2017 Year-End Tax Planning & Accounting Considerations for Corporate Businesses
As the 2017 calendar year-end approaches, the approved tax reform bill will become law effectively, for the most part, in 2018. The importance of meticulous, accurate and comprehensive 2017 year-end (YE) tax planning cannot be overstated. For 2017 YE, paperwork, filings and expected repercussions of future legislative changes need to be incorporated into company documents. More prominent displays of a business’ positions on foreign and domestic tax standings and overall business strategy should also be reinforced.
Tax accounting methods are going to be key as 2018 begins and the next decade progresses. Taxable income deferral into later accounting periods, particularly periods when a lower tax rate may be in effect, offer opportunities for permanent tax savings on items that normally would result in a benefit via the time value of money. This is why it is recommended that a company consider accounting method changes or elections that defer income and accelerate deductions. Taxpayers must assess changes for 2017 immediately and identify alterations that can be filed under procedures for 2017. Accounting standards, guidelines, and rules, as well as general rules and industry-specific laws, are for the most part, governed by Generally Accepted Accounting Principles (GAAP.) Be prepared for GAAP to be even more prominent and in the spotlight, considering new legislation. Compiled below is a discussion of various accounting method considerations which can help meet company objectives.
CONSIDERATION: ACCELERATION OF DEDUCTIONS
Prepaid Expense Deductions – Companies should, especially in light of budget reform, consider any costs they can prepay in 2017 to accelerate tax deductions to 2017 from 2018. Some normal items that fall into these categories include service liabilities, insurance, subscriptions, and dues. A conscientious analysis is certainly deemed necessary to determine the nature of items and to sort through the numerous fiscal and monetary performance rules that may apply to accrual method taxpayers, in particular. Complicating this analysis is the confusion over when payment liability rules apply.
Property Tax Acceleration Expense Deductions – The lien-date method for property tax deduction should be adopted. It should be put into use, with recurring item exception, so to offer taxpayers the option to accelerate deductions for property taxes paid after the end of the year, but before a respective tax return is filed.
Software Development Expense Deductions – Development for software costs, which are currently capitalized and amortized for financial accounting purposes, are usually deductible for tax purposes under current law. These same expenditures and can also be deducted by requesting a change in method of accounting.
Pension Contribution Deductions – Simply put, make pension payments. Sponsors of pension plans should also look into making plan contributions before 2017 year-end (YE) because current year (CY) contributions are tax-deductible.
Depreciation Extension & Expansion – The PATH Act has pushed the filing deadline for the bonus depreciation deduction out to 2019. In conjunction with this, the Act recently added an additional class of property eligible for bonus depreciation, as of the tax year 2016. The extension and expansion of bonus depreciation are also key here. The new class of property added to the PATH Act is one of nonresidential real property and qualified improvement property. The Act allows taxpayers to claim bonus depreciation for qualifying nonresidential real property expenditures, assuming the property’s building was already placed in service.
Evaluation of Current Year Fixed Asset Additions – Companies need to analyze CY fixed asset (FA) additions and consider and confirm, any yearly elections under the final tangible property regulations. Indeed, most companies have adopted any and all final regulations, which became effective January 1, 2014. On an annual basis, a taxpaying entity must evaluate its CY FI expenditures to determine whether the expenditures can be deducted as a repair or capitalizable as an improvement. As a note, a majority of expenditures that are deducted for tax purposes are generally capitalized for book purposes.
Foreign Subsidiary Accounting Methods – The United States’ regulations surrounding its multinational corporations mandate that such corporations utilize U.S. tax accounting methods to compute the loss or income of foreign subsidiaries. Tax accounting method maximization for foreign subsidiaries is usually overlooked as businesses tend to use book financial statement results. Utilizing other accounting methods, however, can help to adjust a foreign subsidiary’s earnings and profits, in order to garner tax benefits including increasing foreign tax credit use or minimizing an income inclusion from deemed or actual dividends. With international taxes implicated significantly in a new American tax reform bill, a thorough and clear comprehension of foreign earnings and profits will also be critical in terms of planning and executing tax strategies prior to any expected legislative changes.
Performing a Segregation Study – Cost segregation studies have always been recognized as tax planning methods that assist in the increase of current cash flow and the generation of net-present-value savings. A CY cost segregation study can offer a business a significant benefit by minimizing the expenses allocated to the building and its structure, and instead allocating those costs out to personal property, land improvements or qualified improvement property- all venues which may be eligible for bonus depreciation.
CONSIDERATION: DEFERRING INCOME WITH ALTERNATIVE METHODS
Income Recognition Timing/Advance Payments – As GAAP stipulates, an accrual basis taxpayer is required to recognize income upon receipt, as it relates to advance payments for goods or services to be provided in the future. For financial purposes, especially as they concern financial reporting for the SEC and IRS, revenue is normally recognized in the period when costs to generate the revenue are incurred. Clearly, this creates an area that may result in extremely significant divergence between tax and book treatment. There are myriad methods of accounting for advance payments that a business can use. If a company is not currently optimizing profit with a using a deferral method of accounting, now is the time for it to start looking.
Choosing Accrual or Cash Accounting – Companies organized as partnerships, S corporations or LLCs are normally able to use the cash method of accounting unless inventoriable goods are held or a C corporation is a partner. The cash accounting method tends to be more favorable to those who bill in arrears, such service providers. Conversely, companies which receive payments in advance may find the accrual method more beneficial, and subsequently, make a change from the cash to the accrual method.
CONSIDERATION: THE “OTHER” CATEGORY
Conformation to Accounting Method Changes Including ASC 606 – Regardless of whether a company’s accounting method alterations are for ASC 606 or not, conformation to accounting method standards is an absolute. Falsely, many people believe that if financial accounting method changes are made and are properly adjusted for tax filings, that the tax accounting method may change as well. Unfortunately for those believers, neither one of these assumptions is wholly true.
Those who pay taxes need to obtain permission to follow a new book method for tax purposes. However, a new book method may not be a proper tax method, or may not be advantageous, resulting in a book and/or/tax difference. For companies in adherence to GAAP, a new revenue recognition standard, which will be enacted in 2018 for public companies (2019 for private companies), will most likely result in changes which require the filing of an application for accounting method changes. As a company, looking into the future to determine the potential impact of tax reform, from both a book and tax perspective, is essential.
Transactions & the Impact of Accounting Methods – Risk regarding to taxes can sometimes be directly related to an acquired company’s method of accounting and is often identified by the purchaser, as part of the due diligence investigation or subsequent steps leading to the finalization of a transaction. The seller can speed up an unfavorable change, resulting from an alteration in the accounting method, into the pre-acquisition tax year by allowing for an eligible acquisition transaction election. Transaction simplification, along with an election also opens a brand new planning opportunity for company with a net operating loss (NOL.) Adjustments, in a pre-acquisition year and of the unfavorable sort, can be counterbalanced by NOLs that would, in other cases, be deemed limited, resulting in the potential creation additional tax basis for the buyer.
Of course, every business must decide whether to implement specific year-end strategies based on the context of their specific income and tax scenarios. Accordingly, it could be extremely beneficial to have a conversation with your CPA now about how the new tax reform legislative changes might impact you.
In order for your business to be successful, you should consider leaving its accounting to professionals. Employing the services of a CPA firm will allow you peace of mind because you will know that your company’s accounting processes are in good hands while adhering to all best practices. Your time should be concentrated on building your business. Thomas Huckabee, CPA of San Diego California is a small business accountant expert who can help you succeed. Please contact our office for further information.