As we reach the end of 2019, companies may want to check out some of the following steps to maximize their tax strategies in regards to deduction and revenue organizing for the year.  These steps differ upon the company’s intention - reducing taxable income or accelerating income. A company may want to reduce taxable income by year-end to minimize its current taxes payable; accelerating income would reduce current year net operating losses.  

Change in accounting method - from cash to accrual or from accrual to cash

When following the cash method, income is recorded at the time of receipt and expenses are recorded at the time of payment.  By delaying its billing until year-end, a company can reduce its income because the income will not be recorded until payment is received in the new year.  Any payments for expenses could be paid before year-end to ensure expenses are maximized.

According to the accrual method, revenues are recorded when earned and expenses are recorded when incurred.  Accounts receivable and accounts payable accounts are used to record transactions incurred before year-end and in turn to maximize or minimize revenues and expenses for tax purposes.

Inventory Planning

If a company plans properly it can use its inventory to assist with tax strategy.  Inventory can be pre-purchased if necessary and will, in turn, decrease gross income and reduce taxable income. 

Following the Last In First Out (LIFO) method of valuing inventory is likely to lower a company’s tax liability.  Using this method means that any item sold is priced at the last price paid for that specific item for inventory. As costs increase it is most likely that the last price paid is the highest cost per item, ensuring the cost of inventory is at its highest and the reduction of income is maximized.

Shifting inventory methods is not a simple process, and it is not guaranteed to reduce tax liability.  Tracking of purchase price per item is required for the LIFO method. 

Apply the 12-month Rule for Prepaid Business Expenses

In general, a company cannot deduct in the current year any prepaid business expenses for the following year.  An expense paid in advance can only be deducted in the year it applies. However, there is an approved exception to this rule which is called the 12-month rule.  According to this rule, a company may deduct prepaid future expenses in the current year if the expense is a right or benefit that extends no longer than the earlier of 12 months or until the end of the tax year that follows the tax year in which the company made the payment.  Some examples of expenses allowable under the 12-month rule include prepayment of business insurance premiums, building rent, office equipment leases and vehicle leases. Purchases of furniture, equipment and other long-term capital leases, as well as payments for interest, loans and other financing interests, are not considered allowable.  

The 12-month rule helps a company to increase its business deductions at year-end which reduces taxable income.

It should be noted that changing accounting or inventory methods as well as maximizing business expense deductions are all topics that are more complex than a simple election and require tax planning and advising through a tax professional.