In detail
Changes in facts
Internal taxpayer actions and practices
Incentive compensation. A taxpayer may deduct compensation in the current tax year if the liability is fixed and determinable at year-end and the taxpayer pays the compensation within 2½ months after year-end. Compensation is not fixed if an event must occur in the next tax year for an employee to have a right to receive it, for example if the employer has discretion after year-end to not pay a bonus for services performed in the current tax year or an employee must remain employed in the next tax year to receive a bonus. To fix the liability to pay bonuses in the current year, the bonuses must be based on either a fixed formula or a fixed minimum bonus amount approved by a company's board of directors before year-end and the authorized amount must be paid to eligible employees and not be able to revert to the company.
Issuing or not issuing a board resolution by year-end, and paying or not paying the compensation within 2½ months of year-end, may accelerate the deduction into the current year or delay it until the next tax year. Taxpayers desiring to accrue bonuses in the current tax year should issue a board of directors resolution by year-end and pay the compensation within 2½ months. A taxpayer that is not using the 2½ month rule for employee compensation also may need to change its method by filing a change under the automatic procedures when it files its tax return.
Bonus depreciation. Taxpayers must place property in service before 2023 to claim 100% bonus depreciation. Beginning in 2023 (2024 for longer production period property and certain aircraft), the bonus depreciation rate decreases by 20% each year. Taxpayers should evaluate whether they can place property eligible for bonus depreciation in service in 2022.
LIFO conformity. Taxpayers that maintain inventories may benefit from using the last-in, first-out (LIFO) cost-flow assumption. Under LIFO, goods sold during the year are deemed to come first from goods purchased or produced during the year and then from beginning inventory, which in inflationary periods results in including higher costs in cost of goods sold and potentially reducing taxable income significantly. A taxpayer adopts LIFO by attaching a form to its federal income tax return for the tax year. However, a taxpayer that uses LIFO for tax purposes also must use LIFO for financial reporting (book). Therefore, a company that wants to elect LIFO to compute its taxable income for 2022 must make this decision by year-end or shortly after so that it reflects LIFO in its 2022 financial statements.
Subnormal goods. Subnormal finished goods are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes. A taxpayer valuing inventory at cost or lower of cost or market (and not using a LIFO method) may value subnormal finished goods in ending inventory at the actual offering price within 30 days after year-end less direct costs of disposition. Taxpayers may wish to offer subnormal goods for sale within 30 days of year-end to establish bona fide selling prices. An automatic method change may be necessary to change a method to properly value the goods below cost.
Passthrough entity state and local taxes. The 2017 tax reform act imposed a $10,000 cap on individual taxpayer itemized deductions for state and local taxes (SALT). Some states enacted passthrough entity (PTE) taxes that impose an entity-level state tax instead of a tax on the individual owner (S corporation shareholder or partner). The PTE deducts the tax at the entity level and reduces the distributive share of income allocable to owners. PTE taxes are not subject to the SALT cap. In some states, the PTE must elect to pay the PTE tax by the end of the tax year. A PTE that follows the procedures (which vary by state) to elect the PTE tax and pays the tax within 8½ months after year-end under the recurring item exception may be able to deduct the PTE tax in the current tax year. A PTE that is not currently using the recurring item exception for state taxes may need to file an automatic change to that method.
Transactions
Advance payments. Section 451(c) generally allows a taxpayer to recognize qualifying advance payments under a full inclusion method or defer recognizing advance payments for one year to the extent not recognized as revenue for book. Taxpayers that want to accelerate income may want to change their facts to receive an advance payment before the end of the tax year and recognize that payment under a full inclusion method. Changing to a full inclusion method may require a nonautomatic method change to be filed by year-end, as discussed below.
Sale and leaseback. A taxpayer may realize gain on appreciated tangible or intangible property or loss on depreciated tangible or intangible property that it wants to continue to use by selling the property and then leasing it back. To qualify to realize gain or loss, the taxpayer must transfer tax ownership of the property to the lessor.
Passthrough payments to foreign related parties. A taxpayer may be able to reduce its liability for the base erosion and anti-abuse tax if transactions involving payments it receives from a third party and remits to a foreign related party are structured so that the taxpayer is an agent or conduit. The taxpayer then has no income and no deduction resulting from the payments and the payments to the foreign related party are not base erosion payments. To qualify as an agent or conduit, the taxpayer may need to modify its agreements before year-end to provide that all rights and obligations associated with passthrough payments are with the foreign related party.