The current retail crisis can teach CFOs some valuable lessons. This crisis can be felt across many industries, not just retail — from hotels, to taxi services, to restaurants. Last year set a record pace for retail bankruptcies and store closings with household names faring no better than small shops.
But more retailers continued as going concerns. According to the National Retail Federation, store openings outpaced store closings nearly three to one in 2017.
What’s more, innovators in related and similar industries continued to thrive. For instance, Airbnb built an inventory of 600,000 rooms in four years, which took Hilton about 93 years. And according to the Brookings Institute, the sharing economy is estimated to grow to $335 billion by 2025.
Successful businesses seem to share a common theme — the use of advanced technology. Leveraging technology is imperative in the modern age, especially for finance departments that must be on top of restructuring, compliance with current tax laws, and tax planning.
A restructuring event, such as a store closure, or merger/acquisition can be extremely challenging. Regardless of the method used, the company left standing will be challenged with merging tax data from various legacy systems and managing cash tax. For asset-intensive businesses like retail, this exercise can be daunting.
To be sure, most companies take traditional approach to merging data. A recent Bloomberg Tax survey found that more than half of the respondents still used proprietary spreadsheets or homegrown databases to manage their tax and accounting data and computations. For these companies, any kind of restructuring event requires manual inputting of data from various spreadsheets, databases, and even hard-copy tax returns.
After data is manually manipulated and consolidated, spreadsheet tax models, with complicated formulas supported by online research, are created to determine the tax effects of the restructuring event on cash and accounting impacts on such things as:
- Net operating losses (NOLs).
- Federal and state tax elections.
- Tax provision (deferred tax assets and liabilities).
- State add-backs, credits, or specialized industry rules.
The merging of fixed-assets data alone can take months. By the time data is consolidated and a tax strategy put into place, business decisions may already have been made without factoring in vital tax information.
That’s less likely to happen at companies that use today’s automated approach. The most efficient method uses robust, end-to-end tax solutions to manage such key areas as fixed assets and corporate and state taxation.
These products may even use robotics to accomplish repetitive manual tasks, allowing finance and accounting staffs to focus their time on more strategic efforts. Tangible benefits, such as increased cash tax flow, faster accounting closes, and reduced audit and financial controls risk are immediately realized.
Compliance with Current Tax Law
Besides simply complying with the tax law, many companies, as a common practice, take advantage of current tax incentives. There are literally thousands of federal, state, and local tax incentives, exemptions, and accounting methods that can significantly reduce cash tax.
As an example, for retailers on a growth path, Revenue Procedure 2015-56 allows retailers to immediately deduct 75% of the cost of remodel and refresh projects (with the remaining 25% being depreciated under section 263(a) as a capital expenditure).
Using a traditional approach, tax team members must consistently monitor tax incentives and laws. When an incentive applies, such as Revenue Procedure 2015-56, they must undertake the time-consuming task of analyzing and manually inputting the details into a spreadsheet. When tax time or an audit comes around, there may be no way of knowing if the research done was accurate or remains current, putting the company at potential risk.
In contrast, contemporary solutions enable tax teams to model out various tax scenarios using advanced “what-if” analysis. This can be used to compare different accounting methods, such as Revenue Procedure 2015-56.
Tax laws may be automatically updated in the system to ensure accuracy and eliminate the need for manual processes. Platform-based technology hosted in the cloud improves accessibility and provides transparency to financial executives, giving them more insight into their tax obligations.
In any given year, finance teams can expect hundreds or even thousands of tax law changes. With the Tax Cuts and Jobs Act now the law of the land, CFOs are analyzing and assessing its possible short-term and long-term effects on their businesses.
For example, before the law’s enactment, interest-deduction limits under section 163(j) of the U.S. Tax Code only applied to certain cross-border related-party interest payments. But now that the law is in effect, the section limits net business interest deductions to 30% of adjusted taxable income (ATI).
This modified provision greatly expands the limitation on interest deductions, which is further expanded for taxable years beginning January 1, 2022. The expansion stems from a definition of ATI that includes reductions for depreciation, amortization, and depletion thereafter.
When a company complies with aspects of the new law like the new interest deduction limitation using traditional compliance approaches, an assigned team member must analyze and input the data into a spreadsheet.
The team member may even create “what-if” modeling scenarios based on current and anticipated debt and forecasted earnings to determine the allowable amount of interest deductions. Models often need to be documented and understood by auditors and tax preparers in order to support tax return positions.
Using advanced “what-if” analysis, however, enables tax teams to compare future changes in tax law against existing law, and even past tax law. If the company finds itself overleveraged and unable to deduct all its interest, tax executives may recommend refinancing or early payment of debt to align cash flow with current tax deductions.
As the business expands or retracts, modernized operations provide executives with more timely and accurate tax and accounting information for decision-making.
Spurred by technology advances in the last decade, retail and many other industries have undergone a complete metamorphosis and will likely continue to evolve in the coming years.
By taking steps now to implement smart tax and accounting strategies driven by equally smart operational systems, CFOs can position their finance departments for success.
Ken Crutchfield is vice president and general manager of Bloomberg Tax Technology.