Tax planning when using the accrual method of accounting can increase or decrease the amount of taxable income for the year. Listed below are a few techniques that can be used to increase or decrease taxable income for the tax year in which they are used.
Income may be deferred by the following techniques:
1. Delays in shipping goods sold (if shipping time is accrual time)
2. Shipping free on board destination, delaying the title change ( if title change is accrual point)
3. If allowed, switching from accrual to installment reporting
4. Sales and leasebacks at a loss
5. Lease with option to buy or just sales of options
6. Using an independent escrow account beyond year end
7. Deferring December billings for services until January ( If billing is accrual point)
8. Advanced payment may be structured as conditional prepayments or as loans
Deferring income can work in some situations but may not in others. It is important not to abuse the privilege to defer income unless it is completely necessary for your business.
Income may be accelerated by the following techniques:
1. The reverse of the deferral techniques listed above
2. The sale of installment notes
3. Sales and leasebacks of appreciated assets
4. Increased year end orders through payment deferrals, next year discounts, and special promotions
5. Electing out of the installment method for casual sales
There are many more ways to accelerate income when using the accrual method of accounting; these examples are just a few that are common.
Deductions may be increased by the following techniques:
1. Paying bonuses to officers and/or shareholder employees
2. Prepaying nonrefundable commissions
3. Increasing deferred compensation contributions, such as to an ESOP or a Code Sec 401k plan
4. Incurring expenses before the end of the year, such as charitable contributions, advertising, accelerating repairs, and settling disputed amounts
5. Purchasing business equipment and autos at year end
6. Making use of all travel and entertainment expenses
If you were to reverse this list, you would basically decrease the amount of deductions that you would be able to realize. In some cases, a deduction will be more beneficial in the following year and therefore should be deferred.