On top of the economic uncertainty all companies must contend with, retail stores face significant long-term challenges, including the continued rise of e-commerce and the ongoing need for financing.
And while there’s no easy fix, these companies can enjoy a higher level of financial security and take advantage of potential opportunistic moves in a soft market by focusing more attention on their cash and capital.
To do this properly, they need to truly understand their sales peaks and valleys and carefully project their cash flow on a rolling 12-month basis. The following seven factors can help you make the most of your cash flow potential.
Gift Card Revenue Recognition
When companies receive cash for gift cards, they credit their balance sheet with deferred revenue until the card is redeemed and, normally, recognize any applicable taxes. The IRS, however, allows unredeemed gift card revenue to be deferred until the last day of the second taxable year following the year of the sale. This can significantly increase cash flow by reducing current tax liabilities, so it’s important that a company’s system accurately tracks the age and use of gift cards.
Inventory Planning
To take full advantage of tax deductions, every company—no matter the size—must regularly analyze its inventory and push off old and slow-moving products from the books. Proactive planning also involves determining the root cause of slow moving inventory so a company can apply the correct method to segregate and dispose of the problem goods.
Accelerated Depreciation
There are a number of accounting methods currently available for companies to accelerate the depreciation of assets and increase their cash flow. These include traditional methods found in the Modified Accelerated Cost Recovery System, a “bonus depreciation” that currently allows up to 50 percent of some investment costs to be expensed in their first year, and the Section 179 accelerated depreciation that allows 100 percent of the cost of qualifying property to be deducted in the first year, up to a cap and with limitations. The upcoming election may impact what depreciation options are available in the future, making it extremely important for companies to stay up to date on legislative and policy changes.
Cost Segregation
Particularly relevant to companies that have recently purchased or constructed a building, cost segregation is the process of identifying certain nonintegral building items whose costs can be depreciated more quickly, thus saving current-year taxes and increasing cash flow. Examples of potential items include special flooring or air conditioning systems.
Accounts Receivable and Bad Debt Reserve Planning
The objective of this activity is to accelerate tax deductions by identifying specific debts that a company has unsuccessfully tried to collect. Like cost segregation, this requires a detailed approach.
Prepaid Expense Acceleration
The IRS doesn’t normally allow retailers to write a check and then deduct the expense; instead, companies have to wait until the service they purchased is rendered. That said, certain prepaid purchases are eligible for immediate write-offs, such as insurance, taxes, and licenses.
Payroll and Employment Tax Opportunities
The Work Opportunity Tax Credit is available to companies that hire people facing barriers to reemployment, such as veterans and individuals receiving federal or state assistance. However, gathering the necessary background information on these hires in order to obtain the tax credit can be difficult, and the process requires careful legal consideration. Additional tax credit opportunities can be found in the many enterprise and empowerment zone credits that are available in certain regions.
The Bottom Line
Targeted deductions and increased cash flow can translate directly into more safety and security for your business, and these seven areas of focus can have a noticeable impact.
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