Don’t Let Tax Strategies Drive Financial Performance
Don’t Let Tax Strategies Drive Financial Performance

With most young companies cash is king. As a company grows managing the cash available to finance that grow is crucial to sustaining the growth rate. Minimizing the cash expenses of the company is an entrepreneurs and CFO’s primary job. One of the main cash expenses is federal income taxes.

Don’t Let Tax Strategies Drive Financial Performance

During this start up and growth phase (which can last 10 years or more) the entrepreneur is focused on minimizing the cash payments for federal income taxes. He will work closely with his tax CPA to aggressively take financial positions that minimize taxes.
Somewhere along the line this strategy begins to lose its effectiveness. It generally happens when outside bank financing is obtained to fuel the growth of the company. As larger and larger amounts of outside debt is obtained the financial reporting needs of the company changes. The financial statements must now be presented to new users (i.e. the bank). The banks are seeking a clearing picture of the financial position of the company on an accrual basis. Often they want to know the true equity available from the company so they can establish the leverage of the company.
But maximizing the equity value of the company often is at odds with minimizing federal income taxes. To minimize taxes you typically end up either taking deductions sooner, deferring the recognition of income or valuing assets more conservatively. Taking these positions is fine until you want to borrow money.
Most entrepreneurs want to borrow as much as they can to fuel growth. However, by presenting there financial statements on a tax basis they minimize the amount that lenders will advance.

Conclusion on Tax Strategies Driving Financial Performance

The answer is that just as no strategy works in every situation, neither does one strategy work forever. The goal of the CFO should be to educate the owner to the needs of the other users of the financial statements. Often the benefits of paying higher income taxes is offset by the increased growth rate of the company.
Tax Strategies


Tax Brackets

See Also: Marginal Tax Rate Prepaid Income Tax Ad Valorem Tax Deferred Income Tax Cash Flow After Tax Tax Brackets What are tax brackets? Tax brackets are levels of taxation determined by income. Individuals with income falling within a certain tax bracket pay taxes according to the stated rate for that bracket. Typically, lower income

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Impact of FIT on Sustainable Growth Rate

The Institute of Fiscal Studies authored a study on tax systems in the UK called “Tax by Design: Mirrlees Review.” They concluded that “in the long-run, the tax system should be judged in part on its impact on the sustainable growth rate of the economy… viewing efficiency in a dynamic as well as static sense.” As we

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W2 Form

See Also: 401k Cash Flow After Tax Deferred Income Tax Form 1098 Marginal Tax Rate W2 Form Definition The W2 form definition is used by employers to report employees‘ wages to the Internal Revenue Service (IRS). The W-2 is also used to report the amount of taxes that have been withheld from each paycheck. W2

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