4 Ideas for Deferring Taxable Income to Next Year

Deferring taxable income to a later year is often an effective strategy for paying less in income taxes and keeping more of your wealth working for you. For example, if you are organized as an S Corporation or Partnership for income tax purposes and anticipate being in the same or a higher tax bracket in 2018 than in 2019, then you may benefit from deferring income into 2019. 

Here are four ways you might achieve this:

(1) Cash Method of Accounting

The Tax Cuts and Jobs Act (TCJA) expanded the number of businesses that can use the cash method of accounting.  This can be important for you because often you are better able to accelerate deductions and defer income by adopting the cash (versus accrual) method of accounting. It’s not too late to implement this idea because an automatic change to the cash method can be made by the due date of the tax return including extensions. Who can make this change?  Sole proprietors, partnerships, and S corporations can change to the cash method of accounting without regard to their average annual gross receipts so long as inventories are not a material income-producing factor. C corporations (or partnerships with a C corporation partner) with average annual gross receipts of $25 million or less for the prior three taxable years can make an automatic change to the cash method.

(2) Delay Billing

If you are on the cash method, delay year-end billing to clients so that payments are not received until 2019. 

(3) Installment Sales

Generally, a sale occurs when you transfer property. If a gain will be realized on the sale, income recognition will normally be deferred under the installment method until payments are received, so long as one payment is received in the year after the sale. So if you are expecting to sell property prior to the end of 2018, and it makes economic sense, consider selling the property and report the gain under the installment method to defer payments (and tax) until next year or later.

(4) Interest and Dividends

Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. Unless you have constructive receipt of dividends before year-end, they will not be taxed to you in 2018 (exceptions may apply if you have control over when dividends are paid to you.)

If you’d like to further discuss any of these or other tax savings ideas, please call and speak with one of our attorneys.

** The information contained in this communication is not intended to constitute legal, accounting or tax advice.