2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

STRATEGIC ACCOUNTING METHODS FOR BUSINESSES: IDENTIFYING OPPORTUNITIES TO DEFER INCOME AND

SAVE ON TAXES BY KAYLA LAU AND MIKE MCDONALD

Accounting methods are essential for each type of business and determine the timing of when income is recognized and expenses can be deducted. Along with considering an overall method of accounting, there are numerous other specific accounting methods to consider for items such as depreciation, inventory, prepaid and accrued expenses, and repairs, among others. Reviewing current accounting methods may identify opportunities for method changes to defer income and save taxes. Companies can generally change their tax accounting methods to take advantage of more favorable methods via Form 3115, Application for Change in Accounting Method. While there are hundreds of method changes taxpayers can file for, we will discuss some of the more common changes below. OVERALL METHOD OF ACCOUNTING (CASH, ACCRUAL, OR HYBRID) receive a deduction currently even if the items are not paid until the following year (please see further discussion below).

for inflation and is currently at $29 million for tax years beginning in 2023. In calculating a taxpayer’s average annual gross receipts, it is crucial to keep in mind the various aggregation rule requirements. If a taxpayer was previously required to use the accrual method of accounting and now falls under these new requirements, the cash method could reduce reporting complexities and taxes. Conversely, a taxpayer could subsequently become subject to the accrual accounting method, also requiring a change in accounting method request.

Most taxpayers fall under either the cash or accrual method of accounting, although a hybrid method, i.e., a combination of certain cash and accrual items, is also available. Under the cash method of accounting, income and expenses are recognized when cash is received and paid. Generally, the cash method is only available to small businesses, with certain exceptions. Alternatively, the accrual method allows taxpayers to accrue deductions for various expenses and

Before the Tax Cuts and Jobs Act (TCJA), taxpayers with gross receipts exceeding $5 million were not considered “small” taxpayers and were required to use the accrual method of accounting. The TCJA amended the definition of a small taxpayer to include those corporations and certain partnerships with average annual gross receipts for the prior three year period of less than $25 million. This number is adjusted each year

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