The Case of the Unnecessary Spending Spree
When a contractor doing institutional work wanted to incur large discretionary costs to reduce their reported profits, they turned to Scarrow Yurman & Co for guidance. The client was facing a potentially high corporate tax bill because of large profits. But, profits were tied up supporting ongoing work in progress and the funds were not available to pay a large tax liability.
We strongly advised against incurring costs just to manage a tax liability. Given the relationship of trust built over many years, the client accepted our advice. Our analysis showed that by using percentage of completion accounting a significant portion of the profits could be deferred to the next fiscal year. This analysis also gave the client insights into the profitability of the various jobs.
The approach allowed the tax bill to be smoothed over more than one tax year, saving valuable cash for operating purposes and eliminating the need for an unnecessary spending spree.