As the year winds down, it’s time for small business owners to start thinking about year-end tax planning strategies. With Labor Day behind us, now is the perfect time to take proactive steps to potentially lower your tax liability for both 2024 and 2025. A solid tax plan can help you optimize your finances, boost deductions, and minimize the tax burden on your business.
Here are some essential tax-saving strategies to consider before the year ends.
1. Deferring Income and Accelerating Deductions
A common year-end tax strategy for many small businesses is to defer income and accelerate deductions. By pushing income into the following year and taking as many deductions as possible in the current year, you can potentially reduce your taxable income for 2024. This approach works particularly well if you expect to be in the same or a lower tax bracket next year.
However, if you anticipate being in a higher tax bracket in 2025, the opposite strategy may be more effective. In that case, you might want to pull income into 2024 (when it will be taxed at a lower rate) and delay claiming certain deductions until 2025.
2. Pay Estimated Taxes
Avoiding penalties is critical, so make sure you’re on track with your estimated tax payments. The third-quarter estimated tax payment for 2024 is due by September 16, 2024, and the fourth-quarter payment is due by January 15, 2025. Ensuring that these payments are made on time can prevent you from incurring penalties and interest.
3. Maximize the QBI Deduction
If you own a small business structured as a pass-through entity (such as an LLC, sole proprietorship, S corporation, or partnership), you may be eligible for the Qualified Business Income (QBI) deduction. This can reduce your taxable income by up to 20%, but only if your taxable income is below a certain threshold.
For 2024, the QBI deduction starts phasing out for married couples filing jointly with taxable income over $383,900 (or half that amount for single filers). If you’re nearing this income threshold, you may be able to increase your QBI deduction by deferring income or accelerating deductible expenses to stay below the limit.
Additionally, increasing W-2 wages paid by your business before the end of the year may also help maximize your QBI deduction. Be sure to consult a tax professional to navigate these complex rules and make the most of your deduction.
4. Take Advantage of Cash Accounting
Many small businesses are eligible to use the cash method of accounting for federal tax purposes. This method allows you to record income when it is received and expenses when they are paid, offering more flexibility in deferring income and accelerating expenses.
If your business has average annual gross receipts of less than $30 million over the past three years, you may qualify to use cash accounting. Delaying invoices until the new year or prepaying expenses such as rent, supplies, or utilities can reduce your taxable income for 2024.
5. Utilize the Section 179 Deduction
Consider making capital investments that qualify for the Section 179 deduction before the year ends. For 2024, the maximum Section 179 deduction is $1.22 million, with a spending cap of $3.05 million. This deduction applies to qualifying business property, including equipment, machinery, and off-the-shelf software, as well as interior building improvements.
The high limit allows many small and mid-sized businesses to fully deduct most, if not all, of their capital expenditures. Even if you purchase and place eligible assets into service in the last few days of 2024, you can still claim the full Section 179 deduction for the year.
6. Consider Bonus Depreciation
In addition to the Section 179 deduction, businesses can take advantage of bonus depreciation. For 2024, businesses are eligible for a 60% first-year depreciation deduction on qualified property, including equipment, machinery, and qualified improvement property. This bonus depreciation applies whether the property is new or used, making it a powerful tool for reducing taxable income in the current year.
7. Stay Informed About Upcoming Tax Law Changes
Tax laws are always evolving, and it’s essential to stay up to date on potential changes that could affect your small business. Many current tax provisions, including the QBI deduction, are set to expire at the end of 2025. Additionally, the outcome of the upcoming elections could bring new tax breaks or changes that impact small businesses. Staying informed will help you adapt and make the most of any new opportunities.
Consult with a Professional
As tax season approaches, working with a tax professional can help ensure you’re making the best decisions for your small business. At Botwinick, we specialize in helping businesses like yours navigate tax planning strategies, saving you time and money.
Whether you’re considering an LLC, S corporation, or other business structure, we can provide expert advice tailored to your unique needs. Contact us today to discuss how to optimize your year-end tax planning and prepare your business for a successful financial future.
