Tax Benefits of a Preservation Plan

A preservation plan is an agreement that a company enters into to preserve specific tax benefits for the future. These plans are often associated with limiting the amount of ownership change that can take place within the organization. By setting up this type of plan, a business can take advantage of several tax benefits.

Carry Forward Losses

When a company posts a net operating loss, it has the option of carrying that loss to a subsequent year. By doing this, the company can offset future gains that would ordinarily be taxable. For example, if a company has a net operating loss of $1 million in one year, it can offset $1 million of gains in a future year. This allows the company to keep this essential tax benefit in place and save money on future earnings.

Save Tax Credits

Another benefit of setting up a preservation plan for businesses is that it can preserve tax credits. If a company earns some type of tax credit, it will be able to retain the tax credit to use at some point in the future. With a tax credit, the company gets to reduce its tax liability on a dollar-for-dollar basis instead of simply offsetting income. Tax credits are a more powerful way to lower tax liability and with a preservation plan, a company gets to keep the credits it has earned.

State Taxes

When a company earns income, it may also have to pay state taxes. By setting up a preservation plan, the company can also minimize the amount of taxes that it has to pay at the state level. For example, if credits or losses are realized with one ownership in place, retaining the same ownership structure will allow the company to carry forward these state tax benefits for use at some point in the future.

Considerations

Although setting up a preservation plan can be beneficial when it comes to paying taxes, it could limit the potential for growth of the company. When a company is involved in a preservation plan, it typically cannot change more than 5 percent of its ownership. Because of this, investors may not be willing to put money into the company and the business could not issue new shares of stocks.

References

• Gibbons; Ownership Changes and Their Impact on Net Operating Losses -- Tough to Avoid and Hard to Control; Peter Ulrich; May 2009
• Internal Revenue Service: Internal Revenue Bulletin - 2003-36; Sept. 8, 2003
• College of William & Mary Law School; A Primer on Protecting Tax Losses from a Section 382 Ownership Change; Mark C. Van Deusen; 2010
• Extreme Networks: Questions and Answers about the Tax Benefit Preservation Plan