theReactor

December 15th, 2010

Talking to Your Bo$$: Taxes and Conclusion

By Teresa Jurgens-Kowal | Comments (5)

Part VII – Taxes

As Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes.” Ugh! As chemical engineers, we are obligated to design safe processes in our communities to minimize our impact on the former and our bo$$ would beg us to reduce our impact on the latter. Consider that your project is ready to go to the field for construction. Perhaps the project requires a small cooling tower during start-up to keep the temperature in the reactor below a certain threshold. The process is expected to run continuously for 6 years between turnarounds. You have the choice of buying, renting, or leasing the specific cooling tower for this application. Your bo$$, of course, wants to know which option will provide the company with the most profit. Buy, rent, or lease decisions are strongly impacted by potential tax payments. Purchases and leases are normally transactions allowing for depreciation (see our earlier post) and can reduce the potential for income tax for the firm.  On the other hand, rentals cannot be depreciated, but can be deducted as an immediate expense, also reducing the firm’s tax burden. Of course, the final decision you make will depend on the circumstances of the specific project, and will involve the technical viewpoint as well as the business tax strategy.  However, understanding how taxes impact a business can help you better communicate with your bo$$.

How taxes can affect your project

Paying taxes, as you know from your personal experiences, requires a cash outflow. When you go out to lunch, you order a $5.00 sandwich but you have to pay $5.25 for the sandwich at the register. You are not allowed to delay the payment of the 5% sales tax until later – you will not get your sandwich unless you pay the price of the good plus the added tax – with cash! Unfortunately, taxes in a business are similar. Taxes paid to government authorities reduces the operating profits of refineries and petrochemical plants and are cash outflows, reducing the amount of cash available to invest in your project, for example. When applying tax considerations to costs, you can use the following formula for charges that are tax deductible (most business expenses):

A similar formula applies to income:

This is the same formula for individuals.  Let’s assume a chemical engineer makes $1,000 in weekly salary.  Because she is in the 30% income tax bracket, her take home pay is only $700:

Taxes on overseas projects

Multinational corporations also need to be concerned about taxes in each country in which they do business. The United States and France, for instance, have an income tax treaty that avoids duplicate payments. Some countries may charge a tariff (essentially another word for “tax”) on imported products, which might be your raw materials or finished process streams. Foreign taxes get even more complicated depending on where the transaction takes place – on the shipper’s dock, on the ship itself, or at the destination port. Tax laws are very complex and each project you work on may require tax advice from experts within your company. Understanding that tax deductible expenses may benefit the net income and that income taxes will reduce the profitability of your project will start the conversation with your bo$$ so that your project will be successful and deliver maximum profit to your company.

Conclusion

I hope you’ve enjoyed this series of posts on financial topics and how to talk to your bo$$. Engineers are very talented and logical decision-makers. Being armed and ready to talk to your bo$$ about financial matters will help your projects become more successful, and I hope will allow you to make the best financial decisions in your personal life.

What other business topics would you like to learn more about?

Please leave a comment below and let me know. I’d love to address them in a future blog post on ChEnected.org. image of Benjamin Franklin courtesy of Wikimedia Commons image of Eiffel Tower courtesy of landscape-photo.net
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5 Responses to “Talking to Your Bo$$: Taxes and Conclusion”

  1. Robert S. says:

    Thanks for the series. This is a side of engineering that frequently gets glossed over quickly but is important to being able to see the big picture.

    • ehorahan says:

      Agreed! Though I have not yet completed my MBA, understanding the financial ramifications of certain things has been exceptionally useful to me thusfar in my career.

  2. May says:

    Teresa – thanks for the informative series! I agree with Robert and Elizabeth, the topics you have shared a nuggets of wisdom, especially one is working on justifying an improvement project. Would love to see more in the future on what affects an investment decision. Perhaps a few examples of buy vs. lease or something of that nature.

  3. koko says:

    Hello Theresa. Thank you for this series. I am a bit confused about the after tax cost. Shouldn't that be pre tax cost x (1+tax rate), not minus?

    • tajurg1 says:

      Hi. Thanks for your question. The after tax values are the pre-tax less the tax rate. If the tax rate is 35% and your cost is $1000 pre-tax, then if you want to know the after-tax cost, you calculate $1000 (1-0.35) = $650. This is related to income taxes and not a typical sales tax or VAT tax. The reason is that shareholders understand that the business can't really control taxes so they want to know how well the business is doing without the influence of taxes.__Let me know if you need more info!

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