Timing is also a big tax planning issue this year, especially to companies that seek more cash flow. Historically, public companies that are pumping out substantial profits don’t worry about accounting issues related to timing, such as accelerating expenses and deferring taxable income. Indeed, those companies are traditionally worried about earnings-per-share and permanent tax benefits. But with the economy sagging, and cash becoming more valuable, “even publicly-traded companies are looking at what we call timing items, cash benefits . . . even though it doesn’t affect their effective tax rate,” posits Salza.
Timing changes “probably provide companies with the biggest bang for their buck, the biggest cash benefit,” says Auclair. By his lights, companies weathering the current economic crisis are more receptive to timing opportunities than they were in the past.
Such accounting changes affect taxable income, and are therefore subject to IRS approval. But prodded by the credit crisis, the IRS gave companies a bit of a break by increasing the number of changes that garner “automatic” consent, which total about 18 now. In a bulletin put out in September (Revenue Procedure 2008-52), the IRS provides a list of permissible accounting changes that apply to 2008, but can be filed along with corporate tax returns prepared in 2009. Changes made in 2008 not deemed to be automatic must be filed with the IRS by Dec. 31, for calendar year companies.
Timing changes named in the IRS automatic list include receipt of advanced payment for goods and services on the income side, and prepaid expenses — such as insurance outlays — on the expenditure side. Another common issue on the automatic list that may help companies uncover cash involves the amortization life of tangible and intangible property. For example, a company may be using a 39-year amortization life for an industrial machine, when a 5-year life is more appropriate.
Distressed companies will also find opportunities to spin tax breaks into cash. For example, loss companies should take stock of potential net operating losses and the associated tax benefit before consolidating the debt, asserts Salza. If a loss company successfully writes off debt, its NOL may be wiped out. While that may be prudent in some cases, eliminating NOLs could cost a company all of its 2008 tax deductions linked to the loss, plus any carryforward losses from past years that could offset current income.
Another way for troubled companies to fish for cash is to take now deductions that would normally be held until 2009, especially if executives expect their companies to lose money next year. In that case, a company can grab a deduction for accelerating contributions to pension and 401(k) matching plans, says Salza, or paying out bonuses within two-and-one-half months of the year’s end. If a company is legally obligated to pay out a bonus, a 2008 deduction can be taken as long as the incentive is paid out within the prescribed period.
In the category of “most overlooked” deductions, Salza points to bad debt — particularly accounts receivables that companies deem uncollectible. “This is one of the largest liquid assets for most companies, and a place often overlooked for tax savings,” says the tax partner.