A large corporation hires you as a consultant. The firm has accumulated tax loss

Question

A large corporation hires you as a consultant. The firm has accumulated tax losses, and it expects to be in this position for a number of years. The firm needs a new distribution facility on the West Coast to service its customers there more efficiently. The facility has an estimated cost of $10 million. The firm is considering there alternative plans. Under plan A, the firm can borrow the $10million and purchase the facility, under plan B the firm can issue common stock to raise 10million and purchase facility, under plan C, the firm can lease the facility from the current owners. The firm asks you to prepare a brief report outlining the tax consequences of each plan. Your report should also contain your recommendation as to the most tax efficient plan.

Explanation / Answer

Plan A - The company will have to pay interest on the loan. Further, the company is into losses, so it will not get the benefit of interest in tax computation Plan B - The company should go for equity as there would be no interest liability Plan C- Lease rentals need to be paid, so there would be cash outflow. The company is into losses and will not be able to serve the lease rentals The company should go for Plan B Happy to help

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