Improve your federal income tax posture without amending returns
An accounting method is the method by which income and expenses are reported for taxation purposes. A change in accounting method includes any change in the taxpayer’s overall method of accounting (e.g., cash to accrual) but also includes changes in the treatment of any “material” item. The IRS requires taxpayers to choose an accounting method that accurately reflects their income and be consistent in their choice of accounting method from year to year. As a tax planning tool, accounting methods help taxpayers implement cost segregation studies and energy efficiency incentives, adopt beneficial provisions of the Tangible Property Regulations, and numerous other tax minimization strategies. Accounting methods also help taxpayers correct improper methods to maintain tax compliance or to eliminate audit risk.
There are several accounting method changes that are extremely valuable to taxpayers. For example, changing depreciation methods from a Cost Segregation Study can vastly increase the timing of deductions and improve cash flow. Adopting the numerous favorable provisions of the Tangible Property Regulations allows taxpayers to retroactively review expenditures that were capitalized and identify ones that can be treated as immediately deductible repair and maintenance expenses, such as replacing roof membranes, resealing parking lots, and replacing of HVAC components. Using the Section 179D Energy Efficient Commercial Building Deduction allows taxpayers to immediately deduct up to $1.80/SF for investments in efficient lighting systems, HVAC and hot water systems, and the building envelope.
An accounting methods optimization study strategically assesses a company’s current tax accounting periods and methods among permissible alternatives, which may allow for increased cash flow and improved financial results.
Success Stories
- A national health club was able to accelerate over $10 million in deductions by immediately deducting energy efficiency improvements to their facilities under the Section 179D Energy Efficient Commercial Building Deduction.
- A printer of yearbooks and other publications was able to take $2 million in additional deductions by reclassifying HVAC equipment installed to meet operating requirements of large printing presses as 5-year personal property previously treated as 39-year real property.
- Through a cost segregation study, a taxpayer was able to accelerate $4 million in depreciation deductions for their office buildings and warehouses.
- A grocery chain created a permanent deferral that saved $100,000 in taxes by expensing amounts previously treated as prepaid assets.
- A wallpaper manufacturer saved $1 million by changing a previous method of capitalizing wallpaper sample books to make them a currently deductible expense.
Education
Lexicon provides both in-person, and webinar-based continuing education on Accounting Method Changes throughout the country. Thousands of tax professionals have taken this practical course. It covers several widespread accounting method changes, discusses updates to tax rules, and provides instruction on completing and filing Form 3115 – Application for Change in Accounting Method. This course is often taught for free to state CPA societies, accounting firms, and other tax professional associations.
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