| Organization: A mid-market automotive components manufacturer. | Need: Increased cash flow. | Outcome: Taxable income was reduced by $2 million, boosting cash flow. |
Understanding the situation
A mid-market automotive components manufacturer was seeking ways to increase cash, especially as the company was looking to buy out a few owners.
The company had worked with CLA for years on tax, accounting, and consulting matters, and were looking to increase cash flow for an upcoming buyout. In reviewing strategies, CLA noticed the company had a lot of assets with an opportunity for accelerating depreciation which, in turn, would help cash flow.
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Exploring the challenge
Bonus depreciation has historically been a way for capital-intensive companies to mitigate taxable income. However, these depreciation amounts are being phased out with the federal Tax Cuts and Jobs Act, resulting in companies seeing less depreciation deductions available through bonus depreciation to offset taxable income.
As a result, capital-intensive companies — like this manufacturer — may benefit from a historic review of their fixed asset schedule for cost segregation opportunities. Cost segregation studies review building components for advantageous depreciation strategies.
In this instance, the company had previously received enough bonus depreciation deductions to help offset taxable income. With bonus depreciation decreasing, reviewing the company’s facilities for additional savings proved lucrative.
The depreciation schedule analysis and reclassifications reduced the manufacturer’s taxable income by almost $2 million, nearly wiping out its taxable income for the year.
Achieving results
By reviewing the depreciation schedule and reclassifying assets to a more advantageous recovery period, the manufacturer’s taxable income was reduced by almost $2 million, nearly wiping out its taxable income for the year.
This strategy provided the company with significantly higher cash flow, which has been especially beneficial with the planned ownership changes.
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