The Great Year-End Tax Race : Numbers Crunching is the Name of the Game

A Chatsworth drug manufacturer intentionally slowed its sales to get a bigger tax refund. In Simi Valley, a maker of computer parts hired temporary accountants to put its books in order. And a stockbroker urged a Woodland Hills investor to quickly sell some ailing stocks in his portfolio.

These are just a few examples of how San Fernando Valley area businesses and individuals last week took last-minute steps to bolster their 1988 financial performance as the year drew to a close.

In most cases, the maneuvers were aimed at reducing Uncle Sam’s tax bite. Companies and individuals try to maintain financial and tax strategies throughout the year, but the calendar often prompts them to fuss with their financial affairs one last time in an effort to squeeze out extra savings.

That’s especially true for investors--both institutional and individual--who own securities that have not done well. Tax laws enable investors who sell securities at a loss to use those losses to cut their tax bills.

Losses on securities sales can offset capital gains up to $3,000 of an investor’s ordinary income in any one year, said Richard T. Walsh, vice president for investments at the Woodland Hills branch of the brokerage firm Bateman Eichler, Hill Richards.

Selling Hard to Do

So as the end of the year approached, investors asked: Do I sell now so I can use the losses in 1988, or keep the securities and hope that they will do better in ‘89?

“Selling is the hardest thing an investor does. Dec. 31 forces us to make a decision,” Walsh said.

Some companies were busy tidying up financially in advance of 1989. The maker of computer parts in Simi Valley and a movie company in Burbank were among those getting accounting help from Accountants Overload, a Westwood-based firm that provides 50,000 temporary accountants annually in Southern California. Lynn Kaplan, who manages Accountants Overload’s Woodland Hills branch, declined to identify the companies.

Among other things, her temporary accountants help get the customers’ books and records in order so the customers can have their annual audits performed early in the new year by outside auditors. The Big 8 accounting firms, which perform such audits, also hire temporary accountants to help with the year-end number crunching, she said.

The big accounting firms, meanwhile, were busy dispensing last-minute tax advice to their customers.

Case in point: Bill Michaels, a tax partner at Coopers & Lybrand’s Sherman Oaks office, said one of his clients, the Chatsworth drug producer that he also declined to identify, intentionally “slowed down on year-end sales” to cut its taxes.

Losses Mean Tax Refund

How? If a company loses money from operations during the year, it can use the losses to get back income taxes that it paid in the 3 previous years, Michaels said. Thus, the Chatsworth company, realizing that it would have a loss for 1988 in any case, slowed it sales “to maximize the size” of the tax refund that it stands to get. Why? Had the company continued pushing for sales as the year ended, he said, its operating loss might have narrowed or vanished, as would its tax refund.

Michaels said another client, a majority owner of an insurance agency in Sherman Oaks, had to decide by last week how much he should pay himself in a year-end bonus to cut his firm’s 1988 tax liability.

Thanks to the 1986 overhaul of the federal tax system, closely held firms generally can get a deduction and reduce their taxes by paying much of their profit to owners who control more than 50% of the business. The money is also shifted from the corporate level, where the top federal income tax rate is 34%, to the individual level, where the top rate is generally 28%, he noted.

But individuals also grappled with how best to position their tax liability for 1988.

Several self-employed people came into TransWorld Bank late last week to open Keough accounts, which are tax-deferred retirement plans for the self-employed. The plans can be fully funded later this year when the people file their tax returns, but the law required that the plans be established in 1988 to use the plan’s deduction for that year, said Peter Steinmann, TransWorld’s senior vice president.

Losing Stocks Stold

Walsh, the Bateman Eichler executive, said one of his customers is a well-heeled Woodland Hills man who will retire this year. In looking at his investment portfolio, Walsh noted four stocks that were losers.

Walsh urged the man to sell the stocks because he could use the losses to reduce his taxes. But he said the main reason that he urged the investor to sell last year is because the man’s six-figure income will drop when he retires.

By taking the losses in 1988 instead of this year, the man “gets the maximum use of his tax losses” while he is in a higher tax bracket, Walsh said.