What is Accounting Methods Optimization?
When was the last time you reviewed your clients’ tax accounting methods? If taxpayers have not yet optimized their methods since the 2017 Tax Cuts and Jobs Act, a closer look at those methods might uncover significant deductions or options to kick revenue recognition down the road.
Accounting methods are all about timing. The typical planning approach is to accelerate deductions to the current year and to defer revenue to future years to minimize the tax owed today. Why does this matter when we expect to get the deduction or have to recognize the revenue eventually anyways? The reason is because cash today is more valuable than cash in the future. This especially matters in today’s environment of rising interest rates. Using suboptimal accounting methods operates essentially as an interest-free loan to the IRS until you get the tax benefit in a future year.
Another reason is that if the business is experiencing a growth trend, there is a good chance that the new method could provide continued benefit beyond the year of change. For example, consider a change from the accrual method of accounting to a cash method of accounting for a growing company that has a higher receivables balances compared to its payables balance. The company will get a nice benefit the year of change based on that difference. As the company grows, the difference between receivables and payables is likely to also grow, providing more benefit with that delta.
If your client hasn’t looked at methods for a while or if we need to offset an unexpected tax bill, a conversation to explore methods opportunities might make sense.