Seven strategies to accelerate income in response to increasing rates.

• Author: Richwine, Nathan

EXECUTIVE SUMMARY

* Some businesses and individuals concerned about tax rate increases may be looking to accelerate income. Although income acceleration does not make sense in all circumstances, this article outlines seven proven strategies for accelerating income when it does.

* First, businesses that use the overall cash method can seek to increase collections before year end and/or delay payment of expenses until 2022.

* Second, businesses can delay acquisition of equipment, which defers the deduction.

* Third, individuals can convert a traditional IRA to a Roth to take advantage of the 2021 rates.

* Fourth, many businesses that use the accrual method structure their compensation plans to satisfy the all-events test as of year end. There may be an opportunity to take steps so that the all-events test is not satisfied as of year end, delaying the deduction for accrued bonuses.

* Fifth, businesses currently using the deferral method with respect to advance payments may be eligible to change their accounting method to the full-inclusion method using automatic change procedures, providing an opportunity to make this decision with hindsight.

* Sixth, electing out of the installment method may allow the gain to be taxed at the old rates.

* Seventh, several elections are available to capitalize expenses that would otherwise be deductible, such as costs of acquiring assets, prepaid expenses, repair expenses, and research and development costs.

Through the same budget reconciliation process that Republicans used in 2017 to enact the Tax Cuts and Jobs Act (TCJA), (1) Democrats in Congress have proposed legislation that would, among other things, increase tax rates on corporations and high-income individuals beginning with the 2022 tax year. (2) While at the time this article went to press it was unknown what shape any final legislation might take, the House proposal would replace the flat 21% corporate tax rate with a graduated rate structure with a top rate of 26.5%. The top marginal individual income tax rate would increase from 37% to 39.6% for individuals with taxable income exceeding certain thresholds. Some passthrough businesses would see their marginal rate increase from 29.6% all the way to 46.4%, taking into account a proposed phaseout of the Sec. 199A deduction, expansion of the 3.8% net investment income tax, and a 3% surcharge on high-income individuals.

With these or other potential rate increases in mind, and depending on the contents of any final legislation, taxpayers may be looking for strategies to accelerate income into 2021 or defer deductions into 2022. This article begins by discussing a few factors taxpayers should consider before adopting income acceleration strategies and then outlines seven strategies to accelerate income.

Does income acceleration make sense?

Yogi Berra is often credited with saying "it's hard to make predictions, especially about the future." As of this writing, there is no certainty that proposals to increase taxes will be...