Protecting Company Value
Minimizing Tax Exposure
You and your advisors should begin any discussion about minimizing your tax exposure with a review of your current business income tax status. From there, your CPA or CFO should be able to prepare an initial estimate of the company’s and your income tax liability.
You should then review what you are currently doing to reduce income tax liability. One of the purposes of ongoing tax planning is to avoid extreme peaks or valleys in corporate taxable income. By anticipating increased taxable income, through proper tax planning there is much you can do to minimize the actual tax costs. These methods include:
- Shifting income taxation from one year to the next.
- Implementing tax reduction devices, such as qualified retirement plans, medical expense reimbursement plans and the payment of large bonuses.
- Increasing deductible payments to shareholders, such as renters for equipment or buildings that may be owned individually by the business owner and leased to the business.
After reviewing what you are doing to minimize taxes, turn your attention to your advisors’ suggestions of new ways to reduce tax liability. For example, you might consider (with the input and counsel of your advisors) any new tax credits and incentives created for “small businesses”.
During a period of contraction, most business owners dig themselves into a deeper hole, not by cutting expenses too rapidly, but by hanging on too long to the existing operation, primarily because of pride or a deep aversion to laying off loyal employees. Business owners also don’t like to admit they are cutting back; the American Way is to grow, grow, grow. Yet we’ve all seen businesses that spend themselves into bankruptcy.
One of your most important goals must be to preserve value for the business in difficult times. Your advisory team demonstrates its greatest value when it helps you face hard facts and then helps you translate your decisions into action.
As you weigh the choices you face, use your advisors’ expertise to make decisions and to execute them in a manner that is legally correct and minimizes the affect on the remaining employees’ morale. For example, it may be better to reduce staff and overhead as you would remove a bandage: quickly. Moving slowly through all-but-inevitable cutbacks just prolongs the “Am I next?” period for employees.
Other Corporate Considerations
If you haven’t made an annual pre-fiscal year-end review part of your standard operating procedure, there are a few more items on that agenda that you might want to review.
- Business Continuity. Does your existing buy-sell agreement take into account a decrease in current value?
- Employee Considerations. Are your key employees contractually bound to restrict competition and protect trade secrets? Are their compensation structures defined in writing?
- Business Contracts. Are your existing contracts and forms up to the challenges of a tougher economic environment? When did you last review your property, casualty and liability policies to determine not only if there are ways to save money, but also if you and your company are adequately protected?
Individual Planning Considerations
You should also be talking with your advisors about your own income tax status. Is this the time to leave income in the company or take it out? If you take it out, there are a number of techniques you can use to reduce taxation at the individual level.
Finally, meet with your advisors to see how increased taxation, business contraction or a reduction in business value will affect your financial planning and estate planning goals. They should bring you ideas and strategies to help you protect, if not build, value during difficult times.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.