The Essential Controller: An Introduction to What Every Financial Manager Must Know, Second Edition

CHAPTER 12

Taxation Strategy

Importance of This Chapter

Taxation is an area cluttered with land mines for the new controller, usually involving tax late fees and penalties. However, there are also opportunities to save a considerable amount of money through the use of such tax tools as net operating loss (NOL) carryforwards, inventory valuation techniques, and the use of transfer pricing. This chapter makes the new controller aware of these types of issues.

The obvious objective of tax strategy is to minimize the amount of cash paid out for taxes. However, this directly conflicts with the general desire to report as much income as possible to shareholders, since more reported income results in more taxes. Only in the case of privately owned firms do these conflicting problems go away, since the owners have no need to impress anyone with their reported level of earnings and would simply prefer to retain as much cash in the company as possible by avoiding the payment of taxes.

For those controllers intent on reducing their corporation's tax burdens, there are five primary goals to include in their tax strategies, all of which involve increasing the number of differences between the book and tax records, so that reportable income for tax purposes is reduced. The five items are:

1. Accelerate deductions. By recognizing expenses sooner, you can force expenses into the current reporting year that would otherwise be deferred. The primary deduction acceleration involves depreciation, for ...