The New CFO Financial Leadership Manual, Second Edition

Chapter 3. Tax Strategy

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 CFOs who are 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, one can force expenses into the current reporting year that would otherwise be deferred. The primary deduction acceleration involves depreciation, for which a company typically uses the modified accelerated cost recovery system (MACRS), an accelerated depreciation methodology acceptable for tax reporting purposes, and straight-line depreciation, which results in a higher level of reported earnings for other purposes.

2. Take all available tax credits. A credit results in a permanent reduction in taxes, and so is highly desirable. Unfortunately, credits are increasingly difficult to find, ...