You may not realize this, but there’s far more at stake in next month’s presidential election than the fate of national security, gay marriage and America’s continued independence from China. There’s also the distinct possibility that if President Obama wins reelection, S corporation shareholders will find themselves in the counterintuitive position of trying to accelerate …
Accelerating income means trying to bring in more money in the current year. Target income that’s on the cusp so you might feasibly receive it by year’s end
Planning for Rising Income Taxes by Accelerating Income. Post-election Trump vs Biden, it now appears that rising income tax is now going to be a certainty. Tax rates are estimated to spike to 39.5%.
One way to accomplish this goal is to exercise stock options or sell appreciated property before year-end, recognize the built-in gain, and step-up the tax basis by repurchasing the property. Unlike assets with losses, selling at a profit to relatives or a related company to recognize gain is not prohibited. The wash sale rules also do not apply. If you are not certain when you might sell the asset in the near term, consider utilizing an installment sale to a related party.
Cash basis taxpayers are accelerating income through advancing collections. The key is not when to send the bill, but whether you can receive payment before the year-end. Sending the bill earlier is probably just good business practice. However, you may even consider giving small discounts for pre-year-end accelerated payments. Also, consider settling any open lawsuits or insurance claims that could generate taxable income.
The opposite of Accelerating income is to defer losses and deductions can normally be just as beneficial in a rising tax-rate environment as accelerating income. Payments can easily be deferred until the following year for items such as real estate taxes, interest expenses, charitable contributions, medical and dental expenses, or even year-end bonus payments to employees. Proper timing adjustments of even one day can make a sizable difference in the tax benefit. You can also make certain elections to max out or defer an investment interest expense. However, you must keep an eye on Congress regarding the possibility of placing hard caps or increasing the phase-outs on certain or all itemized deductions, as discussed during the campaign season, which would potentially impact the proper decision to defer those deductions.