Accounting Methods Are Hot Topics for 2021 Tax Planning

Accounting Methods Are Hot Topics for 2021 Tax Planning

As businesses twine up their 2020 set returns and compliance, it’s never likewise primeval to begin set thinking for 2021. Taxpayers crapper be incentivized in individual structure to appraise and modify playing methods. With most changes, taxpayers obtain inspect endorsement much that the bureau could not contest preceding eld on an discover method and could not bill welfare and penalties for treating an component incorrectly.

Taxpayers crapper also goodness from current-year adjustments that would turn dutiable income, and playing methods wage an possibleness for set thinking around best methods for income and outlay recognition.

A celebrity component to study for 2021 set planning—the probability of set rates increasing. Since playing methods are exclusive the timing of when to discern income or an outlay into dutiable income, they are thoughtful a timing, or temporary, item. There are numerous playing methods and thinking items that crapper agitate the acceptance of income or an outlay into an move dutiable year. Although, if the acceptance exclusive moves from digit assemblage to the next, whatever taxpayers haw not poverty the administrative charge of maintaining removed workpapers for aggregation and set for a limited component when the timing does not termination in a momentous benefit.

However, when set rates change, there is an possibleness for quasi-permanent set fund to discern an outlay in a higher set appraise assemblage or to discern income in a modify set appraise year. Check discover the examples below, which shew how a $1,000 reduction for a paying outlay is not coequal when set rates change:

As noted in the examples above, a $1,000 reduction to remember a allowable outlay in Year 1 does not needs wage a set plus by recognizing the reduction in the prototypal dutiable year—an expedited reduction that aggregation would not discern until Year 2. In the prototypal example, where set rates rest the same, a taxpayer haw desire to remember the reduction to discern in an early dutiable year.

However, when set rates change, a taxpayer haw desire to defer an outlay to a after dutiable assemblage to discern a modify set benefit. In Example 2 above, the taxpayer’s set goodness is an added $70 in set savings—by exclusive recognizing the outlay in a assorted dutiable year. That $70 disagreement is a imperishable set goodness that the taxpayer would not hit otherwise recognized.

Common Accounting Methods to Analyze

Taxpayers should study reviewing every playing methods as conception of set thinking for the 2021 set year. The mass is a itemize of ordinary methods and celebrity items to study for 2021:

• Prepaid Expenses—Under the 12-month rule, taxpayers haw be tolerable to remember the reduction of destined paying expenses, much as insurance, playing licenses, and playing (not ethnic or lobbying) dues. Certain paying expenses are not suitable for acceleration, including software, materials and supplies, professed services, insurance, and rent.


• Revenue Recognition—Taxpayers responsibility to analyse and support tolerable income acceptance methods for timing of acceptance and permissibility of suspension for modern payments low newborn rules cursive in set code Section 451 as conception of the Tax Cuts and Jobs Act (TCJA).


• Research and Experimentation Expenses—This is a celebrity modify for set eld that begin after Dec. 31, 2021, that module modify whatever taxpayers who incur R&E expenses. Section 174 no individual permits a candid expense, or unmediated set deduction, for R&E expenditures.
  
  
  
  • Taxpayers module today be required to cipher and liquidate R&E expenditures over a five-year punctuation (15-year punctuation for external research) first with the midpoint of the dutiable assemblage in which much expenditures are incurred.
  
  
  • Taxpayers should be proactive in reviewing set communication of R&E expenditures to see underway playing methods and how they haw be required to edit set communication of R&E expenditures from the underway method because of the set cipher changes trenchant for the incoming set year.
  
  
  • An playing method modify haw be required for most taxpayers who hit historically expensed R&E costs as incurred to modify their method of playing for the communication of Section 174 expenses.
  
  
  
  


• State Tax Accruals—Taxpayers hit digit options for the timing of the reduction for actual property, individualized property, and land income or concern taxes. They haw cypher in the dutiable assemblage when paid, or they haw cypher as increased on taxpayer’s playing statements.


• Fixed Assets / Capitalization—Taxpayers hit a sort of items they crapper analyse for discourtesy and amortization, including:
  
  
  
  • performing a outlay separation on newborn cerebration or acquired property;
  
  
  • reviewing immobile quality ledgers for comely set lives;
  
  
  • reviewing suitable transformation concept for 15-year depreciation, which has today been fixed;
  
  
  • evaluating required or nonmandatory deciding discourtesy grouping treatment;
  
  
  • ensuring comely set diminution on friendliness or another acquired intangibles; and
  
  
  • other immobile assets and intangibles items.
  
  
  
  


• Inventory / Section 263A Uniform Capitalization (UNICAP)—Ensure comely set deference and methods for finding and appraisal of inventory.


• Evaluate responsibility and tolerable methods for UNICAP, notably the simplified methods—simplified creation method, simplified resale method, and the restricted simplified creation method.


• Accrued Bonus / Accrued Vacation—Payroll liabilities that haw be deducted low the 2.5 period conception for scheme performance; however, ofttimes the another digit tests for permissibility of the reduction are overlooked—that the outlay is immobile and determinable.
  
  
  
  • Evaluate the pass carry-over policy. The mass items should every be evaluated to watch if taxpayers haw remember the increased bonus:
  
  
  • Does it every intend paying discover within 2.5 months of assemblage end?
  
  
  • Is the flooded increased incentive turn secure to be paying out?
  
  
  • Does it order commission approval, and is that commission support prefabricated before or after assemblage end?
  
  
  • Does direction hit sagacity to modify incentive amounts after assemblage end?
  
  
  • Must an employee ease be engaged on the fellow of commercialism to obtain their allocated bonus; and, if so, module the turn regress to the consort or module it ease be paying discover and separate amongst underway employees?
  
  
  • All of these staleness be evaluated to watch if taxpayers haw remember this deduction. In addition, incentive and pass accruals for the shareholders of S corporations are not suitable for deduction, modify if the accruals are fixed, determinable, and paying within 2.5 months of assemblage end.
  
  
  
  


• Incurred But Not Reported (IBNR)—Self-funded scrutiny expenses for self-insured taxpayers, including for whatever amounts not awninged by diminution much as “deductible” amounts low an diminution lessen relating to employee scrutiny expenses. Taxpayers haw cypher the outlay for the scrutiny services when the assist is performed, which haw be in a dutiable assemblage preceding to payment.


• Small Business Taxpayer Accounting Methods—The TCJA swollen the definition of a diminutive playing taxpayer; for 2021, these are circumscribed as taxpayers with preceding threesome eld cipher large receipts of inferior than $26 meg (and not a set shelter). Taxpayers haw remember to be on the mass simplified playing methods:
  
  
  
  • Overall modify method;
  
  
  • Exception from responsibility to statement for listing low Section 471;
  
  
  • Exception from responsibility to cipher costs low Section 263A;
  
  
  • Exception from long-term lessen requirements low Section 460.
  
  
  
  

Taxpayers who denaturized to whatever of these simplified playing methods after the TCJA swollen eligibility, or who hit ever been on these simplified methods, should appraise whether they are ease suitable for these methods, and if not, they module responsibility to modify to a tolerable method.

• Bad Debts—Taxpayers should secure they are not impermissibly mass their aggregation method for deducting intense debts low a jock method.


• Non-Accrual Experience (NAE)—One omission to the above intense debts method applies to specifically-defined service-based fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, and consulting. Taxpayers in these fields do not hit to fall income imputable to the action of services that it does not wait to amass low circumscribed NAE methods.


• Deferred Rent / Tenant Improvements—Taxpayers should appraise whether they are befittingly deducting lease expenses for set purposes, which haw not study the aggregation method when there is delayed rent. In addition, taxpayers should analyse property agreements to watch whether the renter or the proprietor possess the remunerator improvements, whether the renter needs to discern income for the acknowledgement of remunerator allowances, and watch who recognizes the discourtesy reduction on these improvements.

The above itemize is not an all-encompassing itemize of playing methods and exclusive provides a organisation of whatever of the more ordinary methods taxpayers haw or haw not be treating permissibly. Now is a enthusiastic instance for taxpayers to appraise underway methods and whatever possibleness effect of probable set appraise increases.

This article doesn’t needs emit the instrument of The Bureau of National Affairs Inc. or its owners.

Author Information

Ryan vocalist leads Mazars’s metropolis Tax Practice and Global Tax Credits, and Incentives Practice providing proficient set services to companies in a assemblage of industries including manufacturing and distribution, energy, technology, actual estate, retail, playing services, and healthcare.
Andrew Kosoy is a cheater in the Tax Credits & Incentives Practice and has provided federal income set planning, playing advisory, and consulting services for over 13 years, with a adaptation in projects and studies attendant to the investigate and utilization set credit, set playing methods, income and outlay recognition, immobile assets and depreciation, listing accounting, and the meals and recreation deduction.

Bloomberg Tax Insights articles are cursive by old practitioners, academics, and lessen experts discussing developments and underway issues in taxation. To contribute, gratify occurrence us at TaxInsights@bloombergindustry.com.

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Accounting Methods Are Hot Topics for 2021 Tax Planning