As the end of the year approaches, small business owners have a golden opportunity to take proactive steps to optimize their tax liability. By implementing strategic financial moves in the final months of the year, you can reduce taxable income, boost financial efficiency, and ensure compliance with key regulations. This guide offers actionable strategies to help you prepare for a smoother tax season and achieve significant savings for 2024.
1. Accelerate Business Expenses
One of the simplest ways to reduce taxable income is by accelerating expenses into the current tax year. Consider purchasing essential equipment, tools, or vehicles before December 31 to take advantage of tax deductions such as Section 179 expensing or bonus depreciation.
Section 179 Expensing
This provision allows businesses to deduct the full purchase price of qualifying property purchased or financed during the tax year. For 2024, the deduction limit is $1,220,000, with a phase-out threshold beginning at $3,050,000. Eligible assets include:
- Machinery and equipment
- Office furniture
- Certain business vehicles
- Roofs, HVAC systems, fire alarms, and security systems
Bonus Depreciation
In 2024, businesses can claim bonus depreciation on 60% of the cost of new or used assets with a recovery period of 20 years or less. This percentage is lower than 2023’s 80%, so taking action now can maximize your savings.
2. Optimize Payroll Practice
Your payroll strategy can significantly impact your tax liability. Evaluate the following options:
Reasonable Compensation for S-Corporation Shareholders
Ensure that shareholder-employees of S-Corporations receive a reasonable salary for their contributions. This affects payroll taxes and deductions, including the Section 199A Qualified Business Income (QBI) deduction.
Year-End Bonuses
Issuing bonuses before year-end reduces taxable income for 2024. However, these bonuses are considered supplemental wages and are subject to withholding and payroll taxes. Be sure to process them correctly to avoid compliance issues.
3. Manage Inventory and Cost of Goods Sold (COGS)
For businesses with inventory, year-end adjustments can make a significant impact on taxable income.
Inventory Write-Downs
If you have outdated or unsellable inventory, writing it down increases COGS, reducing taxable income.
Year-End Inventory Valuation
A smaller ending inventory decreases taxable income, while a larger inventory increases it. Adjust inventory levels strategically to align with your financial goals.
4. Maximize Retirement Contributions
Contributing to retirement plans is a win-win: you save for the future and reduce your taxable income.
Contribution Limits for 2024
- SEP IRA: Contribute up to 25% of net earnings, with a maximum limit of $69,000.
- Solo 401(k): Allows both employee and employer contributions for higher savings potential.
Take advantage of catch-up contributions if you’re over 50, and ensure contributions are made by their respective deadlines for maximum benefit.
5. Leverage Charitable Contributions
Supporting charitable organizations not only makes a positive impact but also provides potential tax deductions.
Deduction Limits
- C Corporations: Deduct up to 10% of taxable income.
- Pass-Through Entities (e.g., S-Corps, Partnerships): Deductions are passed to individual owners who itemize deductions on personal tax returns.
Cash contributions can be deducted up to 60% of adjusted gross income for individuals.
6. Invest in Business Advertising
Advertising expenses are fully deductible as ordinary business expenses. Whether you’re promoting your business online, sponsoring events, or running media campaigns, ensure these efforts are accounted for in your tax planning.
Tip: Differentiate advertising expenses from charitable contributions. For example, sponsoring an event that promotes your business is deductible, but donations without direct business benefits are considered charitable contributions.
7. Ensure Filing Compliance
Year-end is an ideal time to review your compliance with filing obligations to avoid penalties and delays.
Beneficial Ownership Reporting
Businesses must report beneficial ownership information under the FinCEN Beneficial Ownership Information (BOI) reporting requirements. Filing deadlines vary based on when the business was established:
- Existing businesses: Deadline is January 1, 2025.
- New businesses (2024): File within 90 days of formation.
Information Returns
Prepare to file Forms 1099-NEC for independent contractors. Collect Taxpayer Identification Numbers (TINs) or Social Security Numbers (SSNs) using Form W-9 to ensure accurate filings.
8. Explore Tax Credits and Incentives
Tax credits directly reduce your tax liability, offering significant savings opportunities.
R&D Tax Credit
If your business engages in innovation, research, or product development, consider claiming the Research and Development (R&D) Tax Credit.
Energy Efficiency Credits
Investments in energy-efficient equipment or renewable energy systems may qualify for federal and state credits.
9. Consider Employee Gifts
Recognizing employee contributions during the holidays or year-end boosts morale and can be tax-deductible.
Tax Implications of Gifts
- Cash Bonuses: Taxable income, subject to payroll taxes.
- Gift Cards: Taxable unless of minimal value and infrequent.
- Non-Cash Gifts: Items like holiday baskets may be considered de minimis fringe benefits and non-taxable.
10. Handle Disaster Losses Strategically
If your business was affected by a federally declared disaster in 2024, you can deduct the loss on your 2023 tax return to expedite financial relief.
Take Action Now
By implementing these year-end strategies, small business owners can minimize their 2024 tax liability, enhance financial stability, and prepare for a successful year ahead. Consult with a tax professional to tailor these strategies to your specific circumstances and maximize your benefits.
Need help with year-end tax planning? Contact our office to explore how these strategies can work for your business.
