The future of business taxation is the subject of much speculation as 2025 approaches. Significant portions of the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of that year. In addition, the Republican sweep of Congressional majorities and the White House in the 2024 election has set the stage for new tax legislation during 2025. While there’s much tax-related uncertainty for businesses to plan for at the moment, planning the timing of when to recognize taxable income should still be at the top of the list of tax-planning tools — both to respond to potential legislative changes but also to manage taxes for a variety of other reasons. Proactive tax planning is crucial, and businesses that wait until the last minute might miss significant opportunities. Our tax specialists discuss why businesses should plan around this timing and what strategies can be used to accomplish it.
Planning for future tax legislation
The upcoming expiration of the TCJA could cause a variety of changes to tax law, both for provisions set to expire or change under current law and for other parts of tax law that could change as a result of the negotiations. For example, the qualified business income deduction (QBID) is set to expire on Dec. 31, 2025, which could effectively increase the tax rate on partnership and S corporation business income in 2026. However, the corporate tax rate isn’t set to change from its current 21% rate, but it could be increased to reduce the total cost of any legislation that’s ultimately enacted while President-elect Trump has also proposed reducing the rate to 15% for domestic manufacturers. If a business thought its tax rate might increase in the future, it might be incentivized to accelerate taxable income into a lower-taxed year while a business that felt the opposite may want to defer taxable income. Businesses may need to plan for all eventualities to best determine whether any particular tax-planning strategies are advisable in the short or long term and interim.
The same thought process could apply to tax law provisions that impact particular items. For example, it’s possible that the requirement for a business to capitalize and amortize research and development expenditures under Section 174 might be pared back in the future. A business might consider deferring those expenditures into a future year to be able to deduct them more quickly if it anticipated that such a change wouldn’t be retroactive. The same may be true for interest expense to the extent a business anticipated that the Section 163(j) interest expense limitation might be relaxed prospectively. A similar thought process could apply to capital expenditures subject to depreciation if 100% bonus depreciation were reenacted on a prospective basis.
Some potential tax law changes could remove benefits that currently exist. For example, Trump and various Republican leaders have proposed to repeal the tax credits and incentives enacted as part of the Inflation Reduction Act (IRA). Businesses may consider reprioritizing or otherwise altering their plans for these types of projects to try and maximize the benefits as they currently exist.
Other reasons to focus on tax accounting methods
Even if tax laws aren’t potentially going to change, a business’s choice in which accounting methods it uses in determining taxable income can be a very powerful tax-planning tool. Any strategy should factor in the many competing factors, including current cash flow, longer-term tax implications, international and state tax implications, as well as the potential for future changes in tax policy.
- Provide overall cash-tax planning. A fresh look at tax accounting methods may open up opportunities to accelerate tax deductions, reducing the current tax burden and freeing up cash for business needs. While some tax accounting methods opportunities will provide a benefit that will reverse over several years (like accelerated tax depreciation), some methods will generally result in perpetual tax deferral that would generally not reverse while the business continues operation (like the cash method and certain inventory methods).
- Utilize tax attributes before expiration. Tax accounting methods can also be utilized for reverse tax planning by identifying opportunities to accelerate income to utilize tax attributes nearing expiration. Tax attributes that businesses may consider utilizing could include net operating losses or carryforward tax credits (such as a research and development tax credit).
- Reduce GILTI and BEAT liabilities. Taxpayers with foreign subsidiaries and related parties may be subject to the global intangible low-taxed income (GILTI) and base erosion anti-avoidance tax (BEAT) regimes but also might be eligible for the foreign-derived intangible income (FDII) deduction. Taxpayers with foreign subsidiaries can look for opportunities to reduce their GILTI inclusion by deferring income and accelerating deductions at their foreign subsidiary. The base erosion anti-avoidance tax (BEAT) is assessed on certain taxpayers with payments made to a foreign-related party. However, BEAT doesn’t include expenses that are recovered as cost of goods sold (COGS) on the sale of inventory. Therefore, taxpayers can review their inventory costing methods to include all allowable costs in COGS, exempting the payments from BEAT. FDII deductions are generated on income from selling property and providing services in foreign markets. Accounting methods can be used to shift the timing of this income in a manner that can maximize FDII benefits by, for example, shifting a FDII deduction into a year where there’s taxable income to absorb the deduction.
Accounting method planning opportunities and considerations
Below is a list of accounting method opportunities, both for increasing taxable income and decreasing taxable income, depending on the tax strategy of the business. It’s important to note that accounting methods must be applied consistently and, once adopted, generally can’t be changed again for five years. Most accounting methods are changed by filing a Form 3115 with a timely filed tax return. Others provide for an election made with the tax return. However, some method changes may require IRS review and approval, which must be filed by each taxpayer’s tax year-end. Some strategies may require other actions to be taken by a particular point in time to be effective, such as placing an asset in service. Consequently, businesses should proactively review their accounting methods to ensure that all planning opportunities can be fully evaluated and executed before it’s too late.
Depreciation
- Accelerate deductions/defer revenue to decrease income:
- Take full advantage of immediate expensing under Section 179.
- Review asset-class lives and perform cost segregation studies.
- Elect partial disposition deductions when making improvements to property.
- Review previous depreciation methods and elections for opportunities to accelerate deductions.
- Defer deductions/accelerate revenue to increase income:
- Elect straight-line or alternative depreciation system method to slow down depreciation.
- Review fixed asset “de minimis” capitalization threshold and elect to capitalize costs expensed under policy.
- Accelerate deductions/defer revenue to decrease income:
- Take full advantage of bonus depreciation. Bonus depreciation will decrease by 20% each year until it phases out entirely. Bonus depreciation is 60% and 40% in 2024 and 2025, respectively. Defer deductions/accelerate revenue to increase income.
- Defer deductions/accelerate revenue to increase income:
- Elect out of bonus depreciation.
Compensation accruals (bonuses, commissions, vacation, payroll taxes)
- Accelerate deductions/defer revenue to decrease income:
- Accrued bonuses and similar plans — Change plan to ensure the bonus is fixed by year-end or approve bonus pools by year-end and paying bonuses within 2.5 months of year-end.
- Accrued commissions — Change commission arrangement so that the earning of the commission isn’t contingent on future events, such as the collection of accounts receivable.
- Accrued payroll tax — Elect the recurring item exception to deduct payroll taxes paid within 8.5 months after year-end even if the related compensation isn’t paid within 2.5 months of year-end.
- Defer deductions/accelerate revenue to increase income:
- Accrued bonuses and commissions — Pay bonuses and/or commissions more than 2.5 months after year-end or don’t fix the bonus and/or commission plan amounts by year-end.
Other accruals (property taxes, self-insured health, rebates/refunds)
- Accelerate deductions/defer revenue to decrease income:
- Property tax — Utilize the recurring item exception and deduct payments made within 8.5 months after year-end. Adopt the ratable accrual method.
- Self-insured health accrual — Many self-insured health accruals are deductible in the year in which the services are provided even if the accrual is an actuarial estimate.
- Rebates/refunds — Utilize the recurring item exception for rebates earned by year-end and deduct payments made within 8.5 months after year-end.
- Defer deductions/accelerate revenue to increase income:
- Property tax — Deduct taxes only when paid.
- Rebates — Deduct rebates only when paid.
Inventory
- Accelerate deductions/defer revenue to decrease income:
- UNICAP methods — Final regulations effective beginning in 2019 tax years can be favorable to many taxpayers.
- LIFO — FIFO taxpayers should consider if adopting the last-in, first-out (LIFO) inventory accounting method can help decrease taxable income and increase cash flow.
- Reserves — Review inventory reserves for subnormal goods or lower-of-cost-or-market adjustments that may be deductible.
- Cost rebates — Review inventory-related discounts, such as volume rebates.
- Defer deductions/accelerate revenue to increase income:
- LIFO — LIFO taxpayers could elect off of LIFO or change methods within LIFO to reduce the benefits.
- UNICAP methods — Review UNICAP methods, specifically submethods that may allow for semipermanent capitalization of service costs or other approaches to increase capitalization.
Prepaid expenses
- Accelerate deductions/defer revenue to decrease income:
- Elect the 12-month rule to accelerate deductions for certain prepaid expenses, such as prepaid insurance. Adopt the 3.5-month rule or ratable service cost method for prepaid services.
- Defer deductions/accelerate revenue to increase income:
- Elect off of 12-month rule to defer prepaid expenses.
Deferred revenue
- Accelerate deductions/defer revenue to decrease income:
- Utilize the one-year deferral method for advance payments.
- Defer deductions/accelerate revenue to increase income:
- Adopt the full-inclusion method for advance payments.
Pension contributions
- Accelerate deductions/defer revenue to decrease income:
- Qualified pension contributions can be deducted if paid by the tax return due date and contributed to the prior tax year.
- Defer deductions/accelerate revenue to increase income:
- Calendar year taxpayers should consider making pension contributions after the tax return due date or for the benefit of the subsequent plan year to the extent possible. This contribution would then be deducted in the tax year in which the contribution is made, thus deferring the deduction.
Overall income and expense recognition
- Accelerate deductions/defer revenue to decrease income:
- Adopt the cash method for taxpayers with average prior three years gross receipts less than $31 million for 2025 ($30 million for 2024) also available to larger flow-through taxpayers who don’t hold inventory.
- Defer deductions/accelerate revenue to increase income:
- Review the options to change to the overall cash, hybrid, or accrual method to accelerate income or defer deductions.
Bad debt
- Accelerate deductions/defer revenue to decrease income:
- Review opportunities to utilize specific charge-off method.
- Certain service providers may adopt the nonaccrual experience method to exclude uncollectible receivables from income.
- Defer deductions/accelerate revenue to increase income:
- N/A
Materials and supplies
- Accelerate deductions/defer revenue to decrease income:
- Elect to expense de minimis amounts of materials and supplies.
- Defer deductions/accelerate revenue to increase income:
- Elect out of the de minimis expensing safe harbor.
Small business taxpayer inventory methods
- Accelerate deductions/defer revenue to decrease income:
- UNICAP — Certain small business taxpayers can elect off of UNICAP/Section 263A, which would permit them to no longer capitalize certain costs to inventory.
- Consider adopting other favorable inventory methods such as the materials and supplies approach for accounting for inventory or the book conformity method for inventory, which may allow for accelerated deductions compared to historical tax methods.
- Defer deductions/accelerate revenue to increase income:
- Adopt traditional tax inventory accounting and UNICAP/Section 263A to capitalize additional tax costs to inventory.
Percentage-of-completion: Small business taxpayer
- Accelerate deductions/defer revenue to decrease income:
- Small business taxpayers in construction can elect to apply cash or completed contract method instead of percentage-of-completion for long-term contracts.
- Defer deductions/accelerate revenue to increase income:
- Elect to apply Section 460 to long-term contracts.
Percentage-of-completion: Larger taxpayers
- Accelerate deductions/defer revenue to decrease income:
- Pay-if-paid and other submethods — Contractors should evaluate whether their percentage-of-completion methods for taxpayers takes advantage of favorable tax deferrals, including pay-if-paid and 10% method.
- Research costs – Taxpayers on percentage-of-completion with research costs that are being amortized under section 174 can significantly defer the recognition of revenue.
- Defer deductions/accelerate revenue to increase income
- Taxpayers can also evaluate different sub-methods to accelerate taxable income.
What can taxpayers do now regarding accounting methods?
While the list of possible changes to tax law may feel endless, scheduling out the possible ways in which a business could react to them to determine which ones could be most impactful and when to take action is key. The same is true for any other planning related to tax accounting methods. For example, if a tax-planning strategy would require an expenditure to occur at a certain time, that decision might need to be made relatively quickly. But if a strategy merely required an election to be made with a tax filing, that decision might be able to be made later (as long as tax legislation didn’t adversely impact the availability of that type of election). Without considering all possibilities upfront, a business might be letting many opportunities unknowingly pass by.
