It’s Time to Begin Year-End Tax Planning for Your Small Business

With Labor Day behind us, now is the time to focus on strategies that could reduce your small business’s tax burden for this year and the next. Common approaches include deferring income and accelerating deductions, both of which can help minimize your taxes. Another option is bunching deductible expenses into either this year or next, to maximize their tax benefits.

However, if you expect to be in a higher tax bracket next year, an opposite strategy may yield better results. In this case, you might consider pulling income into 2024 to take advantage of lower tax rates and delaying deductible expenses until 2025, when they could offset higher-taxed income.

Here are some additional tax-saving ideas to consider before the year ends.

Estimated Tax Payments

Make sure you’re up to date on your estimated tax payments to avoid penalties. The third quarter payment for 2024 is due by September 16, 2024, and the fourth quarter payment is due by January 15, 2025.

Qualified Business Income (QBI) Deduction

Non-corporate taxpayers may be eligible for a deduction of up to 20% on their qualified business income (QBI). For 2024, if your taxable income exceeds $383,900 for joint filers (or half that amount for single filers), the deduction may be limited based on factors like whether you’re in a service business (e.g., law, healthcare, or consulting), the amount of W-2 wages your business pays, and/or the unadjusted basis of qualified property like machinery. These limitations phase in as income increases.

You may be able to preserve some or all of the QBI deduction by deferring income or accelerating expenses to keep your taxable income below the thresholds. Increasing your W-2 wages before the end of the year can also help. Given the complexity of the rules, it’s advisable to consult a tax professional before taking action.

Cash vs. Accrual Accounting

More small businesses now qualify to use the cash accounting method for federal tax purposes. Under current law, a business is considered small if its average annual gross receipts over the past three years do not exceed $30 million. Cash-basis businesses may find it easier to defer income by delaying billing or prepaying expenses.

Section 179 Deduction

Consider investing in assets that qualify for Section 179 expensing. For 2024, the deduction limit is $1.22 million, with a phase-out starting at $3.05 million. This expensing option applies to most depreciable property, excluding buildings, such as equipment, off-the-shelf software, HVAC, and security systems. The generous deduction limits enable many small and midsized businesses to deduct most or all of their investments in these assets.

What’s more, the Section 179 deduction applies regardless of how long the asset is in service during the year. Even if you place a qualified asset in service at the very end of 2024, you can still take a full deduction.

Bonus Depreciation

Businesses can also take advantage of a 60% bonus depreciation deduction for eligible improvement property, machinery, and equipment placed into service in 2024. As with the Section 179 deduction, the bonus depreciation applies even if the asset is only in use for a few days before year-end.

Upcoming Tax Law Changes

These strategies can help reduce your tax liability, but it’s important to remain informed about any tax law changes that could affect your business. The QBI deduction and many other tax benefits are set to expire after 2025. In addition, the results of the upcoming elections may lead to new or modified tax provisions.

Contact us for personalized tax planning to ensure your small business is prepared for the future.