Year-end business tax planning is crucial because it offers opportunities to reduce your tax burden and keep more money in your business. As the year draws to a close, there are specific strategies you can use to maximize savings:
- Defer Income: Postpone income to the next year to reduce this year's taxable income.
- Accelerate Expenses: Prepay for certain expenses to claim deductions in the current year.
- Invest in Equipment: Take advantage of Section 179 deduction and bonus depreciation.
- Contribute to Retirement Plans: Increase contributions to individual and employee retirement accounts for tax benefits.
- Review Eligible Tax Credits: Claim applicable credits like the Work Opportunity Tax Credit or Disabled Access Credit.
The end of the year is the last chance to make decisions impacting your company's tax return. As Russell Rosario, a seasoned financial expert and CPA, I bring over 20 years of experience in helping businesses navigate tax complexities. Through cutting-edge technology like Huxley, our AI advisor, I assist in making data-driven financial decisions for optimal savings.
Invest in Business Equipment and Supplies
The Section 179 deduction is a powerful tool for businesses looking to reduce their tax burden by deducting the purchase price of qualifying equipment and supplies. For 2023, the IRS allows businesses to deduct up to $1,160,000 of the cost of equipment, tools, vehicles, and technology placed in service during the year. This deduction is phased out on a dollar-for-dollar basis once total equipment purchases exceed $2,890,000.
Here's a quick tip: Make sure the equipment is in use before the end of the year to qualify for this deduction. If it's not operational until 2024, you won't be able to claim the deduction for 2023.
Bonus Depreciation
In addition to the Section 179 deduction, businesses can also benefit from bonus depreciation. Under the Tax Cuts and Jobs Act, you can deduct 80% of the cost of qualifying property purchased and placed in service in 2023. This percentage will drop to 60% in 2024, so it's wise to take advantage of this higher rate now.
One key difference between bonus depreciation and Section 179 is that bonus depreciation must be applied to all assets within a category. For example, if you claim bonus depreciation on one vehicle, you must apply it to all vehicles purchased that year.
Regular Depreciation
If you still have costs left after claiming Section 179 and bonus depreciation, you can use regular depreciation to deduct the remaining amount over time. The IRS uses the Modified Accelerated Cost Recovery System (MACRS) to determine the depreciation schedule.
For instance, if you purchase a piece of machinery for $1,500,000 and claim a Section 179 deduction of $1,160,000, you can apply bonus depreciation to 80% of the remaining $340,000. The leftover amount can then be depreciated over the asset's useful life using MACRS.
Example Calculation:
| Cost of Equipment | Section 179 Deduction | Bonus Depreciation (80%) | Remaining Cost for MACRS |
|---|---|---|---|
| $1,500,000 | $1,160,000 | $272,000 | $68,000 |
Pro Tip: Special "luxury car" rules limit deductions for business vehicles, but you can still write off up to $20,200 for such a vehicle placed in service in 2023 due to the TCJA.
By leveraging these depreciation-based deductions, you can significantly reduce your taxable income and reinvest those savings into your business.
Russell Rosario, the co-founder at Profit Leap, uses cutting-edge technology like Huxley, an AI advisor, to help businesses make data-driven decisions and maximize their tax savings.
Prepay for Services
Prepaying for services is a smart move for year-end business tax planning. It helps you reduce your taxable income for the current year by paying for next year's expenses now.
Business Insurance
One effective strategy is to prepay for business insurance. This includes general liability, property, and professional liability insurance. By paying these premiums in advance, you can deduct the expense in the current year, lowering your tax bill.
Professional Memberships and Association Dues
If your business is part of professional organizations or associations, consider prepaying membership fees and dues. This not only secures your membership for the next year but also allows you to claim the expense this year.
Business Rent
Prepaying rent for your office or business space can also be advantageous. If you know you’ll be in the same location next year, paying a few months' rent in advance can reduce your taxable income for this year. Just ensure that your lease agreement allows for advance payments.
Case Study: Small Business Owner
Consider Jane, a small business owner. Last year, she had a higher-than-expected profit. By prepaying her business insurance, professional memberships, and three months of office rent, she was able to lower her taxable income significantly. This strategy saved her thousands in taxes, which she then reinvested into her business.
By prepaying for services, you can effectively manage your taxable income and enjoy the benefits of reduced taxes. This is just one of the many ways to optimize your year-end tax planning.
Write Off Bad Debts
Unpaid accounts can be a headache for any business. But did you know that you can use these bad debts to reduce your tax burden?
When a customer doesn't pay their bill and you don't expect to collect the payment, you can write off this debt on your taxes. This process can lower your taxable income, thus reducing the amount you owe in taxes.
How to Write Off Bad Debts
- Identify the Bad Debts: First, pinpoint which accounts are unlikely to be paid. Keep detailed records of your collection efforts, such as phone calls, emails, and letters. This documentation will help prove the debt is worthless.
- Consult a Tax Advisor: Writing off bad debts can be tricky. If the customer pays later, you must reverse the write-off. To handle this correctly, consult with a tax advisor. They can ensure you follow the rules and maximize your tax savings.
- Claim the Write-Off: Once you've identified the bad debts and consulted your advisor, you can claim the write-off on your tax return. This will reduce your taxable income, lowering your overall tax liability.
Real-World Example
Consider Jane, a small business owner. She had several unpaid invoices totaling $10,000. After consulting with her tax advisor, she decided to write off these bad debts. This action reduced her taxable income by $10,000, resulting in significant tax savings.
Important Considerations
- Future Payments: If a customer eventually pays their debt, you'll need to reverse the write-off. This means reporting the payment as income in the year it's received.
- Keep Records: Maintain thorough records of all collection efforts and communications. This documentation is crucial for proving the debt was genuinely uncollectable.
By writing off bad debts, you can effectively manage your taxable income and reduce your tax burden. This strategy, combined with the guidance of a tax advisor, can save your business money and improve your financial health.
Next, let's explore how deferring income and expenses can further optimize your year-end tax planning.
Deferring Income and Expenses
Deferring income and expenses can be a strategic move for year-end business tax planning. Depending on your accounting system, you can either defer income to the next year or accelerate it to this year. Let's break it down.
Using the Cash System
If your business uses the cash method of accounting, you recognize income when you receive payment and record expenses when you pay them.
How to Defer Income
To reduce taxes this year, delay sending out invoices to clients until January. This way, the income will count towards next year's taxes.
How to Accelerate Expenses
Prepay expenses like rent, suppliers, or other bills before the year ends. This reduces your taxable income for the current year.
Using the Accrual System
If your business uses the accrual method of accounting, you recognize income when you earn it and expenses when you incur them, regardless of when cash changes hands.
How to Defer Income
Postpone completing projects or shipments until January. This way, the income will be recognized next year.
How to Accelerate Expenses
Agree to new business purchases or sign contracts for equipment now, even if the payment isn't due until next year. This allows you to deduct the expenses this year.
By strategically deferring income and accelerating expenses, you can manage your taxable income more effectively and reduce your tax burden.
Next, let's explore how contributing to retirement plans can offer significant tax breaks for your business.
Contribute to Retirement Plans
Contributing to retirement plans is a powerful tool for year-end business tax planning. It not only helps secure your employees' futures but also offers significant tax breaks for your business.
Setting Up a Retirement Plan
Setting up a retirement plan like a 401(k) or SEP (Simplified Employee Pension) can be straightforward and highly beneficial.
- 401(k) Plans: These allow both employees and employers to make contributions. Starting in 2024, employers must provide automatic enrollment for new plans, which simplifies participation and boosts savings.
- SEP IRAs: Ideal for small businesses and self-employed individuals, SEPs allow contributions of up to 25% of an employee's salary, with a maximum of $66,000 for 2023.
- Retirement Plans Startup Costs Tax Credit: Small businesses with 50 or fewer employees can qualify for a credit of 100% of their contributions to a new retirement plan, up to $1,000 per employee. This credit phases out over five years but provides a substantial incentive to start a plan.
Maximizing Contributions
Once your plan is set up, maximizing contributions can yield significant tax deductions.
- Employee Contributions: Employees can contribute up to $22,500 to their 401(k) in 2023, with an additional $6,500 catch-up contribution if they are 50 or older. These contributions are pre-tax, reducing taxable income.
- Employer Contributions: Employers can match employee contributions or make profit-sharing contributions. For 401(k) plans, this can total up to $66,000 per employee, including the employee's contribution.
- Tax Deduction: Contributions to retirement plans are tax-deductible, lowering your business's taxable income. For example, if you contribute $10,000 to each employee's 401(k), that amount is deducted from your business's income, reducing overall tax liability.
By setting up and maximizing contributions to retirement plans, you can effectively reduce your tax burden while supporting your employees' financial futures. This strategic approach not only helps with immediate tax savings but also fosters long-term loyalty and satisfaction among your workforce.
Next, let’s take advantage of various tax credits available to businesses.
Take Advantage of Tax Credits
Tax credits are a powerful way to reduce your tax bill. Unlike deductions, which lower your taxable income, tax credits directly reduce the amount of tax you owe. Let’s look at three significant tax credits your business can leverage.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is designed to encourage businesses to hire individuals from specific target groups who have faced barriers to employment. This includes veterans, ex-felons, and recipients of Temporary Assistance for Needy Families (TANF).
Eligible new hires can earn your business a tax credit of up to $2,400 per employee. To claim this credit, you need to:
- Hire an eligible employee
- Complete Form 8850
- Submit the form to your state agency within 28 days of the employee's start date
Once the state agency confirms eligibility, you can claim the credit on your next tax return. This credit not only reduces your tax liability but also supports workforce diversity and inclusion.
Disabled Access Credit
The Disabled Access Credit (DAC) helps small businesses offset the costs of making their facilities accessible to disabled individuals. If your business earns $1 million or less annually and has 30 or fewer full-time employees, you can qualify.
The credit covers 50% of eligible expenses, up to $10,000, but excludes the first $250 of costs. Eligible expenses include:
- Modifying existing facilities (e.g., installing ramps)
- Providing accessible formats of materials (e.g., Braille or audio)
- Offering sign language interpreters
- Purchasing adaptive equipment
By claiming this credit, you not only improve accessibility but also reduce your tax bill.
Small Employer Health Insurance Premiums
If your business provides health insurance to employees, you might qualify for the Small Employer Health Insurance Premiums Credit. To be eligible, your business must:
- Have fewer than 25 full-time equivalent employees
- Pay average wages of less than $62,000 per year per employee
- Purchase group health insurance through the Small Business Health Options Program (SHOP)
- Cover at least 50% of the cost of employee-only coverage
This credit can cover up to 50% of the premiums you paid during the year and can be claimed for two consecutive tax years. This is a great way to reduce your tax liability while providing valuable benefits to your employees.
By taking advantage of these tax credits, you can significantly lower your tax burden and make strategic investments in your workforce and facilities.
Next, let’s dive into how monitoring changes in tax law can benefit your business.
Monitor Changes in Tax Law
Keeping up with changes in tax law is essential for year-end business tax planning. New legislation can introduce opportunities to save money or require adjustments to your current tax strategy.
Inflation Reduction Act
The Inflation Reduction Act (IRA) of 2022 brought several significant changes that could impact your business taxes. One of the most notable is the doubling of the small business R&D tax credit. If your business invests in research and development to drive innovation, you can use these expenses to offset the employer portion of Social Security and Medicare taxes. The credit has increased from $250,000 to $500,000 per year. Your business must have less than $5 million in revenue and be under five years old to qualify.
The IRA also extended the Affordable Care Act’s premium subsidies through 2025. This means employees earning over 400% of the poverty limit will continue to receive help with their health insurance premiums. You still need to report health insurance amounts on Form 1095-C, but this extension provides stability for your employees.
Additionally, the IRA introduced tradeable energy credits. Though guidance on how transfers will work is still pending, businesses can now purchase energy credits from unrelated parties to reduce federal income tax liability. This opens up new avenues for tax savings if your business invests in clean energy solutions.
CARES Act and PPP Loans
The CARES Act and Paycheck Protection Program (PPP) loans were crucial during the COVID-19 pandemic. They provided much-needed financial relief but also introduced specific tax implications.
PPP loans, for example, are forgivable if used for eligible expenses like payroll, rent, and utilities. Initially, the IRS stated that expenses paid with forgiven PPP loans were not deductible. However, subsequent legislation reversed this, allowing businesses to deduct these expenses, reducing taxable income.
The CARES Act also allowed for increased tax savings through provisions like the Employee Retention Credit (ERC) and relaxed rules on net operating losses (NOLs). The ERC provides a refundable tax credit for businesses that kept employees on the payroll during the pandemic. The NOL provisions allow businesses to carry back losses from 2018, 2019, and 2020 to the previous five years, providing immediate tax relief.
State and Local Tax Changes
State and local tax laws can change frequently and vary widely. For example, some states are falling below their reserve requirements for unemployment insurance, which could lead to increased payroll taxes. Approximately 10 states are at risk of losing a federal credit for unemployment taxes, potentially increasing the amount businesses need to collect.
Monitoring these changes is crucial. Consult with your tax advisor to understand how these shifts may affect your business and what steps you can take to mitigate any negative impacts.
By staying informed about these changes and working with a knowledgeable tax advisor, you can ensure that your business remains compliant and takes full advantage of available tax benefits.
Next, let's answer some frequently asked questions about year-end business tax planning.
Frequently Asked Questions about Year-End Business Tax Planning
How can I reduce my business taxes at the end of the year?
Reducing your business taxes at the end of the year involves strategic planning and taking advantage of available deductions and credits. Here are some key strategies:
- Invest in Business Equipment and Supplies: Utilize the Section 179 deduction and bonus depreciation to deduct the cost of equipment and supplies. This can significantly reduce your taxable income.
- Prepay for Services: Consider prepaying for next year's business expenses, such as insurance or rent. This can lower your taxable income for the current year.
- Write Off Bad Debts: If you have unpaid accounts that are unlikely to be collected, write them off to reduce your tax burden.
- Contribute to Retirement Plans: Set up and maximize contributions to retirement plans like a 401(k). This provides tax breaks and helps in long-term financial planning.
- Take Advantage of Tax Credits: Utilize credits like the Work Opportunity Tax Credit and the Disabled Access Credit to reduce your tax liability.
- Monitor Changes in Tax Law: Stay updated on new tax laws and regulations, such as the Inflation Reduction Act and the CARES Act, to ensure compliance and maximize benefits.
How to do year-end tax planning?
Year-end tax planning involves a series of steps to optimize your tax situation. Here’s a simple guide:
- Review Financial Statements: Go over your profit and loss statements to understand your financial position.
- Consult with a Tax Advisor: Work with a tax advisor to identify potential deductions, credits, and strategies specific to your business.
- Invest in Assets: Purchase necessary business equipment and supplies before the year ends to take advantage of deductions.
- Prepay Expenses: Prepay for fixed expenses like rent and insurance to reduce taxable income.
- Write Off Bad Debts: Identify and write off any bad debts to lower your tax burden.
- Contribute to Retirement Plans: Maximize your retirement contributions to reduce taxable income.
- Track Tax Law Changes: Stay informed about relevant tax law changes that may affect your business.
What is tax planning for businesses?
Tax planning for businesses involves strategically managing your finances to minimize tax liabilities. It includes:
- Identifying Deductions: Finding and utilizing all available tax deductions to reduce taxable income.
- Timing Income and Expenses: Deciding when to recognize income and expenses to optimize tax outcomes. For example, deferring income to the next year if you expect a lower tax rate.
- Maximizing Credits: Taking full advantage of tax credits like the Work Opportunity Tax Credit and Disabled Access Credit.
- Retirement Planning: Setting up and contributing to retirement plans to benefit from tax breaks.
- Staying Compliant: Keeping up with changes in tax laws and regulations to ensure compliance and avoid penalties.
- Consulting Experts: Working with tax advisors to develop and implement effective tax strategies.
By implementing these strategies, businesses can effectively manage their tax liabilities and enhance their financial health.
In the next section, we will delve into the key takeaways to help you maximize your savings through effective year-end tax planning.
Conclusion
Russell Rosario, Co-founder at Profit Leap, has dedicated his career to helping small businesses thrive through comprehensive financial and strategic consulting. At Profit Leap, we understand the complexities of year-end business tax planning and offer tailored solutions to meet your unique needs.
Our services include bookkeeping, ensuring your financial records are accurate and up-to-date, which is crucial for effective tax planning. We also provide business intelligence services, leveraging cutting-edge technology to offer insights that drive informed decision-making. One of our most innovative tools is Huxley, an AI advisor designed to help business owners make data-driven decisions. This ensures you are not only compliant with tax laws but also strategically positioned for growth.
By partnering with us, you gain access to expert advice on maximizing tax deductions, optimizing your business structure, and staying ahead of regulatory changes. Our goal is to help you reduce your tax burden and keep more money in your pocket, so you can reinvest in your business and achieve sustainable growth.
Key Takeaways
- Invest in Business Equipment and Supplies: Utilize Section 179 and bonus depreciation to maximize deductions.
- Prepay for Services: Reduce taxable income by prepaying for business expenses.
- Write Off Bad Debts: Claim tax deductions for uncollectible accounts.
- Defer Income and Expenses: Strategically manage cash flow to minimize taxes.
- Contribute to Retirement Plans: Benefit from tax breaks through retirement contributions.
- Take Advantage of Tax Credits: Explore various tax credits to reduce your tax liability.
- Monitor Changes in Tax Law: Stay informed about legislative changes to ensure compliance and capitalize on new opportunities.
For more information on how we can help you with year-end business tax planning, visit our service page.
By implementing these strategies and leveraging our expertise, you can ensure your business is financially healthy and poised for success in the coming year.
