HOW TO REALIZE TAX SAVINGS WHEN TAX RATES INCREASE

The Treasury Department’s Green Book outlines proposals by the Biden Administration to raise federal tax rates for corporations and high-income individuals. If enacted, these changes would generally take effect for tax years beginning after December 31, 2021.

Key Proposed Changes:

Corporate tax rate increase: from 21% to 28%
GILTI (Global Intangible Low-Taxed Income) effective rate: from 10.5% to 21%
Top marginal individual tax rate: from 37% to 39.6%
Long-term capital gains rate for high earners: from 20% to 39.6% (or 43.4% with the Net Investment Income Tax)

⚠️ Note: The increase in long-term capital gains rate is proposed to apply retroactively to gains recognized after April 28, 2021.

Why Timing Matters

If tax rates increase, strategic timing of income recognition and deductions can lead to permanent tax savings. The idea is simple:

Accelerate income into lower-tax years
Defer deductions into higher-tax years

This approach can reduce overall tax liability for corporations and individuals—including flow-through income from partnerships, LLCs, and S corporations.

Income Acceleration Strategies

Advance Payments:
Switch to the full-inclusion method to recognize income when received, not deferred.
Installment Sales:
Elect out of the installment method to recognize the full gain in the current year.
Sale-Leaseback Transactions:
Recognize gain now and take future deductions on lease payments (if not recharacterized as financing).

Deferring Deductions

For accrual-method taxpayers, consider delaying certain payments so deductions fall into a higher-rate year:

Accrued Liabilities:
Items like warranties or rebates are deductible when paid.
Accrued Compensation:
Bonuses are deductible when paid within 2.5 months of year-end; delay further to push deductions forward.
Related-Party Payments:
Interest or fees owed to related cash-method or foreign entities are only deductible when paid or recognized by the recipient.

Additional Tactics for Future Deductions

Expense Capitalization:
Capitalize and amortize qualifying costs (e.g., R&E expenses, software development, patents).
Depreciation:
Elect out of bonus depreciation or Section 179 to spread deductions over asset life.

Note: Starting in 2022, U.S. and non-U.S. R&E expenses must be capitalized over 5 and 15 years, respectively.

Net Operating Loss (NOL) Preservation

NOLs will be more valuable under a higher corporate rate. But beware of triggering a Section 382 ownership change, which can limit NOL utilization. This can occur through:

Stock redemptions
Equity financing
Transfers among 5% shareholders

Monitor shareholder activity to protect NOLs and strategically time their use for maximum benefit.

When Deferring Income Makes Sense

Not all taxpayers benefit from accelerating income. Some may:

Qualify for CARES Act NOL carrybacks (at 35% or 39.6% rates)
Be pass-through owners who can offset income in earlier years
Expect a drop in future income, making deferred income less costly

Act Now: Review, Model, and Execute

Whether or not tax rates rise, the time to plan is now. Taxpayers should:

Model the impact of timing shifts
Consult with advisors on method changes or elections
Make necessary moves before year-end or by extended filing deadlines