At Channel Computing, a Newmarket, N.H., business-software-development company, chairman Mark Klein pays close attention to prospective tax consequences before making any significant decisions. "This is the second company I've started," he explains, "and I learned the first time around that tax benefits can really help." Here are some ways he has strategically managed Channel's tax picture:
* Net operating losses (NOLs). During Channel's start-up phase, the company accumulated enough net-operating-loss carry-forwards to deduct against three years' worth of revenues. "Those tax benefits meant there was a major difference between what our financial reports would tell us during the course of a year and the cash flow we knew we would actually have once we filed our taxes," Klein notes. Channel tracked both actual and tax-adjusted numbers (which factored in federal and state deductions) on a quarterly basis.
"By managing according to both sets of financial results (Channel's actual numbers and projected after-tax numbers, which factored in the NOLs, depreciation, and other deductions), we were able to figure out when we'd have the cash to support growth-related expenditures," says Klein.
* Revenue recognition. Now that NOLs have run out for the company, Klein looks for other tax-related ways to maximize cash flow. One strategy: "It sometimes makes sense to time shipments to delay some tax liabilities and improve cash flow." -- Jill Andresky Fraser
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To learn more about the way NOLs work and how to use them in your company's tax planning and reporting, order free IRS publication number 536 (800-829-3676). Then check with your accountant about relevant state laws.