Accounting Methods & Inventories
The timing of income and expense recognition and the appropriate determination of capitalizable costs are essential elements of tax planning for every business. At Andersen Tax, we have the knowledge and experience necessary to help you address tax accounting method issues effectively, whether in the context of planning, compliance or IRS examinations.
Andersen Tax professionals have experience advising companies of all sizes. Local office personnel are supported by our U.S. National Tax Office (USNT) located in Washington, D.C. Our USNT professionals have years of experience practicing before the IRS National Office handling accounting method changes, rulings, requests for technical advice and closing agreements. Our focus is on helping you achieve your goals, whether risk minimization, cash generation or simplification.
Some of the accounting method planning services we provide include:
Accounting Method Reviews
We review your trial balance and book/tax reconciling items to identify potential opportunities and exposure items. Book and tax treatment of many items are different due to the IRS focus on accounting for income and expense when legal rights and obligations fix as compared to book accounting that matches related income and expense.
We identify opportunities and exposure items, handle all administrative filings and interface with IRS to obtain permission for any advance consent or automatic method changes to correct or optimize the company's methods. We can assist with the implementation of the new methods and any compliance issues that arise. Accounting method reviews can enhance net operating losses that are available for carry back and can resolve issues that may otherwise require disclosure on Schedule UTP for uncertain tax positions. They can also provide cash that can be used for debt service or business expansion.
Inventories are a large dollar item on many company balance sheets. The treatment of inventories for book and tax purposes can be quite different. The determination of LIFO inventories, allowable mark-downs, other inventory reserves and capitalizable overhead are a few of the areas in which book inventory accounting differs from tax accounting. Experienced professionals at Andersen Tax's can review your inventory accounting and suggest changes that will address exposure and capture opportunities. The administrative process for changing tax accounting methods provides back-year audit protection, allowing the correction of erroneous methods prospectively with no penalty or interest exposure to the company.
Many costs that are properly capitalized for book purposes may be currently deducted for tax purposes. Examples include engineering costs, certain prepaid expenses, certain transaction costs, recurring repairs and maintenance, abandoned property, cost of removal and demolition costs. Andersen Tax can identify these opportunities and file the necessary applications to change the company's tax accounting methods for these items.
Foreign Currency Gains and Losses (Sec. 987)
Sec. 987 provides a complex regime for taxing foreign currency gains and losses of foreign branches or disregarded entities (e.g., those with “check-the-box” elections). Because of the complexity of these rules, we find that many taxpayers have either ignored them or misapplied them. IRS allows taxpayers to change from their present methods, whether proper or improper, to potentially more favorable methods under recently proposed regulations in a manner that provides:
- Back-year audit protection for a company on an erroneous method of accounting
- Possible permanent tax benefit
- A less burdensome and more beneficial method
Mark-to-Market Elections for Traders (Sec. 475)
Individuals and companies that actively trade securities may benefit from a voluntary Sec. 475 mark-to-market election. This election converts capital losses from trading activities to ordinary losses that can offset ordinary income without limitation. Andersen Tax can assist with the preparation of the election and the required method change filings. We also provide advice on the recordkeeping necessary to designate securities held for investments.
Deduction for Property No Longer Used in a Trade or Business
In economic downturns, many businesses close locations and downsize their operations. If such locations are closed permanently, it may be possible to abandon the related tangible property and take a loss deduction before the property is sold. Andersen Tax can advise you on the steps necessary to secure an abandonment loss deduction for tax purposes.