Trimming tax liability could be a matter of survival

Remember when the junk hit the fan back in 2008? Everyone and his dog was yelling about the imminent economic collapse. Three years later, a lot has certainly occurred: bailouts, unemployment, housing slump, business failures, you name it. If it was bad, it probably happened.

But, pretty much unreported, something amazing happened during the same time. Ever since Jeff Immelt succeeded Jack Welch as CEO, General Electric had endured several years of stagnant earnings. All the bad news caused a number of talking heads to wonder whether or not GE could weather the storm. Fast forward three years and there’s no longer any question. GE is doing just fine. In fact, the company has thrived during the recession. How on earth did that happen?

Two words: taxes and strategy. Wow. There’s a novel idea. You hear those two words combined from time to time, but usually to describe things that aren’t strategic at all, just basic timing differences like section 179 or 401(k)s … which might push income off into the teeth of higher tax rates certain to be coming out of Congress over the next few years.

Going into the recession, GE was in the same boat that 99 percent of businesses and practicing professionals are in. They were paying more tax than the law required. To their credit, GE realized it and set about fixing it, probably in the same way your tax professional has described it to you many times.

Here’s my version. Tax strategy does not operate in a vacuum. You can’t save on taxes by making cosmetic changes. Tax strategy and operating strategy go hand in hand.

It’s possible to use well-established law to mix and match selected tax preferences and tax savings devices embedded in the tax code by Congress over the last generation; combine them with entity selection, economic substance and valid business purpose; and tie it all up in ordinary, necessary and reasonable packages to cut the income tax of business owners and practicing professionals to the legal minimum, which is sometimes zero.

GE had the talent to make that happen. Consider the recent announcement that GE cut its domestic taxes to zero on worldwide income of $15 billion and U.S. income of $5 billion. In other words, GE rearranged its affairs to cut its income tax to nothing — on $5 billion of domestic income.

Paying more tax than is required by law is an unnecessary burden. This success that took three years to bring to fruition probably aided GE greatly.

I don’t have access to GE’s culture or strategic initiatives, but I know enough to make educated guesses. First, they probably made effective use of tax preferences, possibly tax preferences Congress passed just for them. That might sound a little farfetched, but it’s as common as dirt.

Note these examples:

The Gallo family reportedly got Congress to extend the number of shareholders in S corporations numerous times from 10 to 100 and even got Congress to change the definition of a shareholder to an entire family.

Kohlberg, Kravis and Roberts got Congress to allow its principals to pay tax at the 15 percent long-term capital gains rate instead of the 35 percent ordinary rate.

The Kennedys and Rockefellers got Congress to allow dynasty building trusts to avoid estate taxes so they could build American dynasties.

GE itself got Congress to outlaw ordinary incandescent light bulbs, making its spiral shaped bulb the only legal bulb.

You might not be rich enough to get the same kind of treatment from Congress. But if a law is passed, it’s passed, and anyone can use it, including you. All you have to do is find it.

Another thing. Based on the recent announcement GE placed orders for 50,000 GM Volts, they probably made effective use of tax credits. Why did GE buy what I’ve read described as an unpopular piece of junk? For the tax credits. At $7,500 apiece they’ll reap $375 million in credits. No other company is doing that.

Paying more income tax than is required by law is an unnecessary burden for any company and the solution is available to any company. It could pay huge dividends for you to cut your tax bill as well.

 

Robert Ellis is principal at Ellis CPA, a Grand Junction-based firm that serves closely held businesses throughout the United States. For more information, call 241-5040 or visit www.elliscpa.com.
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Posted by on Apr 6 2011. Filed under Contributors. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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