2023 Marcum Year-End Tax Guide

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balance sheet rather than a current period deduction. The expense is then recognized as the benefit is realized. For certain expenses that are prepaid for 12 months or less, economic performance can occur at the time of payment, thus accelerating the deduction. The taxpayer can realize a current year expense benefit rather than capitalizing these expenses for income tax purposes. Certain expenses, such as rent, are not eligible for this acceleration, so keeping track of prepaid expenses separately by category is important to maximize the deduction available. ACCRUED EXPENSES For taxpayers utilizing the accrual method of accounting, there is greater flexibility in accounting for future expenses not yet paid at year end. Items such as wages, bonuses, interest, and other expenses paid in the following year can potentially be accrued and deducted currently. The type of accrued expense will determine the timing of the deduction. For instance, accrued payroll would need to be paid within 3½ months of year-end to be deducted. The payroll, including bonuses, must be considered fixed and determinable at year-end to qualify for a deduction. Any non payroll accrued expenses would need to be paid within 8½ months of year-end to qualify for a current period deduction.

CODE SECTION 266 Section 266 is a provision in the Internal Revenue Code that allows taxpayers to capitalize items such as taxes, interest, and carrying costs to the basis of property rather than expensing the items currently. While this may seem counterintuitive on the surface, capitalizing costs may yield beneficial results in the future. For example, in certain instances, capitalizing interest can help avoid or reduce the Section 163(j) business interest expense limitation (see more on this subject in the Summary below). Property under development is another example. In a year with minimal receipts but large expenses, capitalizing costs under Section 266 would save these expenses to offset income when the property is ultimately sold. Whereas recognizing the expenses currently could yield a loss, that loss may be limited due to basis limitations or subject to a net operating loss deduction limitation in a future year. Capitalizing these costs could help yield a larger tax deduction in a future year, recognizing additional expenses in a year in which you may be subject to a higher tax rate. HOW TO REQUEST AND REPORT A CHANGE Each accounting method change requires filing Form 3115, Application for Change in Accounting Method. These forms can be complex, and in most instances, a separate form

is required for each type of change. Accounting method changes result in a Section 481(a) adjustment, the cumulative impact of the respective method change. These changes can either be favorable, resulting in additional deductions available, or unfavorable, resulting in additional income to be reported. All favorable and unfavorable adjustments resulting in income of $50,000 or less can be recognized in the year of the change. Unfavorable adjustments exceeding $50,000 are recognized ratably over four years, thus deferring some taxable impacts to future periods. SUMMARY While many additional accounting method changes are available, this discussion has provided some of the more common method changes used. In considering any accounting method change, it is essential to evaluate the impact such a change could have on other items, such as state tax implications and the interplay with the Section 163(j) business interest expense limitation. Discussing all options with your tax advisor to ensure appropriate implications are considered to maximize tax savings is vital. Marcum’s accounting methods team is available to assist with analyzing how the above items may benefit you and your company.

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