It’s Time for Your Business to Think About Year-End Tax Planning
As summer fades into fall, it’s the perfect time to take proactive steps to reduce your business’s tax burden for this year and prepare for the next. Several strategies—such as deferring income or accelerating deductions—can be effective for many businesses. Another option is bunching deductible expenses into this year or next to maximize their tax value.
Do you anticipate being in a higher tax bracket next year? If so, you might benefit from the reverse approach. For instance, you could accelerate income into 2024 to take advantage of lower tax rates while deferring deductible expenses to 2025, which could help offset income taxed at a higher rate.
Here are a few other tax-saving ideas to consider as we approach year-end:
Estimated Taxes
Ensure you’re on track with your estimated tax payments to avoid penalties. Your fourth-quarter payment is due by January 15, 2025.
Qualified Business Income (QBI) Deduction
If you’re not operating as a C-corporation, you may be eligible for a deduction of up to 20% on your qualified business income (QBI). However, for 2024, this deduction may be limited if your taxable income exceeds $383,900 for married couples filing jointly (or half that amount for other taxpayers). The limitation depends on whether your business falls into a service category such as law, health, or consulting.
To preserve or maximize your QBI deduction, consider deferring income or accelerating deductions to keep your income below the threshold. Alternatively, increasing W-2 wages to employees before year-end could enhance your deduction. Since the rules can be complex, consulting a tax professional is recommended.
Cash vs. Accrual Accounting
More businesses can now use the cash method of accounting for federal tax purposes than in previous years. For 2024, businesses qualify if their average annual gross receipts over the past three years do not exceed $30 million. Cash-method taxpayers can potentially defer income by delaying billing until the following year, paying bills early, or making certain prepayments.
Section 179 Deduction
Consider taking advantage of the Section 179 expensing option. For 2024, the expensing maximum is $1.22 million if you do not spend more than $3.05 million. Most depreciable property, such as equipment, off-the-shelf software, and certain building improvements like HVAC and security systems, qualify for this deduction.
The high limits mean many businesses can deduct most or all of their spending on equipment. Even if the eligible property is put into service on the last day of 2024, you can still claim the full deduction for the year.
Bonus Depreciation
In 2024, businesses can claim a 60% bonus depreciation deduction for qualified improvement property, machinery, and equipment, whether purchased new or used. As with the Section 179 deduction, the property must be placed in service during 2024—even if only for a few days.
Retirement Plans
One creative strategy is to maximize your retirement plan contributions. Carefully designed plans such as a cash balance plan or a solo 401(k) plan can save substantial tax while substantially increasing the business owner’s retirement assets.
Upcoming Tax Law Changes
It’s essential to stay informed about upcoming tax law changes that may affect your business. Many tax breaks, including the QBI deduction, are set to expire at the end of 2025. In addition, the outcome of the upcoming presidential and congressional elections could bring further changes to tax laws.
At Whittlesey, we stay ahead of these developments to ensure you receive the latest tax news and advice. These are just a few strategies that could help reduce your tax liability as we approach the end of the year. Whittlesey’s tax advisors work with businesses to develop personalized tax plans that maximize savings.