TAX CHALLENGE: Stock Option Windfall
Andrew owned 5,000 vested employee stock options when his company, Risk R Us, merged with another company. Andrew asked us for help in calculating and planning for the tremendous income tax bill associated with the windfall profit created by the merger.
KBT&E SOLUTION: Persistence and Expert Research
As we worked through the details and became more familiar with the nuts and bolts of the merger, we asked the CFO of Risk R Us some fundamental questions about how he envisioned the stock options being taxed. Using the information we gleaned from Risk R Us representatives, KBT&E performed extensive research to find the most advantageous solution.
Joint efforts between KBT&E, the CFO, and legal counsel of Risk R Us paid off! KBT&E’s ideas saved Andrew $28,000 of Federal and State income tax by looking at option taxation from a new angle. Even better, the entire company adapted the stance we fashioned for Andrew, saving options-holders a total of $1.4 million in taxes.
TAX CHALLENGE: Construction Business Profits
Abraham builds high-end homes in Buckhead. He keeps his crews busy during slow times by contracting to perform “mansion renovation” work. In 2002, Abraham agreed to remodel a fire-damaged home for $1.5 million. The work was performed in late 2002, with job clean-up and homeowner sign-off occurring in early 2003. KBT&E began preparing Abraham’s 2002 tax returns in February 2003. Initial estimates for Abraham’s 2002 tax liability were around $410,000.
KBT&E SOLUTION: Leverage Practical Experience to Offer Expert Advice
Overhearing a conversation between Abraham and the homeowner, we probed further with detailed questions about the job. We advised Abraham to use the “completed contract” method of accounting for this engagement, allowing him to delay payment of the taxes on his $800,000 profit from the renovation until April 15, 2004.
Abraham saved $320,000 in 2002 taxes and was able to plan accordingly for the future amount payable.
TAX CHALLENGE: Finding Tax Loopholes Through Forward Thinking
Ulysses’ company designs, builds, and repairs gizmos. As gizmos become more sophisticated, Ulysses builds fewer but the profit per gizmo increases. Having been in the gizmo business for many years, Ulysses made more profit in 2003 servicing previously-built units than building and selling new ones. In the late 1990’s, KBT&E designated the service portion of Ulysses’ business as eligible for a significant tax loophole if average annual revenues fell below $10 million.
KBT&E SOLUTION: Customize a Plan for the Client’s Situation
Since fewer gizmos were built in 2003, the company qualified for the first time that year. KBT&E prepared Ulysses’ 2003 tax returns incorporating the long-awaited loophole.
Ulysses not only paid $0 in 2003 income taxes, but also received a refund of $350,000 for prior year tax payments.
TAX CHALLENGE: IRS Rejects Claimed Deduction on Tax Return
Rutherford’s company writes Workers Compensation insurance for landscaping companies. The company is very profitable because it does a great job evaluating risk and collecting premiums. Oddly enough, the Internal Revenue Code allows a tax deduction for dividends paid to shareholders of companies in the insurance industry – a little known deduction considered “too good to be true” in some circles. For reasons only known in Washington, D.C., the Internal Revenue Service challenged the company’s dividend deduction in 1998, asking for $4.5 million in additional taxes.
KBT&E SOLUTION: Go to Bat on Behalf of Our Clients
KBT&E crafted a 22-page “protest” to fight the assessment levied by the IRS. Between 1998 and 2004, we dealt with six different Internal Revenue Service agents, as if our protest was a “hot potato” in the eyes of that organization.
In early 2004, our client was notified that no additional taxes were owed related to the dividend deduction.
TAX CHALLENGE: Research and Development Expenditures
James’ company manufactures for mass distribution unique housewares such as baby cups and specialty beverages. Constant innovation is required to stay “ahead of the curve” associated with the ever-changing preferences of American consumers.
Federal tax law allows a credit against income taxes payable for certain qualified research and development (R&D) expenditures. Beginning in 1999, KBT&E aggressively claimed the R&D tax credits for James’ company.
In 2002, James designed a major enhancement of an existing product. This product failed to qualify for the credit since it was a “redesign” rather than brand new. The product was oddly shaped, requiring repeated assembly line tinkering and adjustment for more than a year before the molding process could be automated.
KBT&E SOLUTION: “Dig Deep” to Find a Tax Break for the Client
KBT&E performed extensive in-depth research and discovered that creation of a new manufacturing process can qualify for a tax credit even if the product itself is not sufficiently unique to qualify.
James’ company was granted a 2002 tax credit of $42,300.
TAX CHALLENGE: Conversion of Apartment Units to Condominiums
Ben wished to convert an apartment complex he owned into condominiums to earn a nice profit by selling each unit for much more than his original cost per unit. Ben discussed his plan with us before the conversion so KBT&E could advise him on the most tax-efficient way to accomplish his business objectives.
KBT&E SOLUTION: Structure the Transaction to Minimize the Tax Burden
Using a perfectly legal technique, Ben sold the entire apartment complex to a newly-formed company created to oversee the condo conversion.
Ben saved $840,000 in income taxes by trapping “pre-conversion” profits as a capital gain taxable at a lower rate than ordinary income.
NEW DEVELOPMENT - ADDITIONAL SAVINGS:
Less than four months after the creation of the new company, KBT&E’s weekly review of Federal tax-related court cases uncovered another tax-saving opportunity. We called Ben and helped him structure his condo sales to take advantage of this new court decision. Our continued diligence on Ben’s behalf resulted in an additional tax savings of $137,000.