Note: The Federal Reserve’s response to inflation is ever-changing. The below is accurate as of August, 16, 2022.
Inflation. Recession. Those two words have been thrown around a lot lately. As prices continue to inflate, the Federal Reserve implemented another rate hike for the second month in a row, matching the largest increase since 1994. Multiple hikes have happened this year and as the Federal Reserve continues to raise interest rates and commence quantitative tightening, debt becomes more expensive.
An ongoing pandemic and the conflict in Ukraine continue to create supply chain disruption. US consumer demand may be cooling. We may be heading towards a recession.
That’s a lot to digest. With these pressures, businesses are taking stock of their supply chains and where they operate. They are searching for opportunities to free up or preserve cash in an uncertain market. But it’s not all doom and gloom. There are ways to optimize tax accounting methods to drive cash savings.
Income Tax Accounting
Taxpayers can find opportunities in income tax accounting methods for timing the recognition of items of taxable income and expense. This establishes when cash is needed to pay tax liabilities.
With growing interest rates and more costly debt, businesses look to preserve cash. Deferring tax liabilities through their choice of accounting methods is one way to do so. Generally speaking, accounting methods either result in the acceleration or deferral of an item or items of taxable income or deductible expense, but they don’t alter the total amount of income or expense that is recognized during the lifetime of a business.
Some of the more common accounting methods to consider center around advance payments, inventory valuation, structured lease agreements, and more.
Enhancing tax accounting methods can be a wonderful option for businesses that need cash to make investments in property, people, and technology as they tackle constricted labor markets, supply chain issues, and ever-changing business and consumer landscapes. Many investments are perfect for accounting method opportunities—such as deciding the treatment of investments in new technology upgrades. Revisiting tax accounting methods could free up cash for a period of years, which would be useful in the event of a recession that might diminish sales and squeeze profit margins before businesses are able to right-size costs.
What Can You Do Now?
Taxpayers should keep in mind that tax accounting method changes falling under the automatic change procedure can still be made for the 2021 tax year with the 2021 federal return and can be filed currently for the 2022 tax year.
Nonautomatic procedure change requests for the 2022 tax year are recommended to be filed with the IRS as early as possible before year end to give the IRS sufficient time to review and approve the request by the time the federal income tax return is to be filed.
There’s no better time than now to discuss how to successfully plan for the current taxable year and beyond. Our team can help.