If there’s anything certain, uncertainty abounds regarding the likelihood of tax legislation in 2025 and beyond.
Previously, prospects for changes to tax law through new tax legislation and/or through expiration of existing tax law previously enacted through the Tax Cuts and Jobs Act (TCJA) were shared. To that end, the expiration of the TCJA provisions would generally result in tax increases for certain individual and pass-through business taxpayers. On the other hand, President-Elect Donald Trump’s messaging on the campaign trail communicated an intent to extend the expiring TCJA provisions.
Aside from legislation, tax planning is also dependent upon an individual business’s goals. The pathways can toggle between a desire to manage current-year income and future taxable income.
Businesses may be interested in accelerating revenue to 2024 and deferring deductions into the future so that they can claim in tax years with potentially higher tax rates. This could be top of mind if an organization is expecting the expiration of the TCJA provisions, resulting in an increase in tax rates applied to pass-through business income at individual tax rates (and also anticipating that there will be no new tax legislation in 2025 or 2026).
Conversely, businesses anticipating new, favorable tax legislation resulting in the extension of TCJA provisions may wish to apply typical tax planning by accelerating deductions to 2024 and deferring revenue to future tax years.
Given the uncertain direction of future tax law changes, there are accounting methods tax planning considerations that businesses can utilize for two scenarios: if they anticipate there will be favorable tax legislation in 2025 or unfavorable tax law changes in 2026 with the expiration of the TCJA provisions. Businesses will have to juxtapose anticipated tax law changes with their business goals and expected performance.
Considerations for Your Business
One way for businesses to possibly accelerate or defer taxable income is through changing tax accounting methods. Accounting methods permit taxpayers to change from an existing accounting method to a different permissible accounting method, in most cases providing a “catch-up” adjustment equal to the difference of lifetime taxable income between the old and new method, thus achieving the desired outcome of accelerating or deferring taxable income between tax years through the catch-up adjustment. A few notable tax accounting method options to accelerate or defer taxable income are listed below.
Accounting methods to accelerate deductions to the current year and defer revenue to future years:
- Cash Method of Accounting — Small business taxpayers and other eligible businesses can adopt the overall cash method of accounting, which generally (specific to facts and circumstances) allows for deferral of accrual basis revenue and acceleration of cash basis deductions.
- Advance Payments — Accrual basis businesses may be able to defer up to one year of the revenue from receipt of advance payments.
- Bad Debt — Consider claiming a deduction for totally or partially worthless receivables.
- Prepaid Expenses — Accelerate deductions for certain prepaid expenses, such as insurance and taxes, providing a benefit of 12 months or less.
- Bonus Compensation Accruals — Fix at year-end the amount of accrued bonus compensation liabilities to deduct bonus accruals in the year accrued if also paid within two and a half months after year-end.
- Accrued Expenses — Consider accrued expenses that are eligible for the recurring item exception if paid within eight and a half months after year-end.
- Inventories — Claim deductions for inventory carried at the Lower of Cost or Market (LCM) or for subnormal goods on hand at the end of the year.
- Depreciation — Review construction in process accounts to identify acquired assets that can be placed into service for depreciation purposes, and possibly claim bonus depreciation.
- Interest Expense — In some cases, Section 163(j) limits the business interest expense deduction allowed each year. Taxpayers should consider capitalizing interest on acquired property or depreciable property through Section 263A and Section 266 when permissible.
Accounting methods to defer deductions to later years and accelerate revenue to the current year:
- Depreciation — Consider opting out of bonus depreciation. Instead, try electing slower depreciation methods and/or longer depreciation recovery periods.
- Overall Method of Accounting — If you are currently using the cash method that results in a deferral of taxable income (again, this is specific to facts and circumstances), consider switching to the accrual method to accelerate taxable income to the current year.
- Advance Payments — Accrual method taxpayers may consider adopting the full-inclusion method to recognize advance payments in taxable income in the year received.
- Prepaid Payment Liabilities — If currently deducting upon payment certain prepaid expenses providing a benefit of 12 months or less, such as insurance, consider changing to amortize the expenses over the life of the contract.
- Bonus Accruals — If currently deducting accrued bonus compensation in the year accrued and paid within two and a half months after year-end, consider paying the accrued compensation liability later than two and a half months after year-end, thus deducting the amount in the year paid rather than the year accrued.
- Accrued Expenses — If deducting accrued expenses paid within eight and a half months after year-end under the recurring item exception, consider paying the accrued expense later than eight and a half months after year-end, thus deducting the amount in the year paid rather than the year accrued.
Find additional accounting methods resources in our FORsight™, Tax Specialty Updates: Year-End Planning Considerations.
If you have any questions or would like to discuss pursuing any tax planning opportunities, please reach out to the Accounting Methods team at Forvis Mazars.