Using Income Taxes to Maximize Your Company's Value, Part II

By:  Michael Abramovitz

Has your business identified potential tax risks that could affect the valuation of your company? Maintaining good corporate tax 'hygiene' is imperative to ensuring that a potential acquirer recognizes that the company has controls in place to ensure that, at a minimum, tax filing requirements have been addressed. That includes filing tax returns on a timely basis, even if the business generated a tax loss. Since penalties are generally assessed on any underpayment, oftentimes loss companies may not bother with extensions.  Even if an extension was filed, the loss company will file their returns late, since no penalty is expected. Not a good idea. Even though a penalty might not be assessed, the practice appears to present the company as not caring about its governmental obligations. If tax filings aren't considered important, it may raise the question with a potential acquirer, "what else isn't the company doing that it should be?" If your company is required to file foreign returns, it is important to note that a failure to timely file the required U.S. foreign information forms may result in the IRS assessing a $10,000 penalty for each such failure. That's a good reason to file your returns on time! 

State taxes are another obligation that many companies overlook. Your company might consider preparing an analysis of where it is conducting business and generating 'nexus,' that is an attachment with a state such that a filing obligation is required. This is especially important with entities that have historically generated losses. Many companies choose to not file returns in states where nexus has been established, but the company generated losses in those states. A potential acquirer would certainly discount that conclusion since, again, corporate tax hygiene hasn't been maintained which could generate actual tax, interest, and penalties for net worth, franchise, or minimum taxes that the other states may assess. Further, since the state returns were never filed, the company is leaving net operating losses on the table that might otherwise be usable by the acquirer. This could result in a lower valuation by the acquirer since the company can't substantiate the amount or right to those losses.   

Every company has a tax function and maintaining good corporate tax hygiene is a part of this process. Other aspects include tax planning, cash flow management, tax risk analysis and mitigation, tax reporting and compliance, tax information needs, and the integration of the tax department with other corporate functions. Future articles will address these other aspects.

(originally published in December 2012 eNewsletter)  

Michael Abramovitz, Partner, TaxOps (www.taxops.com), is a certified public accountant in Colorado and is a member of the American Institute of Certified Public Accountants and the Colorado Society of Certified Public Accountants. He frequently writes and speaks on tax-technical and advisory topics that help businesses achieve greater success.  You can contact Mike atmabramovitz@taxops.com or (720) 227-0423.  Tax Ops is a business tax outsourcing and advisory firm delivering customized tax solutions that drive business value.