2023 Marcum Year-End Tax Guide

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“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.”

There are many pros and cons to both accounting methods, with some to consider highlighted below:

PROS

CONS

• Restricted to use by certain taxpayers • Inability to accrue for expenses at year-end • It can offer a misleading picture of long-term health as receivables and payables are not accounted for • More complicated accounting and the need for accounting software • Income is taxed when invoiced rather than received, leading to the possibility of being taxed prior to cash being received

• Easy to track income and expenses • Provides an accurate accounting of cash on hand • Easy to plan for taxes as you can control the timing of transactions

CASH METHOD

• Able to accrue for expenses at year-end • Ability to plan for long-term growth • Available to a majority of taxpayers

ACCRUAL METHOD

INVENTORIES AND UNIFORM CAPITALIZATION (UNICAP) The UNICAP rules require certain taxpayers to capitalize into inventory certain direct and indirect costs associated with the production and sale of inventory. Just like the overall cash and accrual methods of accounting, the TCJA drastically changed which taxpayers were subject to these rules. Prior to TCJA,

taxpayers with average annual gross receipts exceeding $10 million were subject to UNICAP. Post TCJA, that number has also increased to $25 million (or inflation-adjusted $29 million for tax years beginning in 2023). For taxpayers previously subject to these rules, filing a change in accounting method could result in a current-year benefit by allowing the previously capitalized costs to be recognized as an expense.

FIXED ASSETS AND DEPRECIATION

Fixed asset purchases could be a significant expenditure for a taxpayer. A majority of fixed asset purchases are capitalized and depreciated over the applicable life of the asset as determined by regulations (e.g., computers and equipment over 5 years, furniture and fixtures over 7 years, qualified

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