Year-End Tax Planning for Retail and Grocery Stores

Now that Q4 is upon us, it is a great time for retail and grocery store owners to consider accounting methods and year-end tax planning. There are a few options that should be considered under the Tax Cuts and Jobs Act of 2017 (TCJA).

Companies that have average annual gross receipts for a three-year tax period ending immediately before the current tax year (2021) of $26 million or less can qualify for a few small business exceptions.

1. They can switch to the cash method of accounting even if they have inventory. An election (Form 3115) would have to be made with the taxpayer’s return in order to change their accounting method. The company would then make a negative Sec. 481(a) adjustment to reduce taxable income. Consideration should be made to recognize the adjustment in the tax year most advantageous to the business. If the cash method is preferable, a business should plan ahead and make informed business decisions to minimize the impact of the change in accounting method. Some examples would be to consider payables or deferred revenue and their effect on taxable income before and after the change in method.
   
   
2.  The TCJA also exempted small business taxpayers from the Sec. 263A uniform capitalization rules (“UNICAP”). These rules require certain direct and indirect costs produced by the taxpayer to be either included in inventory or capitalized into the basis of the property produced. For property acquired by the taxpayer for resale, Sec. 263A generally requires certain purchasing, storage, and handling costs allocable to the property to be included in inventory.
   
   Now, if these owners met the $26 million gross receipts test they are exempt from the application of Sec. 263A. This is a very favorable exception as the uniform capitalization calculation can be complicated and tedious. It should be noted that changing from the application of UNICAP will require a change in accounting method.
   
   Even if a company doesn’t qualify under the gross receipts test, careful consideration should be given to the methods they use to account for inventory costs under the uniform capitalization rules as there is the potential to reduce the costs included in the calculation.

Another factor to consider at year-end (whether or not you qualify under the gross receipts test) is the need for capital expenditures. Recent tax law has changed the unfavorable rules concerning the depreciable life of qualified improvement property. For retail and grocery store owners this would include certain interior store fit-out components (improvements that enlarge the building, are for the internal structural framework, or an elevator or escalator would not apply). These improvements were originally given a depreciable life of 39 years under the TCJA and now have a more favorable 15-year depreciable life, thus qualifying them for favorable accelerated depreciation deductions. The two accelerated depreciation options companies should consider are as follows:  

1. Section 179 deduction is an immediate expense business can take for purchases of depreciable business property and equipment instead of capitalizing and depreciating the asset over a period of time (useful life). The amount of the deduction allowable in 2021 is $1,050,000. This expense is phased out once the total company purchases exceed a threshold of $2,590,000.
   
   
2. Bonus deprecation is also an immediate expense available to business. In order to qualify for this deduction, the original use of the property needs to begin with the company (property can be used property as long as its new to the taxpayer) and the asset recovery period generally has to be 20 years or less.

Consideration should also be given to the life used for 2019 and 2020 additions as there is an opportunity to accelerate those additions with an accounting method change. Additionally, state tax rules should be considered when deciding which depreciation option to implement as some states have adjustments for both Section 179 and acceleration bonus depreciation.

Now is the time for retail and grocery store owners to contact their business advisors to discuss these opportunities and ensure they are implemented prior to year-end. The Manufacturing & Distribution Practice professionals at Citrin Cooperman have the depth of expertise to assist retail and grocery store owners with evaluating their options. Contact your Citrin Cooperman representative for further discussion.