5 business and corporate federal tax planning considerations for year-end

Business changes do not always manifest as discrete tax events. They may occur gradually as a company grows, restructures or adopts new ways of operating. As those changes accumulate, tax policies based on earlier facts and circumstances may become less effective or no longer fit the business.

Accumulated earnings illustrate the issue. If your corporation retains significant earnings year after year rather than distributing them, your plans for using those funds and the records supporting those plans may warrant discussion with your tax advisor.

What to consider: Focus on the developments that changed your organization most during the year and those taking shape for the next one. The tax question is what those developments mean for tax policies, arrangements or assumptions already in place.

Changes in compensation arrangements, for example, may warrant a review of the related federal tax treatment as roles, ownership or incentive structures evolve.

An acquisition can bring inherited entities, elections and tax positions that need to be evaluated and incorporated into the way the combined business approaches tax.

Other changes that don’t seem to have a tax consequence at the time may end up being significant. For example, a different use of retained cash, a new growth plan or a shift in operations can change facts that support an existing tax position even when the underlying tax law remains the same.

The analysis may point toward a change, or it may reinforce the existing approach. It may identify documentation that should better reflect how the business operates today.

The timing of a tax discussion can affect the choices available to you. By the time an issue reaches return preparation or another filing deadline, the underlying business decision may already be made.

Tax elections illustrate the issue. An election can affect how an item or transaction is treated for federal tax purposes, and different elections involve different requirements and deadlines. Discovering too late that an election should have been considered can shift the conversation from choosing an approach to determining what, if anything, can still be done to achieve a meaningful tax result.

Accounting methods and tax elections each have timing considerations beyond the return filing date. A potential accounting method change may require analysis across tax periods as well as procedural steps before the desired treatment can take effect. An election may be tied to the related business action or another specific deadline.

Once one of those deadlines passes, the available choices may change. Corrective relief may be available for some missed elections, depending on the provision and circumstances, but it should not be assumed.

What to consider: Look beyond the next filing deadline to make decisions that could establish a tax treatment, require an election, or affect the timing of income or deductions. Those are useful places to determine when the tax analysis needs to begin.

For an accounting method, that may mean evaluating the timing and effects of a possible change well before return preparation is underway. For a tax election, it may mean understanding the available choices and filing requirements before the business action associated with that election is complete.

Not every operating decision requires extensive tax analysis. Focus earlier attention on decisions involving elections, accounting methods or other timing requirements that could limit your choices if you wait.

Federal tax treatment can change the timing and after-tax cost of investments your company is already considering as part of its business strategy. For example, the available treatment of equipment and other depreciable property can affect when deductions are recognized and the resulting cash flow effects.

The largest available deduction does not necessarily produce the strongest investment outcome. Alternatives may entail different deduction periods, cash flow effects or requirements for when property must be placed in service. Those differences can affect the relative cost of the alternatives without changing their underlying business merits.

The more useful comparison is how the available tax treatment affects the cost and timing of each option alongside the business reasons for making the investment.

What to consider: Treat tax as one input into an investment decision, in addition to expected returns, financing needs, operational priorities and other business considerations. Evaluating the tax effects at the same time gives you a more complete view of the economics before you commit capital.

For equipment and other depreciable property, discuss how available cost-recovery rules could affect the timing of deductions and the after-tax cost of planned investments.

Other business expenditures may raise different questions about capitalization, deductions or the timing of tax benefits. The tax analysis can help identify where federal tax treatment is significant enough to include in the financial analysis and where it is unlikely to change the business decision.

Research and development tax credits are a good example. An R&D credit analysis may document how the credit was calculated, but supporting the tax position can also require evidence about the underlying research activities and costs.

Other positions may present different documentation challenges. For example, depreciation and amortization deductions can depend on records supporting the assets. A bad-debt deduction can turn on facts surrounding collectibility and when a debt became worthless.

Important evidence may reside elsewhere in the organization and may not be identified as tax documentation. Records created to manage research activities, track assets or pursue collection of debts may be maintained across different systems and business functions, but could later become necessary to support a tax position.

What to consider: Look at significant tax positions through a simple lens: If someone asked why you took this position and requested the evidence supporting it, where would the answer come from?

Materiality is one consideration. Another is the degree to which a position depends on facts developed over time or information maintained outside tax. Also assess how that information is captured, managed and retrieved across the business.

Prioritize positions based on their significance and the evidence needed to support them. Knowing where documentation may be difficult to assemble gives you an opportunity to understand what exists today and where additional attention may be warranted.

Some tax issues take time to investigate or correct. A missed tax election is one example. Depending on the election and the company’s circumstances, relief may be available, limited or unavailable. Even when potential relief is available, determining eligibility and completing the required steps can take time.

Diligence can turn a historical tax question into an immediate request for records, analysis or corrective action. Matters that require research or involve potential relief may be especially difficult to address within a transaction timetable.

Basic records can create delays as well. Inconsistencies involving entity names, taxpayer identification numbers or entity histories may need to be reconciled before a buyer or lender can obtain a clear picture of the company’s tax history.

What to consider: Focus on matters that could require significant time to research or correct if a transaction or financing takes shape. You do not need to conduct full tax diligence for a transaction that may never occur.

Verify that important elections can be substantiated and that entity records are complete and consistent. Review historical tax matters that could attract attention during diligence and identify those that would be difficult to resolve under someone else’s timetable.

If an issue emerges, addressing it earlier may provide more time to locate records, understand the potential exposure and evaluate corrective options. That can help preserve the company’s options for a future transaction or financing.

Keep tax planning connected to your business

The answers to these questions will change as your business does. A transaction emerges on the horizon. Investment plans change. A new business model creates different tax considerations. A position that once seemed routine warrants a fresh look as business conditions, industry trends or tax law change.

Use the end of the year to identify which conversations deserve attention now, and revisit them as business decisions take shape. Keeping tax planning connected to those decisions throughout the year can give you more time to evaluate choices, address issues and understand the tax consequences before your options narrow.

Frequently asked questions (FAQs)