Strategic Tax Planning

1
Strategic Tax Planning

• Financing Ongoing Operations
• Chapter 10

2
Sources of Cash Flows to Finance Ongoing
Operations

• Operating Earnings earnings retained without a
  business purpose may be subject to a penalty
• Sale of Operating Assets gains are treated as
  capital gains, and are not taxed in many
  jurisdictions
• Sale of Investments generates either capital
  gain or loss
• Short-term borrowing cash flows not taxable
• Accelerating, factoring, and selling receivables
  income recognized under the accrual method

3
Sources of Cash Flows to Finance Ongoing
Operations

• Decrease in dividends retaining cash from
  reduced dividends increases a firms value
• Payment of stock dividends instead of cash
  dividends firms can retain cash and incur on
  the transaction cost of determining shareholders
  and printing shares
• Stock buybacks More cash can be retained
  because fewer dividends need to be paid

4
Sources of Cash Flows to Finance Ongoing
Operations

• Employee stock option plans dividends paid are
  deductible as a compensation expense if
  borrowed, interest expense is deductible
• Receipt of dividends from subsidiaries payment
  of dividend to subsidiary is tax-neutral

5
Financing Ongoing Operations from a SAVANT
Perspective

• Win-win choice is sale of warehouse
• Strategy no harm to strategic production plans
• Anticipation Transition out of NOL status
• Value-Adding net effect of warehouse sale is a
  gain
• Negotiating persuade management to take reduced
  bonuses
• Transforming any gain-generating transaction is
  tax free losses do not create deductions