Strategic Tax Advisory

Looking to Boost Liquidity? Consider Changing Your Accounting Method

As businesses across all industries look for ways to reduce costs and increase liquidity, unique opportunities exist — both within the general tax code as well as a result of the CARES Act — to take advantage of credits, incentives and deductions that could reasonably benefit businesses in need of increased cash flow.

Depending on the size and structure of your business, one potentially beneficial strategy involves a change in your accounting method.

The method in which businesses account for revenues (e.g. cash basis vs. accrual) can make a difference in when they are required to pay taxes on those revenues. Businesses — in particular those whose revenues are membership based — should evaluate the relative merits of a change in accounting method including the ability to defer revenue and provide a potentially substantial tax benefit in the same year the change is made.

See below for an illustrative example of how a business could foreseeably benefit from a change in accounting method:

The Situation

  • Business is a flow-thru entity.
  • Business receives $2 million in monthly membership revenues received on the last day of each month for the next month’s membership.
  • Net income after expenses is $4 million.

Change in Accounting Method

The Impact

  • By shifting its accounting methodologies, the business can create upwards of $2 million in tax deductions which would result in anticipated federal and state income tax shelter / recoupment of approximately $860,000 for (assuming 37% federal and 6% average state tax rates).

To learn more about changes to your accounting method or examine other tax-saving strategies that could boost your business’ liquidity, please contact us.

Strategic Tax Advisory

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