typically, these relate to proper planning to minimize the effects of downsizing on unemployment taxes for the company and to structure severance payments to maximize deductibility.
Additionally, review of a company’s incentive and qualified retirement programs will often identify more cash efficient approaches to provide benefits to employees.
Summary
The items discussed above are just some of the ways that companies are minimizing tax burdens and maximizing cash flow. Due to overall downsizing and the increasing complexity of financial reporting and income tax compliance, many tax departments do not have the resources to identify and implement these costs saving measures. As a result, companies may consider outsourcing to a firm that has specialized expertise in these various areas.
