Old Faithful: The Permanent Tax Deferral
Imagine two taxpaying entities. We’ll call one Abraham and one Beame. They each have the exact same financial information, listed below:
One pays $360K of federal & state tax each year, and the other $600K:
Abraham collects the $240K tax savings and reinvests it in his business, earning a 25% ROIC and generating an extra $60K of cash each year.
Meanwhile Beame religiously makes his $240K interest-free loan to the IRS year after year.
Perhaps Beame, ever the patriot, feels the government could use the extra funds to help narrow our federal deficit. Or perhaps his accountant was too busy working 80-hour weeks to realize the disparity, or just too tired to dedicate any extra time to correct it. (But most likely it was just the default selection in his tax software.)
The situation perplexes me too but, whatever the reason, this dynamic is astoundingly common in tax practice. So much so that a partner at the firm where I began my career called it “Old Faithful” because of how reliably he could use it to find tax savings ideas to impress new client prospects.
Mainline practitioners miss it up to 20% of the time.
Are you one of the 20% or one of the 80%? Like Abraham, do you defer what taxes you can and profitably reinvest them or, like Beame, unecessarily loan your excess capital to the federal government?
Not sure and want to find out if this could help your S-Corp, Partnership, or LLC? Talk to us and we’ll confirm if you’re claiming this simple but often-overlooked tax break, while also checking for any other strategies you may have missed. It’s all part of our free second-look financial & tax review. If you like the ideas and want our assistance to implement them, then we can work together on a permanent basis.
If you want better value from your accounting & finance function, contact us today for an introductory conversation. You can’t argue with the value of a $240K tax savings, and you can’t argue with the value of free.