TrailMix: Year-End is right around the corner; are you ready?

As the year ends, a few smart accounting decisions can make a meaningful difference to your tax bill and cash flow. Many business owners miss opportunities simply because they act too late. Before joining Tamarack, I spent 20 years as a CFO for an equipment finance company and experienced the busyness of year-end firsthand. As you enter this season, it is important to review non-performing assets and corporate taxes. 

Non-performing assets are incredibly important to consider at this time of year because they can have an impact on cash flow and Accounts Receivable quality. They can create a liquidity strain, even if your accounting books look profitable. They can also often trigger loan covenant breaches and increase cost of capital. Non-performing asset expenses can also impact corporate tax planning by creating temporary timing differences between book and tax.

Non-performing assets have direct and indirect tax consequences, and tax planning around them is about timing, recognition and deductibility – not avoiding tax. From a tax perspective, make sure you are planning for when your losses may be recognized and what income will be taxed. Impairment usually does not constitute a tax deduction.

Corporate taxes are also especially important as they can lead to cash flow shock. Cash flow shock happens if you have not appropriately planned, and there is a sudden, unexpected disruption to the normal inflow or outflow of cash that threatens the company’s ability to meet short-term obligations. One of the first steps of corporate tax planning is to make sure property classes, depreciation conventions and bonus depreciation analysis are timely analyzed.

Another important aspect of tax planning is your tax gain/loss analysis. Are you monitoring your taxable gains on sales throughout the year? Your team needs to track taxable gain to mitigate year-end surprises, which can happen unintentionally. If accelerated depreciation occurs on an asset, and it was subsequently sold early on, Ordinary Depreciation Recapture rules may come into play. Modeling a gain/loss stress test may become a tool to help your team avoid this issue. By modeling best-case and worst-case scenarios and deliberately breaking your original assumptions used to determine cash tax and depreciation recapture under §1245/§1250, your team can plan for cash flow shock.

We hope that keeping these important items top of mind helps take some of the stress out of the season. If you would like further assistance or to schedule a review of our complete year-end playbook, please email Shelly Kirsch at skirsch@tamarack.ai.