The Tax-Advantaged CEO

TAX TIPS

Some advice from managers who are experienced in weighing tax matters against the other financial needs of growing companies:

* Start tax planning early. "Since this is my second start-up, I'm trying to avoid some of the mistakes I made the first time around," says Mark Klein, chief executive of Channel Computing Inc., a software developer in Newmarket, N.H. "I learned along the way that tax savings can help pay for corporate growth, so with Channel I went out and hired my tax accountant and started tax planning before I even hired any full-time employees." Recently, Klein decided to purchase -- rather than lease -- new, expanded office space because he calculated that tax subsidies helped tip the balance to make it more profitable to buy.

* Keep detailed tax records. M. C. "Mac" McConnell, whose Fort Lauderdale, Fla., company, The Artful Framer Gallery, has grown from $175,000 in sales to $625,000 over the last four years, keeps meticulous records of all expenditures. "My computer software forces me to categorize every check I write and every deposit I receive, so there's absolutely no guessing -- or missed opportunity -- when it comes to figuring out my taxes."

Ann Blakeley, president and CEO of Earth Resources Corp., a hazardous-waste-management firm, agrees. "Since we do a lot of research and development, the R&D tax credit really adds up for us. So I tell my people that they've got to keep the same kind of accurate, detailed records -- complete with full documentation and very precise time and cost breakdowns -- that they would keep for any project where we were billing a customer."

* Document top-level tax decisions. John C. Heenan, the chief financial officer of Physical Acoustics Corp., in Lawrenceville, N.J., must juggle the needs of four foreign subsidiaries with the tax considerations of a U.S. parent. "I've found it helpful in dealing with the IRS to keep detailed minutes of meetings in which board members or key executives authorize decisions about tax-related matters like charges to foreign subsidiaries or how we'll make use of our net operating losses. It's better to prepare the records in advance than to have to scramble around for documentation if the company gets audited."

* Don't let taxes run the company. Although tax savings can definitely add up, it's essential for managers to remember that those savings are only one factor in a business decision. "It feels as if I've spent $5 trillion on accountants, only to come down to one basic conclusion," emphasizes Richard Novak, owner of N.H.S. Inc., in Soquel, Calif., which sold $23 million worth of skateboards and snowboards last year. "If you earn $100 in profit on the sale of skateboards, you'll eventually have to pay $40 or so in taxes. Rather than coming up with some kind of crazy, time-consuming tax scheme that just puts off the inevitable, I'd rather pay my taxes and put that $60 to work in ways that will generate more sales for the company."

IS YOUR ACCOUNTANT SAVVY?

Sophisticated tax strategies require expert advice

It's not uncommon for young companies to outgrow their accountants. But how can you tell if that's the case? Here are the types of questions you might ask -- and some red flags to watch out for.

Question: Anything new on the tax front?

Answer: No, things are about the same.

Any company, particularly any growth company, that relies on the same tried-and-true tax plans and strategies year after year is missing out, since the Internal Revenue Code itself is a fluid body of regulations that changes to offer new opportunities each year. If you can't remember the last time your accountant suggested a change in tax strategy, it may be time to look around for a new one.

Question: I read something in The Wall Street Journal about a private-letter ruling. Is that something we should be looking into?

Answer: I don't know; what did it say?

Private-letter rulings are among the best indicators available about IRS thinking on innovative tax strategies. Companies contemplating state-of-the-art tax maneuvers can petition the IRS for a ruling, by mail, on the tax consequences and risks, if any. Good accountants stay up-to-date on monthly publications of those rulings and look for ways to relate them to their clients' needs.

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