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Do you believe there are corporate tax benefits to financing the working capital requirements of a business? Those benefits exist, and this article introduces a taxable income strategy that financial professionals can use to promote their financial services.
First, let’s summarize the 2005 corporate tax rates (banks have different tax rates). The federal corporate tax rates range from 15 percent to 39 percent of the taxable income with several tax brackets. The state corporate taxes rates range from 1 percent to 12 percent of the taxable income, depending on where the corporation resides (six states have no corporate income taxes). With only this information, you can appreciate the following:
Taxes on corporate income are significant . This impact on corporate earnings can be seen as targets of opportunity for financial professionals, particularly factoring services.
Taxes on corporate taxable income are dependent on which state the corporation resides in . Many states that collect corporate taxes have flat tax rates and the rest have tax brackets, more opportunity for financial professionals.
Corporate tax rates do not always increase with taxable income , e.g., federal corporate tax brackets favor larger corporations.
Taxable income
Over Not over Tax rate
$ 0 $ 50,000 15 percent
50,000 75,000 25 percent
75,000 100,000 34 percent
100,000 335,000 39 percent
335,000 10 million 34 percent
10 million 15 million 35 percent
5 million` 18,333,333 38 percent
18,333,333 35 percent
It is important to note that corporations that have taxable income of $100,000 to $335,000 are in the 39 percent tax bracket. These corporations generally are great targets of opportunity for financial professionals. However, most financial professionals seek to provide their financial services for businesses whose revenue is $30 million or less.
Financing has a negative impact on the taxable income of a corporation because of the interest for loans and the discount fee for factoring services. On the other hand, because of the lower taxable income of either of these instruments, there are fewer taxes due to the federal and state revenue services. The amount of income tax savings depends on the reduction in taxable income. It is obvious that any reduction in taxable income would recover some of the interest or the discount fee.
Let’s look at a business that is in the 15 percent federal income tax bracket and pays 6 percent state income taxes — a composite 21 percent tax bracket. Now, let’s also suppose the business has a $1 million loan at 8 percent APR with a term of one year. The question is: How much lower are the taxes due to the federal and state revenue services? The interest paid during the year is $43,861.15. The taxable income is reduced by $43,861.15, and at the 21 percent composite tax bracket, $9,210.84 less in taxes are due to the revenue services. That means the business had a net interest of only $34,650.31 for the $1million loan — an effective 6.34 percent APR.
A business in the same 21 percent composite tax bracket that sells $1 million in accounts receivable in a year at a 4 percent discount would reduce the taxable income by $40,000. The tax savings is $8,400, an effective discount fee of 3.16 percent.
Financial professionals using this technique to sell financial services to business prospects will increase your productivity in obtaining financing applications. Start by finding out the state corporate tax structure for your state. Then use the taxable income strategy for each of the business prospects that pay corporate income taxes.
Most financial officers of corporations are already aware of and use the leverage that taxes have on debt so they can grow the business. When those same financial officers are presented with a new debt or factoring instrument, they often forget about the leverage that taxes play on a growing business. Savvy financial professionals can use the taxable income strategy in their presentations to business executives and be rewarded more frequently.
About the Author: For many years Joe Winegardner has been assisting financial professionals by providing marketing assistance, training, books, special reports, and profitability analysis, explaining how factoring increases assets in a business without adding any liabilities. His company, 3W Internet Corporation, has been hosting business profitability analysis services for over 10 years including the Invoice Profitability Calculator, and now the Advanced Consultant Training Videos. The Web site is www.3wi.com. Please call 215-736-1107 or visit the Web site at your convenience.
Source: American Cash Flow Journal – September 2005

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