By: Emily Dunn

In the world of business, especially in today’s economy, it’s the “survival of the fittest” elimination process which weeds out the weaker companies from the sea of competitors. One of the key “separators” is cost management.  A company’s ability to critically analyze and effectively manage its business expenses is its competitive advantage. 

Although each industry carries its own costs, there are certain expenses that every for-profit business must account for. One of the standard cash out-flows is taxes. But are taxes really a business cost? Taxes share some of similar characteristics with other traditional costs, such as advertising and R&D, but they also have distinguishing features. 

One of the main similarities taxes and other business expenses share is that they are a necessary cost of simply doing business. Effective planning and management of all of your company’s operating costs will increase predictability, cash flow, and ultimately, your company’s bottom line. In addition, in order to ensure your company’s profitability, taxes and business expenses must be built into the pricing structure. Finally, taxes can serve as an indicator of how well any company is being managed. 

However, taxes are different from other business expenses in the following aspects:
1. Taxable income can be manipulated. Strategic tax planning provides a company the ability to reduce its effective tax rate lower than the unaltered income generating statutory tax rate. Many tools can be used to manipulate the company’s effective tax rate such as amount, rate, timing, character (ordinary or capital), and source (domestic or foreign). By outsourcing through a subsidiary, companies can improve their tax position with tax holidays and lower overhead. In addition, credits and deductions can be applied to lower taxable income such as foreign tax credits, deferral of taxes, accelerating deprecation deductions, and interest deductions.
2. When a tax expense appears on the company’s balance sheet, it does not carry the same quantifiable value as other business expenses (e.g. salaries, R&D, etc.). The reporting method is different for taxes than other expenses. On the company’s income statement, tax expenses can be found hiding in the footnotes providing details on where they were incurred, what the permanent deductions are (e.g. R&D credits) and when assets will expire. Taxes are also located on the company’s cash flow statement.
3. Effective tax planning brings “value” to the company. Make sure your company’s tax strategy correlates with your company’s business plan. By having these two plans match, your company is better able to justify its tax position on audit.
4. Taxes impact every aspect of business including: the form (e.g. corporation or partnership), location, financing (e.g. debt or equity), and method of acquiring equipment (e.g. lease or purchase). Unlike other business expenses such as salaries, which are predictable, taxes are more flexible. The sustained tax rate will indicate how well the business is being managed, and successful management of a company’s tax rate can pose as a positive indicator to potential investors.

Since effective management of your company is an important responsibility, then having a tax strategy that works is a positive indicator for market growth. It is wise for every entrepreneur to learn how taxation works, how taxes affect the operations of the business, and to seek the advice of an expert to develop a business plan that incorporates your tax needs. Seek the proper tax advice to learn how you can successfully manage your company’s tax rate to make it a positive indicator of your business! For more assistance with managing your company’s tax rate, please ask our experts at Exemplar.