2023 Marcum Year-End Tax Guide

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Determining how to treat particular items from a GAAP (generally accepted accounting principles) standpoint versus from a tax standpoint can drive CFOs crazy. The differences are substantial enough that there is no simple way of taking a company’s book (GAAP) income and using it as the starting point for the Company’s tax return. FROM DEPRECIATION TO DISCOUNTS: UNDERSTANDING BOOK-TAX DIFFERENCES IN THE FOOD & BEVERAGE INDUSTRY BY LOUIS BISCOTTI

With respect to depreciation, tax laws allow for accelerated write offs, bonus depreciation, and cost segregation studies, while GAAP requires assets to be depreciated over their economically useful life. This results in larger deductions for tax purposes than those recorded on the books, and while those deductions will ultimately reverse to arrive at the same point, the year-by-year differences can be significant and must be analyzed during tax planning. While most recognize depreciation differences, there are many others. This article will address some of the more common book-tax differences to be aware of. INVENTORY COSTS Both GAAP and tax laws require that companies capitalize (add in) overhead costs (such as rent, utilities, supervision labor, etc.) to the inventory costs of purchasing and manufacturing products. To rectify a long battle between the IRS and tax practitioners, the IRS created a simplified method for

adding overhead costs to inventory values, which differs significantly from GAAP. Under recent tax laws, companies with average revenues under $27 million (adjusted annually for inflation) are exempt from this methodology, further complicating the situation. As with all book-tax differences, they must be analyzed and tracked every year and taken into consideration for tax planning purposes. SMALL WARES FOR RESTAURANTS AND OTHER FOOD SERVICE COMPANIES While GAAP requires assets with a longer useful life to be capitalized and depreciated over their useful life, the tax laws recognize that small wares (purchased often and utilized quickly) may be immediately written off as an expense. SALES OF GIFT CARDS For cash basis taxpayers, the income from the sale of gift cards is taxable in the year of receipt. For accrual basis taxpayers, the revenue from the sale of gift cards can be deferred to the following tax year provided

that the cards are not redeemed in the current year, and such income is deferred beyond the current year for book purposes on an “applicable financial statement” (AFS). For book purposes, the revenue is deferred until it is earned. Companies can elect a method to minimize these differences. PACKAGE DESIGN COSTS Companies spend enormous amounts on packaging. There are three alternative methods of accounting for package design costs: 1. Capitalization; 2. Design-by-design capitalization and 60-month amortization; and 3. Pool-of-cost capitalization and 48-month amortization. Companies can indicate the year the packaging was created on the food or beverage label. This allows for immediate write-off of any remaining capitalized costs when new packaging is designed or labels are altered.

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