Ducking the Real Costs of 2020: Next-era Financial Maneuvering in Biofuel
The U.S. has become a net exporter of energy, positioning the nation once again into the global economy. Competition will be fierce here, and this will likely feature an uneven playing field. Domestically, many professional observers are projecting inflation and higher taxes. Federal aid for COVID relief has put massive amounts of money into the economy. That money will have to be covered. As a result, inflation and higher taxes may become simultaneous occurrences.
We would have to guess about the actual consequences of inflation and higher taxes. Inflation could be perceived as helping alternative fuels. But higher taxes along the supply chain and on companies may even out the benefits. It is likely that tax increases will cancel out the benefits of inflation in the energy business. It is always desirable to cover every expense and have capital to expand. But in 2020, such simple goals brought some businesses to the brink of disaster. Taxes and inflation could be the final flint for others.
The blenders tax credit for biodiesel and renewable diesel is in effect through 2022. That is the least the government can do for the biobased diesel industry. There’s quite a bit more available. If individual businesses benefit, then it follows that the industry can stabilize. Unleashing growth is up to each business no matter what the financial future holds.
Here are a few examples of outside-the-box tools to strengthen an energy company balance sheet.
Exploring Earned Capital
R&D tax credits are often misunderstood to be only for technology companies, but many companies qualify because they innovate or are members of a qualifying industry. One part of the tax code, 26 U.S.C. § 41, offers substantive credits for businesses. Many consider this a high-tech credit. But it is more.
Companies that develop, design or improve products, processes, formulas or software qualify. As this is a 30 percent credit, it is well worth investigating.
Talent Retention and Tax Reduction
Retaining talent is especially tough in a competitive economic environment. Employees expect benefits. Defined benefit (DB) plans provide employer granted benefits for added security in retirement. These are usually considered part of the employees’ compensation. But a DB plan offers minuscule financial benefit to the sponsoring business. Employees accept it as security—but the benefits can be very limited, especially in a post-COVID world. We can all do better.
Corporate Sponsor Group Life offers a 100 percent deductible plan to C corporations. Executive benefits are partly taxed to the lead individual. (We recommend covering this as a business deductible “bonus” expense where the company might cover the personal taxes.)
Employee coverage is not taxable in the group. The plan takes only five years for payoff. And it pays out untaxed income to the employee for life. There is a death benefit too, a positive for individual estate planning.
Energize Exit Strategy by Preparing for ‘the Next Big Thing’
Sale of a company along with its assets is probably subject to a capital gains tax. What if that wasn’t such a large hit? One plan reduces taxable gain by 85 percent. The assets from the sale go into a managed account. The cap gains savings and the profit convert to charitable status.
Energy people understand that control can be better than ownership. That is true here. There is an added benefit to the principal. Part of the 85 percent cash savings invests in a specialized life insurance policy. Now the owner has control of one untaxed charitable asset. And the owner owns a life insurance policy.
The policy grows in value and brings more tax advantages. The holder now owns two sources of collateral, or two sources of investment funds. Over about 11 years the value of the original asset has better than doubled. This plan is not for everyone. It has to be kept in place during the entire investment term to work. But sophisticated business owners are sometimes open a to program that is as customizable to future plans as this.
A global economy has a nice ring to it for a lot of people. But business people tend to be more individualistic and thoughtful. Wise business owners are considering what global means in practice, and they are preparing for it—no matter what occurs. Author: Robert Bailey
TrustedAdvisory/Parallax Group LLC