Strategic Business Tax Planning

Strategic Business Tax Planning, Second Edition is the definitive handbook on business tax planning, skipping the unnecessary and minute taxation details and focusing instead on the big picture in taxes. Organized around business processes, this reader-friendly guide shows you how to optimally put tax management principles to work in your business.

JOHN E. KARAYAN, JD, PHD, is a professor at California State Polytechnic University, Pomona. He is also a Partner at the law firm of Bond Karayan. Prior to his academic career, he was director of taxes at Informatics General Corporation (now Sterling Software); assistant tax counsel at The Parsons Corporations, and supervising specialist at Coopers & Lybrand (now PricewaterhouseCoopers). He is the Editor in Chief of the Journal of Interdisciplinary Studies as well as a member of the editorial review board (former associate editor) of Mid-Atlantic Journal of Business, Research in Healthcare Financial Management, and the Business Forum Journal.

CHARLES W. SWENSON, CPA, PHD, is Professor and Leventhal Research Fellow in the Marshall School of Business at the University of Southern California, where he has taught for the last nineteen years. He holds a joint appointment at the California Institute of Technology (Caltech). His practice experience includes PricewaterhouseCoopers and Deloitte & Touche. He is a member of the AICPA and the American Economics Association, and is a cofounder of the National Tax Credit Group, LLC.

ABOUT THE AUTHORS

V

ACKNOWLEDGMENTS

XIII

INTRODUCTION

XV

PART 1 Strategic Tax Planning

1

(92)

CHAPTER 1 A Framework for Understanding Taxes

3

(58)

How Are Taxes Important in Decision Making?

5

(3)

Types of Taxes

8

(22)

Basic Principles of Taxation

30

(5)

Sources of Tax Laws

35

(7)

Important Principles and Concepts in Tax Law

42

(14)

SAVANT Framework

56

(5)

CHAPTER 2 Using the SAVANT Framework to Guide Tax Planning

61

(32)

Strategy

63

(3)

Anticipation

66

(6)

Value-Adding

72

(11)

Negotiating

83

(2)

Transforming

85

(2)

Putting It All Together: SAVANT Concepts Illustrated

87

(6)

PART 2 Forming the Enterprise

93

(60)

CHAPTER 3 Choosing a Legal Entity: Risk Management, Raising Capital, and Tax Management

95

(30)

Strategy

100

(6)

Anticipation and Timing Issues

106

(2)

Value-Adding

108

(2)

Negotiating

110

(2)

Transforming

112

(4)

Putting It All Together: Applying SAVANT to Entity Choice

116

(2)

Specialized Legal Forms

118

(7)

CHAPTER 4 Financing a New Venture

125

(28)

Internal Financing

126

(3)

External Financing: Debt versus Equity

129

(24)

PART 3 Operating the Firm

153

(214)

CHAPTER 5 New Products: Development, Promotion, and Advertising

155

(24)

New Products and Product Improvement

155

(20)

SAVANT and Research and Development

175

(4)

CHAPTER 6 Attracting and Motivating Employees and Managers: Company and Employee Tax Planning

179

(34)

Executive Compensation

180

(2)

Nonexecutive Employee Compensation

182

(7)

Perquisites

189

(2)

Pension and Profit-Sharing Plans

191

(4)

Current and Deferred Compensation

195

(1)

Limits on Deductibility on Executive Compensation

195

(1)

Stock Options

196

(6)

Management Bonus Plans

202

(2)

Financial Statement/Finance versus Tax Strategy Trade-Offs

204

(2)

Putting It All Together: Applying SAVANT to Executive Compensation

206

(7)

CHAPTER 7 Market Penetration: Operating in Different States

213

(28)

General Principles of State and Local Taxation

216

(1)

Planning with Income Taxes: Manipulation of Plant, Workforce, and Point-of-Sale Locations

217

(11)

Location Choice: Sourcing versus Production Platforms

228

(2)

Distribution: Planning for Sales and Use Taxes

230

(5)

Lobbying and Tax Abatements

235

(2)

Trade-Offs with Local Tax Incentives: Infrastructure, Government Costs/Subsidies, and Other Local Costs

237

(1)

Putting It All Together: SAVANT Applied to Market Penetration in Other States

237

(4)

CHAPTER 8 Market Penetration: Company and Employee Tax Planning for Operating in Foreign Countries

241

(48)

Some Basics on U.S. Taxation of Overseas Operations

241

(3)

Some Basics on Taxation by Countries Other than the United States

244

(1)

Tax Treaties

245

(2)

Effective Tax Management

247

(16)

Putting It All Together: Penetrating Foreign Markets from a SAVANT Perspective

263

(26)

CHAPTER 9 Operations Management

289

(4)

Production Design and Process Selection

269

(4)

Inventory: Methods of Accounting and Includable Amounts

273

(10)

Strategic Capacity Planning: Plant versus People

283

(6)

Putting It All Together: Operations Management from a SAVANT Perspective

289

(4)

CHAPTER 10 Financing Ongoing Operations and Tax Planning

293

(26)

Operating Earnings

294

(1)

Sale of Operating Assets

294

(2)

Sale of Investments

296

(2)

Short-Term Borrowing

298

(1)

Accounts Receivable

299

(1)

Decrease in Dividends

300

(2)

Stock Dividends

302

(1)

Stock Buybacks

303

(2)

Using Employee Stock Ownership Plans

305

(1)

Receipt of Dividends from Subsidiaries

306

(6)

Putting It All Together: Financing Ongoing Operations from a SAVANT Perspective

312

(7)

CHAPTER 11 Capital Budgeting

319

(28)

Fixed Asset Acquisition

319

(5)

Analysis from a SAVANT Perspective

324

(8)

Putting It All Together: SAVANT Concepts Applied to Capital Budgeting

332

(2)

Make or Buy Decisions

334

(4)

Capital Budgeting and Plant Capacity

338

(5)

Risk Considerations

343

(4)

CHAPTER 12 Financial Statement Analysis and Proactive Tax Planning

347

(20)

Segmental Analysis

347

(3)

Other Tax Aspects in Segmental Analysis

350

(6)

Strategic Analysis: Using Competitor's Tax Note and Segmental Data

356

(11)

PART 4 Changing Original Form

367

(74)

CHAPTER 13 Restructuring

369

(22)

Financial Restructuring

369

(3)

Financial Restructuring in the SAVANT Framework

372

(3)

Business Restructuring

375

(1)

Legal Entity Restructuring

376

(6)

Divestitures in the SAVANT Framework

382

(1)

Selling Off Parts of the Business

383

(1)

Selling a Business to an Outside Entity

384

(7)

CHAPTER 14 Mergers and Acquisitions

391

(30)

Some General Tax Rules

393

(1)

Tax-Free Mergers and Acquisitions

393

(2)

Statutory Mergers and Consolidations

395

(7)

Taxable Mergers and Acquisitions

402

(3)

Tax Planning and Acquisition Costs

405

(1)

Allocating Purchase Price

406

(1)

Financial Accounting Trade-Offs

406

(1)

Maximizing Tax Benefits

407

(4)

Leveraged Buyouts

411

(1)

Sources of Merger and Acquisition Finance

412

(3)

Defensive Strategies

415

(1)

Merger and Acquisition Activity and Scrutiny by Tax Authorities

416

(1)

Putting It All Together: Merger and Acquisition from a SAVANT Perspective

417

(4)

CHAPTER 15 Other Topics in Changing Original Form

421

(20)

Use of Flow-Through Entities for Divestitures

421

(4)

Use of Flow-Through Entities for Acquisitions

425

(1)

Liquidations

426

(6)

Buying a Subsidiary for Its Assets

432

(5)

Fighting Off Takeover Attempts with ESOPs

437

(2)

Bankruptcies

439

(2)

APPENDIX A Basic Tax Research Skills

441

(4)

Steps in the Research Process

441

(1)

Sources of the Law

441

(2)

Getting Answers to Simple Questions

443

(2)

APPENDIX B Present Value Analysis: Lump Sums

445

(6)

Annuities

447

(2)

Uneven Cash Flows

449

(2)

INDEX

451

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Strategic Business Tax Planning

Summary

Author Biography

Table of Contents

Supplemental Materials