Strategic Tax Planning

1
Strategic Tax Planning

• Capital Budgeting
• Chapter 11

2
Capital Budgeting Decisions

• Proper planning can reduce after-tax costs
• Fixed asset acquisitions
• Make versus buy decisions
• Multiple versus single plant choices

3
Fixed Asset Acquisition

• Capital acquisitions should have net cash flows
  that have a positive net present value
• U.S. Federal Income Tax depreciation tax shield
  provides the primary tax incentive
• Foreign Income Tax
• State and Local Taxes most states have adopted
  Federal accelerated cost recovery rules

4
Fixed Asset Acquisition

• Sales Taxes
• complementary use tax is imposed to prevent
  taxpayers from avoiding out-of-state tax
• Lease instead of purchase will enable firm to
  avoid tax
• Property Taxes
• Capital expansion will result in an increase in
  property taxes
• Tax relief can be negotiated with local officials

5
Analysis from a SAVANT Perspective

• Strategy consider strategic aspects, first, and
  should be independent of tax consequences
• Anticipation Year end acquisitions should be
  made if tax laws change
• Negotiating negotiate tax benefits where a large
  acquisition is made from one vendor

6
Analysis from a SAVANT Perspective

• Value-Adding positive net present will increase
  firms earnings-based performance measures
• Transaction costs should be considered when a
  project has a positive value-added
• Risk should be offset by higher after-tax cash
  flows

7
SAVANT Concepts Applied to Capital Budgeting

• Strategy positive cash flow may allow delivery
  prices to be dropped
• Negotiating Vendor may prefer to lease and can
  treat as a capitalized lease purchase
• Value-Adding and Anticipation no changes in the
  tax rate are anticipated, so the transaction
  should occur when the economics are sensible

8
Make or Buy Decisions

• Internal manufacturing gives completed control
  over quality and timing of product
• Outsourced components can be less expensive
  (overhead costs are not incurred)
• Tax-related transaction costs may be incurred if
  manufacture or purchase is across tax
  jurisdictions

9
Capital Budgeting and Plant Capacity

• Taxes should be considered when expanding
• Property increase
• Income
• Federal tax shield from depreciation
• State and local tax shield from depreciation
• Foreign not applicable

10
Risk Considerations

• Inherent risk that cash flows vary from
  projections
• Income taxes act as a variance reduction mechanism