Year-End Tax Planning for Businesses

As the year comes to an end, it’s a great time to assess your year-end tax-saving strategies. By taking proactive steps, you could significantly lower your 2024 tax bill. The best strategies depend on your unique financial situation. Below are some key year-end strategies to consider:

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November 4, 2024

Year-End Tax-Saving Advice through Timing Income and Expenses

One effective way to save is by controlling the timing of income and deductible expenses. Depending on whether you use cash or accrual accounting, adjusting these elements before year-end can help reduce taxable income.

Cash-Basis Businesses: For instance, you can delay income by sending invoices in January and increase deductions by prepaying expenses before December 31.
Accrual-Basis Businesses: Although there is less flexibility, you might still defer income from advance payments and deduct bonuses accrued by year-end.

However, keep in mind that deferring income and accelerating deductions might not work for all businesses. On the other hand, some businesses may benefit more from accelerating income if they expect higher tax rates next year.

Invest in Year-End Equipment and Capital Assets

Making purchases for your business before year-end can offer immediate benefits. These investments often qualify for significant deductions.

Section 179 Expensing: For example, you can deduct up to $1.22 million on eligible property, though this benefit phases out if total expenditures exceed $3.05 million.
Bonus Depreciation: Additionally, you can deduct 60% of qualified asset costs in 2024, but this rate will drop in coming years.
De Minimis Safe Harbor: You may also deduct low-cost assets up to $5,000 per invoice (if you have an applicable financial statement) or $2,500 if you don’t.

By planning these purchases wisely, you can maximize your savings before year-end.

Year-End Tax-Saving Tips through a Retirement Plan

Setting up or contributing to a retirement plan is another excellent year-end tax-saving strategy. Not only does this reduce taxable income, but it also helps attract and retain employees.

New retirement plans may qualify for tax credits.
Some contributions made after year-end, such as for simplified employee pensions (SEPs), can still count toward your 2024 deductions.

This strategy provides flexibility while offering financial security to employees.

Evaluate Receivables for Year-End Bad Debts

Year-end is the ideal time to review accounts receivable for bad debts. These debts, if uncollectible, may qualify as deductions for 2024.

Ensure the debt is legitimate and unlikely to be collected, such as in cases of debtor insolvency.
Additionally, documenting that the debt was charged off is important for claiming deductions.

Remember, only debts already included in taxable income qualify for this deduction, so accrual-basis businesses are more likely to benefit from this strategy.

Consider Qualified Business Income (QBI) Deduction Impact

The QBI deduction lets eligible taxpayers deduct up to 20% of qualified business income on their personal tax return. However, you must balance year-end deductions carefully. Large deductions, like bonus depreciation, can lower QBI and reduce this benefit.

Review Other Tax Deductions and Credits

As the year wraps up, review other available deductions and credits. These can provide substantial savings:

R&D Tax Credit
Energy-efficient building deductions
Work Opportunity Tax Credit for eligible new hires

Make sure to explore and use these opportunities before year-end.

Optimize Your Year-End Tax Strategy

Year-end tax planning can be complex, but it is well worth the effort. By implementing these strategies, you can save money and start the new year with strong financial footing. Contact DuPage Tax Solutions today to learn how we can help optimize your year-end tax strategy.

References

“Publication 334 (2023), Tax Guide for Small Business.” Internal Revenue Service, www.irs.gov/publications/p334