When do you cross the line between honesty and dishonesty in tax planning? Is it ethical to allocate income between periods to take advantage of tax breaks? Can expenses be put off until the next period to increase income, or accelerated into this period by prepayment to decrease net income? Where do you draw the line, assuming no intent to defraud?
First, corporations are usually on an accrual accounting basis, meaning that income and expenses are accounted for as earned, not when the cash is received. (You, on the other hand, account for your individual income on a cash-accounting bases, counting the cash not the date of your earning or accrued expense. The difference: If you earn pay due December 31st and it is paid January second, you pay income tax on those earnings in the following year. But the corporation that pays you accrues the expense and takes the deduction in the year in which the income was earned or expense actually incurred.)
[Email readers, continue here…] It is perfectly legal to hold delivery of goods until after the start of the next period and take the income next year rather than this. It is a bit murky if you accelerate payment for incomplete services or even for products not yet received into this year to take the deduction from income early. In either an IRS audit or an accounting review or audit, the accelerated costs and payments will show as an accrual – a balance sheet item – that does not change income, just cash and an asset.
In other words, for the usual accrual-based business, there are fewer ways to affect the outcome than for a cash-accounting individual. There are lots of caveats here and certainly if the issue is critical to you, an accountant (rarely a bookkeeper) should guide you to the action that is both legal and strategic.
Please feel free to comment on this post in the field below. -Dave