Taking the opposite approach: Ways your business can accelerate taxable income and defer deductions

accelerate taxable income and defer deductions

Businesses typically desire to defer the recording of taxable income to future years while attempting to accelerate deductions in the current year. When, on the other hand, is it prudent to do the opposite? What’s more, why would you want to?

Changes in tax laws that raise tax rates could be one factor. For example, a proposal in Washington hopes to hike the corporate federal income tax rate from its current flat rate of 21%. Another reason could be that you anticipate paying higher taxes on your non-corporate pass-through entity business because your personal return will include pass-through income tax. There has also been talk about boosting individual federal income tax rates in Washington.

Suppose you think your business income may be subject to tax rate rises in the future. In that case, you should accelerate income recognition into the current tax year to take advantage of the current lower rates. Simultaneously, you may wish to defer deductions until a later tax year when there are higher rates and the deductions will save you more money.

To accelerate taxable income

If you want to accelerate revenue recognition into the current tax year, consider the following options:

  • Rather than waiting until a later year, sell appreciated assets with capital gains this year.
  • Examine the company’s depreciable asset list to see whether there is a need to replace fully depreciated assets. Selling those assets will trigger taxable profits that year.
  • To realize a gain in the year of the sale, opt out of installment sale treatment when selling appreciated assets in installments.
  • Sell real estate in a taxable transaction rather than a tax-deferred like-kind Section 1031 exchange.
  • Consider converting your S corporation to a partnership or a limited liability company (LLC) that is taxed as a partnership. Because the conversion is considered a taxable liquidation of the S corp, gains from the company’s appreciated assets will occur. The assets of the partnership will have a higher tax basis.
  • Do you have long-term construction contracts that were previously exempt from the percentage-of-completion method of accounting for long-term contracts as a construction company? Consider adopting the percentage-of-completion approach. Otherwise, the completed contract method defers income recognition until the long-term construction is complete.

To defer deductions

Consider taking the following steps to defer deductions to a higher-rate tax year, maximizing their value:

  • Deferring the purchase of capital equipment and fixed assets, which would result in depreciation deductions, is a good idea.
  • Depreciate new depreciable assets over several years rather than claiming large first-year Section 179 deductions or bonus depreciation deductions.
  • Determine if you can capitalize on professional fees and employee wages linked to a long-term project. That would spread expenditures over time and allow related deductions to be carried forward to a higher-rate tax year.
  • This year, buy bonds at a bargain to boost your interest income in the future.
  • Defer inventory shrinkage or other write-downs until a year with a higher tax rate.
  • Defer charitable contributions to a year when the tax rate is greater.
  • If possible, postpone charge-offs on accounts receivable for a year at a higher rate.
  • Delay the payment of liabilities if the deduction depends on the date of the paid amount.

Please contact our RRBB accountants and advisors to explore the best tax preparation strategies for your company’s specific tax status.

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