ARTICLE
Building a Business Case for Tax Automation
April 7, 2021
Automation can solve many headaches for your business by saving time, reducing errors, and improving data integrity. The first step to implementing it? Demonstrating the value an automated tax solution can bring to your company.
Top Challenges for Tax Departments
Tax departments face many challenges, but some of the most prominent include data management, legacy technology, and limited resources. Data management, for example, is complicated by increasing volumes of data. Data sources can be varied and inconsistent. Most notably, fixed assets data pulled from an ERP system usually is not in the format that is needed for import into a separate fixed asset management application.
The Biggest Tax Challenges
Source: Bloomberg Tax 2019 Survey of Corporate Tax Professionals
Additionally, the steps involved in transitioning data from source to destination are not always straightforward and can require complex business logic to achieve the desired results. Manually reformatting data is not only time consuming, but also can threaten the integrity of the data due to human error. The ability to automate tax processes offers an opportunity to mitigate these common stumbling blocks.
[For more about the issues businesses face when managing fixed assets, see Top 10 Fixed Assets Challenges.]
Identifying What to Automate
There are tasks that can be automated and there are tasks that should be automated. Your first step is identifying the difference.
Tasks that should be automated:
- Are repeatable and frequently performed.
- Involve high opportunity cost – you want to take the burden off a human who will then be able to tackle more complex and productive tasks. Instead of manually processing data, they could be scenario modeling for bonus depreciation, for example.
- Have simple decision trees, and automation will result in a reduction of complexity, cost, and risk of failure.
Some examples of such tasks:
- Asset basis adjustments
- Capitalization thresholds
- Asset transfer allocations
- Cost segregation adjustments
- Asset type and asset field mapping
- Foreign vs. Domestic asset classification
These are tasks for which automation provides a framework for analysis that can reduce the need for time-consuming manual analysis.
[To learn more about ideal tasks for automation and the tools and methods for getting it done, download 10 Steps to Implement Tax Automation for Fixed Assets.]
Prioritizing Problems
As an initial step in identifying and prioritizing tasks for tax automation, it’s helpful to break down fixed assets data challenges into the smallest possible increments. Large, complex issues are difficult to decipher, but automating smaller parts of the process adds up to solving the larger problem. Phrase the tasks you’d like to automate as problem statements, and then prioritize them based on objectives of the business, reduction of risk, and increases in efficiency.
For example, this large problem: Fixed asset data coming from SAP must be manually manipulated to be able to import it into our tax fixed asset tracking system. This includes identifying, classifying, and reformatting data for additions, disposals, transfers, and other transactions. This takes many man hours and is prone to human error, which increases cost and risk.
Can be broken down into four smaller problems:
- Our fixed asset additions must be manually cleaned for assets below our capitalization threshold. This takes five hours, and if we make a mistake, it means we have taken fewer deductions than we should have. Mistakes happen 10% of the time.
- Our fixed asset additions must be manually classified to the correct tax fact pattern before importing. This takes 30 hours every quarter, and we make mistakes 30% of the time. When we make mistakes, it means we can miss out on bonus expense.
- We need to manually identify cost basis adjustments for late capitalizations. This takes 30 hours every quarter, and we make mistakes 30% of the time, which results in missing bonus expense and incorrectly computing gain/loss when assets are disposed.
- Transfers must be manually identified because SAP does not handle them. We need to sort through disposals that have no gain or loss and then find new assets that have the same net book value. This takes 40 hours, and we make mistakes 15% of the time. This results in the wrong entity getting expense.
Once you identify the various problems you’d like to solve via automation, assign weights to each problem to decide what to tackle first. One method of prioritization is called “weighted shortest job first” (WSJF), which uses benefit/effort to determine what problem and solution mix will give the greatest benefit fastest.
Benefit Score / Effort Score = WSJF Score
Automation Solutions for Tax Departments
There are a number of potential automation solutions to evaluate, such as ETL tools, RPA, APIs, and best in breed software to tie it all together.
Extract, transform, and load (ETL) tools use repeatable rules-based processes – you create the rules within the ETL tool itself, as the middleware – to transfer data to wherever you may be tracking your tax data or fixed assets. Some examples are Alteryx, Microsoft’s SSIS, and MuleSoft. These low-code or no-code solutions allow nondevelopers to create automated processes; however, they can be limited in handling complex transactions and high volumes of data.
Robotic process automation (RPA) scripts tasks that a user is currently doing manually. One of the pitfalls of RPA is it does require a certain level of maintenance and upkeep. If you are using these types of processes, you need to have resources available for continually making sure that, as changes happen to either the data source or the format of the data, the RPA process is also updated.
Application programming interface (API) tools are essentially contracts between the destination software and the data that you’re feeding into it. If your software solution offers APIs, they can also be lower-maintenance than ETL tools. There is an upfront development cost associated with APIs, but once that’s done, they offer robust, easy-to-monitor processes that are better able to handle errors and exceptions than other types of automation.
A best in breed software application like Bloomberg Tax’s Fixed Assets software maximizes your automation opportunities as a part of your technology toolkit. No software does everything well, so creating an ecosystem where each part of your toolkit is the best at what it does enhances your capabilities and reduces risk. The additional advantage Bloomberg Tax’s software has over traditional ERP systems is that was built specifically to handle the challenges of fixed asset tracking for GAAP and tax.
Once you’ve identified and prioritized the problems you’d like to solve with automation, and evaluated the available solutions, you’re ready to present and seek approval from stakeholder departments. These typically include tax, IT, and accounting. Articulate your objectives by highlighting the benefits to the business as whole, not just the tax department. Present your roadmap in prioritized order and articulate why it is prioritized in that manner. Communicate your entire list of problems/solutions to upper management but consider only seeking funding for your highest priority problem at first. This reduces risk of failure to the business and gives you the opportunity to build credibility.