As we quickly approach the end of the year, business owners may have additional opportunities to reduce their tax liability, save more, and position themselves for future success. An effective tax strategy is a critical component of financial planning for business owners. We’ll explore a few items you may want to consider as you wrap up the year.
Maximize Large Depreciation Deductions
Take advantage of depreciation deductions or “bonus” depreciation. Under Section 179, the IRS allows you to write off all or most of the cost of qualified property or equipment purchased in the tax year. This could be a great opportunity to lower your taxable income if you need to purchase new or used equipment.
Additionally, the bonus depreciation deduction allows you to deduct up to 60% of the cost of a qualified property or equipment for the year it’s placed in service, with the remaining to be depreciated over subsequent years. You can still leverage these deductions with some restrictions. Work with your CPA for details and to see if this is right for your business.
Tax Savings for Pass-Through Businesses
Entity Tax Deduction: There may be state-specific opportunities to lower your taxable income. One strategy is leveraging the pass-through entity (PTE) tax deduction if your state offers it. The deduction allows business owners with a pass-through business structure to offset state taxes by shifting the state tax payment from the individual to the entity.
Qualified Business Income (QBI) Deduction: In certain entity structures, business owners may be able to deduct up to 20% of their qualified business income, subject to various rules and limitations. This potential deduction may be available for sole proprietors and pass-through entities such as partnerships, LLCs, and S corporations. Consult with your financial advisor or CPA to discuss strategies and implications when adjusting your business’s W-2 wages to maximize your QBI.
Fund a Retirement Plan
In addition to your personal IRA, consider funding an employer-sponsored retirement savings plan, such as a SIMPLE IRA, SEP IRA, 401(k), or profit-sharing plan, to help you save for the future while providing tax advantages to you and your employees. Contributions you make for yourself and your employees may be tax deductible, lowering your taxable income, but certain limits and restrictions apply. Contact your CPA to ensure you’re staying within the IRS contribution limits.
Defer Income or Accelerate Expenses
Depending on your financial outlook, you may consider shifting expenses between years. For example, if you expect higher earnings next year, you may defer your current year’s income to next year to help reduce your tax liability in the current year. For example, you may consider invoicing a customer in January for services rendered in December so that income is recognized in the following year.
Accelerating expenses involves moving future-year business purchases into the current year to capture more tax savings in the current year. For example, if you plan to purchase $10,000 worth of inventory and equipment in January 2025, you may consider buying in December 2024 to reduce your taxable income for 2024. Additionally, suppose you plan to distribute employee bonuses. You may forecast your projected earnings and determine whether lowering your taxable income this year or waiting until January to distribute bonus checks is more beneficial.
Reimbursement for Business Expenses
If you’ve covered any business expenses personally, be sure to reimburse yourself for those purchases before the end of the year to capture those tax deductions.
Write Off Bad Debts
If you have outstanding receivables, assess their collectability and work with your CPA to determine what’s required to write off the debt, i.e., remove it from your books, as a business bad debt and possible deduction this year. Business bad debts are any money owed to you that is no longer collectible, generally claimed the year they’re deemed worthless. There are certain qualifications for write-offs; however, if you think they’re unlikely to ever get collected, you can turn them into valuable deductions while improving your financial records and cash flow management.
Give Back
Charitable donations are a rewarding way to support causes important to you, and they may also offer significant tax benefits when done strategically. Typically, tax-deductible donations to qualified organizations can help reduce your taxable income. If you usually itemize your deductions, you may consider bunching your gifts into a single year to exceed the standard deduction threshold and capture more benefits. For example, instead of an annual donation of $5,000, a $10,000 donation every two years may offer more tax benefits. Timing is also important to consider when donating in high-income versus lower-income years. Work with a professional to find the best approach and ensure you comply with current laws and eligibility requirements.
Year-End Tax Planning for Business Owners: How CCMI Helps
Based on your unique circumstances, other tax strategies or combinations of solutions may be appropriate. For example, additional tax considerations exist if you plan to exit your company or retire soon. We recommend working with your CPA and financial advisor to optimize your tax situation and stay current with new and evolving tax laws.
As business owners and advisors, we regularly work with entrepreneurs on strategies that maximize their long-term cash flow and value. Contact us to learn how we work alongside your extended team of professionals, including accountants and CPAs, to design tax-advantaged action plans to meet your goals.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
How can we help you?
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
How can we help you?
