There’s a Cash Machine in Your Tax Department

Looking for year-end cash? Make all the right tax moves — from changing your accounting to buying capital equipment now, rather than later — and you may strike a hidden cash vein.

Finance executives are leaving no stone unturned in their effort to find hidden cash before the end of the year. Caught in a credit crunch with limited power to borrow at reasonable interest rates, many CFOs, treasurers and controllers are diligently working to squeeze cash out of their organizations in a year-end effort to boost liquidity.

Now more than ever, “cash is king, and a lot of companies are receptive to focusing on opportunities in the tax area that they may not have been eager to focus on in the past,” says David Auclair, managing principal in Grant Thornton’s national tax office. “There is nothing like the current economic situation to spur companies to generate cash,” echoes Mel Schwarz, Grant Thornton’s director of tax legislative affairs. “There is more at stake now, and the level of interest, concern and effort [regarding cash generation] is more intense,” he adds.

Companies can turn tax benefits into cash in several key areas, say experts. But some opportunities have a tight deadline. For example, C corporations (companies with more than 100 shareholders that are not sole proprietorships or partnerships) that pay quarterly estimated taxes will make their last payment of 2008 on Dec.15. This is a chance for those businesses to calculate if they have overpaid for the year, and if that’s the case, they can hang on to the extra cash.

Overpayment is more likely this year as estimated taxes computed at the beginning of 2008 may not have taken into account unexpected losses stemming from the credit crisis. But if staffers are too busy with year-end closings to calculate the potential overpayment by the Dec. 15, companies can file an Internal Revenue Service form 4466 “quickie” refund, says Schwarz. The quickie refund allows C corporations to file a refund request before filing a tax return, and the IRS promises action on the request within 45 days.

Companies can also mine for cash in capital spending, if they spend quickly. The Economic Stimulus Act of 2008 — which is set to expire on Dec. 31 — allows companies to use the Section 179 provision to purchase up to $800,000 of qualifying equipment for a total deduction of $250,000, explains John Salza, a BDO Seidman tax partner and leader of the firm’s national tax accounting methods group.

The law, which may be extended into 2009 if Congress acts soon, also includes a special 50 percent bonus depreciation allowance. The bonus is available on top of the regular first-year allowance tied to the purchase of most types of tangible property, as well as computer software, acquired and placed into service in 2008. The Section 179 deduction is a complete write-off in the year the equipment goes into service, while the bonus depreciation provision accelerates the recovery period.

So, if a taxpayer has cash on hand and is looking to make a purchase early in the first quarter of 2009, it may be worth making the purchase sooner than later to generate extra cash flow from the deductions. In addition, Auclair points out that new cogs and parts of a refurbished or retrofit piece of used equipment may also qualify for one of the stimulus act tax breaks.

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