How savvy tax strategies can boost your company’s working capital

The Biden administration, with its party in control of both chambers of Congress, could try to move swiftly on tax legislation before the next election. Here are some possible changes and how CFOs can work with their tax advisors to position their companies.

I hate seeing companies leave money on the table. 

CFOs spend hours, days, weeks working out 10-year plans for business development, inventory acquisition and cost management, but when it comes to tax strategies, too many have blind spots.

One of the biggest weak points is the lack of a long-term strategic tax plan to minimize tax liabilities and maximize working capital. When this is overlooked, companies end up overpaying on a line item that could account for as much as 40 percent of the bottom line. That's a terrible waste even in the best of times. But with large segments of the economy still teetering amid the pandemic and many businesses operating on a razor's edge, optimizing your company’s tax strategy could mean the difference between survival and going belly-up.

And now we have a new administration that has shown strong interest in making changes to the tax code. It seems reasonable to expect that the Biden team, with its party in control of both chambers of Congress, could try to move swiftly on tax legislation before the next election. That makes it imperative to start evaluating company’s tax strategy now. If not yesterday. 

For one, CFOs should be on the lookout for a possible change in corporate tax rates. President Biden has called for returning them to 28 percent, reversing the cut to 21 percent that took effect in a "permanent" tax cut enacted in 2017. Given the shifting political winds, permanent may only mean four years. To put it into context, seven percent on a million dollars is a big hit.

Time to plan an exit? 

For capital gains, the Biden team has talked about bumping the capital gains rate for top earners to near 40%, which could make a strong argument for business owners to accelerate an already planned divestment or exit strategy.

Similarly, Biden has proposed eliminating the stepped-up basis provision that reduces inheritance taxes. For businesses with transition plans pegged around the death of an owner, now might be a time to rethink that strategy.

Other examples abound. The proposal to impose an additional 12.4% self-employment tax on income in excess of $400,000 should have small businesses in particular evaluating whether they're structured as the proper entity. It could well be worth the conversation to determine whether it makes sense for a business owner to make the jump from a single member LLC to an S Corp. to keep their tax burden in check.

Other tax strategies to reconsider include sale-leasebacks; like-kind exchanges; Section 179 and Qualified Business Income deductions, to name a few.

It’s almost impossible for typically busy CFOs to keep up with those changes and ensure that they're executing a tax strategy that optimizes their company's working capital. That’s where clear and open communication with their tax advisors is key. 

The case for aggressive tax strategies

Executives I’ve met over the years have been stunned when I’ve mentioned the plethora of legal opportunities to lower their tax bills — because their tax advisors haven’t mentioned them. Why? Like many of us, tax advisors are busy people. It’s a challenge to keep up with every tax code change and they default to strategies that have worked in the past, rather than aggressively seeking new options. 

At the same time, too many tax advisors are cautious to a fault. They may eschew bold — but legal — strategies that could save businesses hundreds of thousands of dollars. Maybe CFOs don’t know the right questions to ask, or maybe they’ve been swayed by the specious argument from their tax advisors that going aggressive could trigger an IRS audit.

The fact is that the IRS opens audits for wildly unpredictable reasons, and anyone who insists on avoiding a bold but fully legal tax strategy for fear of an audit is acting more in the mode of CYA than as a CPA.

Tax advisors should be competent, aggressive and willing to take a holistic look at a business' tax situation to draw up a comprehensive plan. It's equally important they take the time to fully document every decision and strategy so they are prepared to win any potential audit. But fear of an audit shouldn't stand in the way of maximizing working capital.

Creative tax strategies to improve a company's working capital will inevitably vary by the nature of the business and the assets on the books, but one adapts with changes to the code can mean the difference between boosting their company's working capital or overpaying in taxes simply to mitigate imagined risks.