The Tax-Advantaged CEO

Guide to tax strategies that can help a CEO better manage his or her corporate and personal finances.

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Boost your cash flow, hike your profits, accelerate your growth -- start planning now, and that's what the tax laws can do for you

Complaining about taxes is an American tradition that dates back at least as far as the Boston Tea Party. Chances are, you've often joined in the chorus yourself. If you have adopted a fatalistic attitude about taxes and assume there's little more you can do to alleviate your financial obligations to Uncle Sam, it's time to rethink that position. For, as tax accountants and lawyers know, there's a universe of tax strategies out there to help you better manage your corporate and personal finances.

Some are simple; others are more complicated both to plan for and to take advantage of. Some may not be a good fit for your company. But overall they represent solid, legal, and often overlooked opportunities for company builders who want to boost cash flow, improve bottom-line results, and propel their companies toward more predictable and even accelerated growth.

What follows is not intended to be a comprehensive guide through the world of tax breaks; instead, it's a glimpse at the sorts of opportunities you and your accountant might want to consider.

OPERATIONS

* Accelerated Deductions. Tax-reform movements may come and go, but some basic tax strategies last forever. That's particularly true in the case of this maxim: Accelerate deductions, delay cash expenditures -- and increase cash flow.

To take advantage of that technique you'll have to time some company activities more carefully. Take your bonus plan, for example. Most companies assume they have to distribute cash bonuses within the taxable year to qualify for a deduction. But the Internal Revenue Service permits you to take a deduction during the year in which you declare bonuses (provided they aren't going to holders of more than 50% of the company's stock), even if payments are delayed up to two and a half months into the next tax year -- which could mean a valuable boost to the current year's cash flow.

* Research and Development. Last year's tax legislation extended through 1991 the research-and-development tax credit for corporate expenses. Reckoning the actual dollar value of the tax credit takes an accountant's sharp pencil, however. While the maximum size of an R&D tax credit is 20%, the amount each company is allowed is based on a complex set of regulations. Still, the message is simple: keep meticulous records of every relevant corporate expenditure.

Meanwhile, it's at least worth considering getting as much research as possible into 1991, while the tax subsidies are a sure thing. Although there is popular support behind extending the R&D credit beyond 1991, recessionary pressures could force legislation to reduce or discontinue the extension.

* Accelerated Construction Costs. In the good old days of accelerated depreciation -- before 1986's Tax Reform Act -- companies could write off the cost of, say, building a production facility over 19 years, no matter what the real life expectancy of the property was. Now such costs must be written off in equal amounts over a 31½-year span.

But you can get around that provision by putting certain construction costs into other categories that qualify for earlier write-offs. Generally, costs for items such as movable wall partitions, computer-ventilation systems, security lighting, landscaping, and the like can be written off much sooner than core structural costs.

And overall benefits add up fast: the present value of the depreciation deduction from $100,000 worth of construction costs, depreciated over 31½ years and assuming an interest rate of 8%, would be about $36,000, according to Robert M. Hersh, a tax partner in the Fort Lauderdale, Fla., office of Grant Thornton. If that same $100,000 were segregated from structural costs and thus depreciated at an accelerated pace over 7 years, the present value of the depreciation deduction would be about $76,000, assuming the same 8% interest rate.

* Car Use. A sweet and simple tax benefit. The IRS recently raised the expense allowance for business use of cars -- and there's no reduction in the rate for mileage past 15,000, as there used to be. On 1990 tax returns the tax write-off was 26¢ a mile. But as of 1991 the rate rose to 27½. As before, the best way to safeguard this deduction is to keep logs to record all business use of cars by date and mileage.

EXECUTIVE COMPENSATION

* Perquisites. Thanks to 1989's repeal of Internal Revenue Code Section 89, companies can once more look for ways to motivate managers. That's because certain types of benefit plans, such as medical-and life-insurance packages, no longer have to meet federal nondiscriminatory guidelines. That means they can be designed specifically to reward top-level managers, with their costs offset by corporate tax deductions.

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