Deferring or Accelerating Income or Deductions Could be Beneficial

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As we approach year-end, it is worthwhile considering whether you might benefit by deferring or accelerating income or deductions.

Possible Estimated Tax Payment Reduction.  Many corporations can avoid being penalized for underpaying estimated taxes if they pay installments based on 100% of the tax shown on the return for the preceding year.  In the alternative, they must pay estimated taxes based on 100% of the current year’s tax.  However, the 100%-of-last-year’s-tax safe harbor isn’t available unless the corporation filed a return for the preceding year that showed some liability for tax.  A return showing a zero tax liability doesn’t satisfy this requirement.

A corporation that anticipates a small net operating loss for 2012 and significant income in 2013 may find it beneficial to accelerate some of its 2013 income or defer some of its 2012 deductions (or some combination thereof) to create some net income in 2012. This would permit the corporation to base its 2013 estimated tax installments on the relatively small income amount shown on its 2012 return, rather than having to pay estimated taxes based on 100% of a larger 2013 income amount. Moreover, since tax rates may increase in 2013, accelerating income from 2013 to 2012 may result in the income being taxed at a lower rate in 2012.   But, if a 2012 NOL would permit a carryback and refund from an earlier year, the value of the carryback refund must be compared to the value of paying a smaller estimated tax for 2013.

 The 100%-of-last-year’s-tax safe harbor is not available to “large” corporations.  A taxpayer will be treated as a “large” corporation for estimated tax purposes if it had taxable income of $1 million or more in any one of the three preceding tax years. As a result, a corporation that didn’t reach that threshold in 2010 or 2011, but expects net income of $1 million or more in 2012 and later tax years, may have an extra incentive for deferring income into (or accelerating deductions out of) 2013.  Doing such a shift of income or deduction permits the corporation to avoid reaching the $1 million threshold in 2012, and enables it to use the 100%-of-last-year’s-tax safe harbor in 2013.

Deduction in 2012 of Bonus Paid in 2013.   An accrual basis corporation can deduct in the 2012 tax year a bonus not actually paid until 2013 if (1) the employee does not own more than 50% of the value of the corporation’s stock, (2) the bonus is accrued on the corporation’s books before the end of the 2012 tax year, and (3) the bonus is paid within the first 2 and 1/2 months of the 2013 tax year.   The bonus will not be taxable to the employee until paid in the 2013 year.  The 2012 deduction is not permitted, however, if the bonus is paid by a personal service corporation to an employee-owner, or by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner.

Deferral of Certain Advance Payments.  Accrual-basis taxpayers may defer advance payments for goods until the tax year in which they are accruable for tax purposes if the income inclusion for tax purposes is not later than it is under the taxpayer’s accounting method for financial reporting purposes.  An advance payment may also eligible for deferral, but only until the year following its receipt, if: (1) including the payment in income for the year of receipt is a permissible method of accounting for tax purposes; (2) the taxpayer recognizes all or part of it in the taxpayer’s financial statement for a later year; and (3) the payment is for services, goods, the use of intellectual property, the use or occupancy of property related to the provision of services, or some combination of such items.

Please call or email me at 937-223-1130 or Jsenney@pselaw.com if you would have questions or comments about the benefits of deferring or accelerating income or deductions.

AND ONE MORE THING.  Ohio recently amended its corporate dissolution statute.  If a dissolving corporation owes you money, you can be impacted if you do not act timely.

A dissolving corporation is required to give notice of dissolution to each person who has a claim against the dissolving corporation.  In order to preserve your claim, you must file a claim within 60 days following the notice date.  If you do not file your claim by the deadline, then your claim is barred.  For more information see Paul Zimmer’s article on this matter at www.pselaw.com or call Paul at 937-223-1130 or pzimmer@pselaw.com.