Tax Planning in the Final weeks of your Fiscal Year

Tax Planning in the Final weeks of your Fiscal Year

We’ve been hearing a lot lately about taxes and tax planning for the end of the year. Business owners should understand the importance of proper cash and tax planning in the final months of your fiscal year, especially during a transaction or if you are planning on buying another business or selling your business in the future.

The complexities of tax planning and tax mitigations are ascorbated during a transaction as both sides could have different interests and strategies relating to what earnings and financial performance a company wants on record. For example, companies that are looking to sell are often looking for strong operating income performance, even at the expense of a tax burden while companies maintaining operation or status quo will optimize expenses to occur ahead of the completion of the tax year.

Cash basis companies that are looking to optimize tax expenses by pulling in expenses such as prepaid lease obligations, additional shareholder distributions or simply shoring up inventory. These practices can dramatically help reduce the cash on hand on the final day of the year.  That same company if operating on an accrued accounting basis would have a slightly different behavior as they would be focused on signing contracts ahead of the close as well as making purchases but not necessarily releasing the cash.  Both of these scenarios provide different outcomes and opportunities when engaged in a process as the acquiring party may want to weigh in on the strategies since ultimately they will be inheriting the financial performance and at times tax liabilities.


The complexity goes up at times when the deal is in an earlier stage and the parties are not yet fully confident that a transaction will occur.  In many cases the seller owns tax liability post close for the period leading up to the transaction. It is common for the selling party to file what is called a stub filing to establish a demarcation of liability from the original owners to the new owners. It is important to work with your M&A advisor to ensure that proper expectations are met on both sides.  Often valuations are based on operating income & EBITDA and without proper tax fillings to document such performance it can cause issues in due diligence when the forecasted FY performance is missed due to tax mitigation efforts. We work closely with both sides of a transaction to ensure that parties are aligned and valuations are properly documented ahead of a tax filing & stub year.


As we enter the final weeks of 2020 we are advising our clients on these practices as well as taking into account the additional complexity that will come from stimulus funding, SBA loans, and PPP loans when filing this year.  For tax advice, please consult your accountant.


For more information on navigating tax preparation during a pending or forecasted transaction reach out to us at info@revenuerocket.com