What Every CFO Needs to Know About Tax
Welcome to CFO.University’s transcript of Craig Vagt’s CFO Ed Talk? What Every CFO Needs to Know About Tax. Craig wants your tax function to be a success and shares the concepts you will need to make that happen.CFO Ed Talk?
*** With the Covid 19 pandemic many countries are passing tax legislation to help their citizens and businesses get through the crisis. For our finance leaders from the United States here is the page on the Internal Revenue Services website pertaining to Coronavirus Tax Relief.
Be safe and enjoy learning from Craig’s timeless piece. ***
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Here is Craig.
At some point, you as the CFO are going to realize that you have responsibility over the tax function. This may come as a surprise, hopefully not, but it may. This will be the case whether you have an internal tax director or whether you rely on an outside advisor for your tax services. Your role will probably be a little more complicated if you’re relying on outside advisor. But in any case, you’ll have that responsibility. So knowing that you have that responsibility, you need to assess where your tax knowledge is; What do you know about taxes? What should you know about taxes? Do you think there’s a gap? How do you fill that gap? Well we’re going to talk about a few things here that will help you get through that process.
The first is you need to identify what issues you’ve got to deal with. What are the total tax issues that the company has to face? Probably be best to make a list. What’s the first thing that comes to mind? Income Taxes, put that on the list. What do you know about income taxes? Where do you have to file? You’ll file federal return, you’ll file state returns, maybe more than one, you’ll file local jurisdiction returns, City, County. If you’re involved in international operations, you’ll have to file foreign tax return. Keep all those in mind, create a list, know where you’re going to file, know the due dates, know the estimated tax dates if you’re going to have to pay taxes in any of those jurisdictions. That’s all very important.
When you come to the States, you’re going to ask to have to ask yourself, well if we have operations in more than one state, say we’ve got a manufacturing facility in California and a warehouse in Arizona, the entity made $1 million. How do we split that income between the two states? Those are rules called allocation and apportionment rules. You don’t need to know the rules for each state, because they can differ. They can differ to the point where one state may allow a consolidated filing if you have more than one entity and another state may forbid consolidated filing. So the differences could be quite large. Maybe some states rely on payroll, sales, property, ratios of those in and out of the state. But you need to identify those, keep those in mind, not the details; you just need to know that those exist. What do you know about the tax return itself? Page through it. Take a look at the last page where it reconciles book income to tax income. That will be a big help. So that’s income taxes.
How about property taxes? What do you know about property taxes? Who in your organization actually files property taxes? What information do they rely on? Do they rely on the general ledger? Does the general ledger have information about where property is located? What happens if you have property that moves from jurisdiction to jurisdiction? Your construction company and your equipment moves from jurisdiction to jurisdiction? Is there a way to track that? You need to make sure you understand that. Maybe you use the depreciation schedule as the base for your property taxes? Has anyone ever looked at the depreciation schedule to make sure there aren’t assets on it that you don’t own anymore? We find that’s frequently a problem. People are good at adding assets, but not so good at taking them off.
How about excise taxes? Not all companies file excise tax returns, but many do. So you need to put that on your list if you have that in your purview. If you’re involved in international operations, duties would fall on that list. So you need to put that down.
How about payroll taxes? Payroll tax is kind of an interesting idea because frequently it’s handled in the HR department, right? That makes sense, the HR department knows who’s on the payroll, they know what the rates are, and they know what benefits people get, so that makes a lot of sense. But let me pause at a hypothetical for you. What happens if you have an installation in Montana, you’re not located in Montana, this is the first time you’ve ever gone to Montana, you send somebody to Montana to assist with the installation. Somebody in the HR department, one of your smart people in the HR department says, wait a second, we’ve got people in Montana, maybe we should be filing a tax return in Montana. They look at the rules and based on your facts, yep, you’ve got to file. What do you do?
Well, this is a two-part question. The first part is, What are the rules? and this person is determined that you have to file, that’s important. The second question is, Will you file? Now I’m a tax advisor and I don’t advise people not to follow the law. But I’m well aware that pragmatically, companies will say, we have never been in the state before, we’re going to be there for one day, we’re never going back. We don’t want to enmesh ourselves in filing a return in a state where we’re going to have to wait for two or three years to extract ourselves all the time paying somebody to file those returns.
Who should make that decision? Should it be the HR director, they have visibility to the HR issues. They have no visibility to the income tax issues or the sales tax issues. So that decision should be made by the CFO.
Read the rest of Craig's lesson here, What Every CFO Needs to Know About Tax , where he also discusses sales tax, the concept of nexus and most importantly, the steps CFOs should take to make sure their tax function is a success.
Watch Craig's CFO Ed Talk?or listen to the Podcast Here!
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