Like other taxpayers, C corporations should consider year-end tax planning. One of the tried and true approaches is to defer income to the following tax year and accelerate deductions into the current tax year. For 2017, this is a particularly beneficial tip considering the likely tax reform legislation that we will see under the Trump/GOP plan.
For year-end planning purposes, this strategy to defer income should generally make sense for many corporations because of the probable drop from 35% to 20% of the corporate income tax rate. It may turn out to be even more valuable with, in addition to the drop in the tax rate, there will be a slimming down of deductions. Further, the corporate AMT would also be eliminated as well as a reduction the double taxations of corporations.
Regardless of the uncertainty of these tax reform proposals, any tax planning strategies must take into account the facts and circumstances of the taxpayer. So while many taxpayers will benefit from the approach mentioned above, some taxpayers may benefit from accelerating income and deferring deductions. For example, if a C Corporation expects taxable income of $90,000 for 2017 but expects income to go well over $100,000 in 2018, accelerating $10,000 from 2018 to 2017 will save about $500 since the $10,000 will be taxed at 34% rather than 39%.
In the event that a broader tax reform becomes unachievable, and only simple rate reduction is passed, AMT strategies could still generate savings for small corporations. A small corporation’s tentative minimum tax would be zero if its average annual gross receipts for three tax years do not exceed $5 million. Thus a corporation may want to consider deferring income if it will be necessary to keep its average annual gross receipts below the threshold to preserve the AMT exemption for 2018.
Another planning strategy involves accelerating or deferring income to save on estimated taxes. Corporations (other than “large corporations”) can avoid being penalized for underpayment of estimated taxes if they pay installments based on 100% of prior year tax. However, this safe harbor is only available if the taxpayer had a tax liability (even $1) in the prior year. So, if a corporation may be expecting a net operating loss in 2017 and substantial net income in 2018, it may want to consider accelerating income to 2017 to create a small positive tax liability. This will permit the corporation to pay estimated tax in 2018 on the relatively small 2017 liability rather than a much higher 2018 tax liability.
So, whether the corporation is looking to defer income and accelerate deductions for vice versa, it is best to discuss any prudent tax planning strategies with your Citrin Cooperman advisor.
Kristy Hurtt is a manager in Citrin Cooperman’s tax practice with 20 years of experience. Her focus is on corporate taxation and application of ASC 740 and is considered one of the Firm’s resources on the matter. She can be reached at 212-697-1000 or at firstname.lastname@example.org.