The Do-It-Yourself Tax Cut

Tax planning and reduction strategies can add business benefits and reduce audit risks.

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You can lower your tax bill, provided you're willing to do some planning

Although accountants love to emphasize that tax planning should begin on day one of a company's operations, this seldom happens -- especially when the company intends to remain private. And that's all right. Most entrepreneurial ventures generate losses for years, which keeps Uncle Sam's tax bite tiny at best.

But for growing businesses, there comes a time when tax planning becomes desirable -- even essential. For every company, the impetus is different: it might come from a business event, such as the acquisition or sale of a unit; or from a personal matter, such as the death of a partner, a divorce, or the birth of a child. When venture capitalists or investment bankers become involved, they will probably insist on seeing some tax planning. And for some companies, it simply evolves from the owner-manager's gut instinct that he is paying too much money in taxes, money he'd rather use to grow the business.

"I never thought about things like tax planning," says John Richardson, chief executive officer of Morpheus Lights Inc. "For about 10 years I just stayed with the same accountant my mother had found for me when I was in high school. All I cared about was getting my checkbook balanced."

Back in the early 1970s Richardson was a San Jose, Calif., teenager who earned money by manning the lights for local rock-and-roll bands. He stored his supplies -- mainly a few fixtures, cables, and slide projectors -- in his mother's garage. His vision of success was a road show, when he'd load his lights onto a truck and spend a few weeks traveling with the guys in the band, setting up and dismantling his equipment at auditoriums along the California coast.

Today Richardson's company, with projected 1989 revenues of $14 million, is one of the nation's top lighting-service companies, shining the spotlight on such celebrities as The Grateful Dead, Bruce Springsteen, and Oscar of Academy Awards fame. With a 40% annual growth rate for most of the 1980s, Morpheus now employs about 175 people and has spun off a separate unit to sell its founder's patented, computer-operated lighting systems both in the United States and overseas. But it's taken years for Morpheus's tax savvy to catch up with this growth.

For Richardson, the push came four years ago when he applied for his first bank loan: $1 million to finance the purchase of state-of-the-art computer and lighting systems. Richardson brought in an experienced accountant, Bill Burt, to get his finances out of the garage and to generate the frequent and detailed financial reports the bank required. After two years as a consultant, Burt joined the company as director of finance and brought in a team from the San Jose office of Price Waterhouse because, as he puts it, "I was so busy trying to keep up with our expansion that I didn't have time to do the tax returns, let alone think about tax planning."

Tax planning means different things to different people. A manager who decides to buy a piece of equipment in December instead of January is doing a pretty good job of anticipating and reducing taxes. But for larger, growing companies, the most effective approach is a comprehensive one, similar to a medical checkup, that is carried out by a tax expert.

If done thoroughly, the initial stage takes months. Dave Dillwood, the Price Waterhouse accountant who worked with Morpheus Lights, came with a mandate to examine everything from the company's legal structure and accounting methods to the costs of developing the equipment Richardson kept tinkering with in the back rooms. Often, as happened with Morpheus, it is the chief financial officer rather than the CEO who is most closely involved at this stage. "I was like a sponge," Burt recalls. "Dillwood just kept squeezing more and more numbers out of me."

Although tax planning might sound off-putting to nonaccountants, it's similar in many ways to drawing up a business plan. First you do research, attaching a number to every expense, activity, product, and so on. Then you estimate what those numbers will look like three to five years from now, provided the company grows at its current pace. Finally there's the $64,000 question. If the company stays on course, how big will its tax bill be over the next five years, and what can you do to bring it down?

From Dillwood's point of view, Morpheus represented a host of opportunities -- for tax savings, that is -- just waiting to happen. But convincing Richardson and Burt was another matter. "You've got a company that's doing great and suddenly the accountant comes in and says, 'Yeah, but you'd be even better off if you did this, this, and this.' It takes time," Dillwood admits, "and the accountant has got to prove that his suggestions make sense from the business's point of view, not just for tax purposes."

Tax-planning prescriptions will differ depending upon a company's industry, product lines, research activities, and location. Dillwood's wish list began with research-and-development expenses, since Richardson was the type of CEO who couldn't stop inventing new systems for computer-controlled stage lights, even new truss structures to carry his light systems. For the preceding five years, Morpheus had been on an R&D fast track. Yet the company had no sense of the cost of developing each of its new products or how much it had spent on R&D equipment, personnel, and so forth.

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