2023 Marcum Year-End Tax Guide

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“Taxpayers should also consider state and local tax laws and how they may differ from federal tax laws.”

CASH VERSUS ACCRUAL METHOD OF ACCOUNTING FOR BUSINESSES WITH UNDER $27 MILLION OF REVENUE (ADJUSTED ANNUALLY FOR INFLATION). The cash method of accounting allows for the write-off of all expenses when paid and only when paid, while revenue is recognized only when received and not when earned. Even manufacturers, distributors, and producers, which historically were required to use the accrual method for the tax to account for inventories, may use the cash method of accounting provided their three-year average of gross revenue is less than $27M. Careful planning must be utilized with the cash method, as any decrease in sales may result in unintended consequences. ACCRUED BONUS, VACATION, SICK, AND SEVERANCE PAY GAAP requires accruals for bonuses, vacation, sick, and severance pay earned by employees at the end of any given year and unpaid. The tax law only allows for current year deductions of these accrued amounts if paid within 2 ½ months after year-end.

PREPAID GOODS AND SERVICES Companies often prepay for the cost of services and goods (e.g., prepaid advertising, prepaid professional fees, prepaid postage, etc.). For GAAP, these costs are capitalized and written off as expenses as the services are rendered, or the goods are consumed. These costs may be immediately written off for tax purposes if services are rendered within 3 ½ months of payment. Other prepaids, such as insurance or interest, may be deducted in the current year if paid within 8½ months of year-end. ALLOWANCES FOR DISCOUNTS, RETURNS, OR PROMOTIONS GAAP requires that reasonable allowances be established for any sales returns or discounts earned during a given year, while the tax code only allows for write-offs when actually paid. More importantly, companies must establish allowances for promotions and other types of incentives according to GAAP but may not deduct them for tax purposes until paid.

ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE GAAP requires reasonable allowances for estimated uncollectible accounts receivable, while the tax code generally only allows a deduction when the account receivable is totally written off. While this article has identified some of the more common book-tax differences for food and beverage companies, there are specific procedures, elections, and planning techniques that can be followed for each difference, and your tax professional should be consulted on how to best plan for utilizing these methods properly to maximize your tax savings.