Defer Your Income?

Cash-basis taxpayers can take measures to delay the receipt of income such as delaying billings close to year-end. They can also accelerate expenses by prepaying expenses (other than rent and interest) as long as the goods or services purchased are consumed within the next year.

An accrual-basis taxpayer will need to pay all items accrued to owners by year-end to obtain a deduction in the current year. This applies to S corporations, personal service C corporations and partnerships (including LLCs). Accrual-basis taxpayers can also prepay expenses (other than rent and interest) to be consumed within the next year.

Contractors using the completed contract method of accounting may wish to delay completion of a job to the following year to defer the income to the following year. Contractors using the percentage of completion method of accounting may wish to defer incurring costs to the following year to reduce current-year income recognition.

To determine which moves are appropriate in a tax-planning strategy, the first step is to complete a current income and income tax projection. Then determine if deferring income and accelerating deductions is an appropriate strategy. Many strategies for deferring or accelerating income will require advance planning. The earlier you get started with your projections, the more time you will have to execute an effective year-end strategy.

Paul Longsdorf, CPA, is a senior tax officer at HLB Tautges Redpath and leads the firm’s construction accounting and tax group. He works extensively with closely held contractors and developers focusing on tax-efficient entity structures, tax planning, consulting, and banking and surety relationships. Paul can be reached at 651-407-5831 or plongsdorf@hlbtr.com.