- Discover options for accelerating revenue recognition into the current tax year.
- Learn actions you can take to postpone deductions into a higher-rate tax year, maximizing their value.
Typically, businesses want to delay the recognition of taxable income into future years and accelerate deductions into the current year. But when is it prudent to do the opposite? And why would you want to? Fiducial has the answers!
One reason might be tax law changes that raise tax rates. There have been discussions in Washington about raising the corporate federal income tax rate from its current flat 21%. Another reason may be because you expect your non-corporate pass-through entity business to generate income that will result in taxes at higher rates in the future because the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates.
If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may wish to postpone deductions into a later tax year, when rates are higher, and when the deductions will do more tax-saving good.
To accelerate income
Consider these options if you want to accelerate revenue recognition into the current tax year:
- Sell appreciated assets that have capital gains in the current year, rather than waiting until a later year.
- Review the company’s list of depreciable assets to determine if any fully depreciated assets are in need of replacement. If fully depreciated assets are sold for more than net book value, taxable gains will be triggered in the year of sale.
- For installment sales of appreciated assets, elect out of installment sale treatment to recognize gain in the year of sale.
- Instead of using a tax-deferred like-kind Section 1031 exchange, sell real property in a taxable transaction.
- Consider converting your S corporation into a partnership or LLC treated as a partnership for tax purposes if the fair market value of tangible assets exceeds net book value. That will trigger gains from the company’s appreciated assets because the conversion is treated as a taxable liquidation of the S corp. The partnership will have an increased tax basis in the assets. Make sure that consideration is given to any legal issues that may create issues that outweigh the tax benefit.
- For a construction company, do you have long-term construction contracts previously exempt from the percentage-of-completion method of accounting for long-term contracts? Consider using the percentage-of-completion method to recognize income sooner as compared to the completed contract method, which defers recognition of income until the completion of long-term construction.
To defer deductions
Consider the following actions to postpone deductions into a higher-rate tax year, which will maximize their value:
- Delay purchasing capital equipment and fixed assets, which would give rise to depreciation deductions.
- Forego claiming big first-year Section 179 deductions or bonus depreciation deductions on new depreciable assets and instead depreciate the assets over a number of years.
- Determine whether professional fees and employee salaries associated with a long-term project could be capitalized. This would spread the costs over time and push the related deductions forward into a higher rate tax year.
- Purchase bonds at a discount this year to increase interest income in future years.
- Delay charitable contributions into a year with a higher tax rate.
- Delay payment of liabilities where the related deduction is based on when the amount due is paid.
Want to discuss the best tax planning actions in light of your business’s unique tax situation? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.