Could Your Tax Strategy Affect Your Ability to Borrow?
Reducing taxable income doesn't necessarily make your business less attractive to a commercial lender.
Suppose your business is profitable and you're considering borrowing money to purchase equipment, expand operations, or acquire another business.
At the same time, you're evaluating strategies to reduce your tax liability.
Could those strategies interfere with your ability to qualify for financing?
The answer depends on the strategy, how the lender evaluates your financial statements, and when the tax planning occurs.
Taxable Income and EBITDA Are Not the Same
Commercial lenders often examine a company's financial performance using measures such as EBITDA—earnings before interest, taxes, depreciation, and amortization.
EBITDA is not the same as taxable income.
That distinction matters because some tax strategies can significantly reduce taxable income without necessarily reducing EBITDA.
Consider accelerated depreciation.
A business that purchases qualifying equipment may be eligible for accelerated deductions, including bonus depreciation or Section 179 expensing.
These deductions can reduce taxable income.
However, because EBITDA excludes depreciation and amortization, additional depreciation generally does not reduce EBITDA.
Tax depreciation also may differ from the depreciation recorded in the company's financial statements.
The result is that a business may achieve meaningful tax savings without reducing the earnings measure used in certain lending analyses.
Not Every Strategy Works the Same Way
Other tax strategies can affect both taxable income and operating earnings.
For example, employer contributions to profit-sharing or cash balance retirement plans generally represent compensation or employee-benefit expenses.
Those expenses may reduce accounting earnings and EBITDA, in addition to producing allowable tax deductions.
They may also require significant cash funding.
That doesn't make retirement planning inappropriate.
It means the strategy should be evaluated alongside the company's financing requirements.
Timing Can Make a Difference
Consider two situations.
Scenario 1: The business has already closed its loan.
The owner may have greater flexibility to implement tax-planning strategies without the immediate constraints of an active underwriting process.
However, existing loan covenants, future financing needs, and cash-flow requirements still matter.
Scenario 2: The business is currently seeking financing.
The lender may be evaluating EBITDA, debt-service coverage, liquidity, collateral, and other financial measures.
In this situation, it may be appropriate to coordinate tax-planning decisions with the financing process.
For example, a strategy involving substantial retirement-plan funding might be modified or deferred if it could interfere with financing objectives, provided the applicable plan and tax rules permit that adjustment.
The Client Should Understand the Trade-Off
Suppose an otherwise appropriate tax strategy could generate substantial savings but adversely affect a pending financing transaction.
The solution should not be to abandon tax planning automatically.
Instead, the business owner should understand the alternatives.
What tax benefits might be available?
Would implementation affect the company's financial statements or liquidity?
Could the strategy be modified or implemented later?
What are the consequences of waiting?
The client should understand what was changed, why it was changed, and the potential financial impact before making a decision.
Tax Planning and Financing Should Work Together
A commercial lender and a tax advisor may approach the same business from different perspectives.
The lender wants confidence that the borrower can repay its obligations.
The tax advisor seeks to improve the owner's after-tax financial position.
Those objectives are not inherently inconsistent.
In fact, reducing unnecessary tax payments may improve the company's available cash, although lenders may evaluate that benefit differently depending on their underwriting methodology.
The important consideration is coordination.
A well-designed tax strategy should account for the owner's financing objectives—not ignore them.
At Owner Tax Advisors, we evaluate tax-planning opportunities in the context of business operations, liquidity, and anticipated financial commitments.
Our goal is to identify strategies that are both tax-efficient and practical to implement.
This article is for general educational purposes. Tax treatment, financial reporting, and lender underwriting requirements depend on the specific circumstances.
