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Income vs Deductions: When Should Businesses Handle Income and Deductions Differently

Businesses usually aim to defer recognizing taxable income to future years and accelerate deductions into the current year. But when is it wise to do the opposite? And why might you consider it?

One reason could be impending tax law changes that increase tax rates. The Biden administration has proposed raising the corporate federal income tax rate from its current 21% to 28%. Additionally, you might anticipate higher future tax rates for your noncorporate pass-through entity business, where the income is taxed on your personal return. Discussions in Washington about raising individual federal income tax rates also play a role.

If you foresee higher future tax rates, you might want to accelerate income recognition into the current tax year to benefit from the current lower rates. Concurrently, you may want to defer deductions to a later tax year when rates are higher, making the deductions more valuable.

To Fast-Track Income:

Consider these strategies to accelerate revenue recognition into the current tax year:

  • Sell appreciated assets that have capital gains now, rather than waiting.

  • Review depreciable assets for any fully depreciated ones needing replacement. Selling these triggers taxable gains in the sale year.

  • Elect out of installment sale treatment for appreciated assets to recognize gain in the year of sale.

  • Avoid a tax-deferred like-kind Section 1031 exchange and sell real property in a taxable transaction.

  • Convert your S corporation into a partnership or LLC, which triggers gains from appreciated assets due to the conversion being treated as a taxable liquidation.

  • For construction companies with long-term contracts previously exempt from the percentage-of-completion method, consider using this method to recognize income sooner.

To Defer Deductions:

Consider these actions to postpone deductions into a higher-rate tax year, enhancing their value:

  • Delay purchasing capital equipment and fixed assets, which would generate depreciation deductions.

  • Forego claiming large first-year Section 179 or bonus depreciation deductions on new depreciable assets, instead opting to depreciate over several years.

  • Capitalize professional fees and employee salaries associated with long-term projects to spread out costs.

  • Buy bonds at a discount this year to increase interest income in future years.

  • Delay inventory shrinkage or other write-downs until a higher tax rate year.

  • Postpone charitable contributions to a higher tax rate year.

  • Defer accounts receivable charge-offs to a higher tax rate year, if allowed.

  • Delay paying liabilities where deductions are based on payment timing.

Contact Us

Contact us to discuss the best tax planning strategies for your business’s unique tax situation.

We can help you determine the best path forward by  scheduling a meeting with your VAAS Tax Consultant. We look forward to working with you.


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