Salza talks about “fluxing the reserve” describing the rut some companies get into when they follow what they did last year, without examining new market conditions regarding bad debt reserves. In many cases, the end-of-year bad debt balance is reversed, and the current year balance is added back. “It just revolves every year, but there is an extra step that can be added that leads to cash,” asserts Salza.
With some extra work, that likely can be supported by systems already in place, a company can prove to the IRS that some bad debt is “uncollectible,” and therefore should be eligible for a tax deduction. The IRS will look for documentation regarding whether the company made a good faith effort to collect the money, and likely will examine the financial health of the debtor.
Another often overlooked tax play is the write-down of damaged, obsolete or subnormal goods for FIFO taxpayers — companies that use the first-in-first-out method of inventory accounting. Inventory that can’t be sold at regular retail prices — think 8-track tapes or a television with a broken screen — are considered “bad” inventory for tax and accounting purposes. The value of the inventory is reduced for accounting purposes, but to claim a tax deduction, a company must establish a drop in value by offering the goods for sale within 30 days of the last inventory date. The write-off “is a gimme for FIFO taxpayers,” insists Salza.
Companies get into ruts regarding state and local taxes too, says Auclair. When the markets and profits are up, companies that juggle multiple tax jurisdictions sometimes have a tendency to default to a higher tax rate and pay that percentage. They do so to avoid the time-consuming effort of distinguishing between rates and jurisdictions. But this may be the year to invest in the extra effort to unearth the cash.
Property taxes are another area in which staffers can become overwhelmed, and miss low-hanging liquidity. Companies trolling for cash should take a renewed interest in overvalued property, or real estate that has been sold. Schwarz says that even mid-size companies have literally tens of thousands of property tax bills flowing into the company. With that kind of volume, it is understandable why most of the invoices are paid without challenging the valuation or the existence of the property. “This is not to say anyone is a bad guy, but when you are dealing with this number of statements and reports, a percentage of them never catches up to reality,” muses Schwarz.
Companies also fall into last year’s patterns regarding payroll taxes. “Even states can make errors,” quips Auclair, who suggests that since cash may be in short supply this year, taking time to recheck payroll records would be time well-spent.
As for as tax credits — such as the ones for research and development and energy initiatives — “Those will be handled by people looking back and seeing whether they did something to qualify,” and filing for the credit as part of their annual tax return, says Schwarz. “So those issues will be a point of live discussion in March and April.