Why Is Year-End Tax Planning Essential
As we enter the latter half of the year, small business owners have the opportunity to make some financial decisions that can lower their tax bill and prepare them for the upcoming year through some year-end tax planning strategies. There are several steps a business can take to ensure it is prepared for tax season. But what are some effective year-end tax planning strategies?
That’s where DeMar Consulting Group comes in. With our help, you can implement several year-end tax tips that can help reduce your liability, maximize tax deductions, and position your business for success in the coming year, and learn how to reduce small business taxes at year-end.
So what should you be taking when it comes to your small business year-end tax planning checklist, and are there any last-minute tax tips for business owners?
Review and Update Financial Records
The first of our year-end tax tips for small business owners shouldn’t come as a surprise. As we’ve discussed before, one of the best things you can do for your business is to ensure you have accurate financial records, as these become the foundation of effective tax planning for small business owners.
Firstly, it’s important that you’ve been updating your financial records and reconciling any outstanding bank and credit card accounts. This should include collecting any unpaid invoices and outstanding accounts receivable. Once you’ve determined what’s left outstanding and corrected any discrepancies in your records, double-check that all business expenses have been properly classified.
Certain tax deductions and write-offs rely on accurate tracking and recording of these expenses. Once your books are updated, you can begin to utilize the next steps in our small business tax planning tips and the year-end tax moves to lower your tax bill.
Accelerate or Defer Income Strategically
Accelerating and deferring income can be an option for you if you run a cash-basis business. For example, if you’re a freelancer or if your employer allows you to defer non-performance-based compensation or fixed salary, deferring income until December 31st will mean you aren’t taxed on it until next year.
This means that there’s no tax liability on your income or its growth until you’ve officially received it. At that time, it will be taxed based on the rate in effect. However, if you expect a higher income next year or that you’ll be pushed into a higher tax bracket if you were to follow this tip, it may make sense to pull income into this year instead of deferring it to the next.
It should also be noted that by deferring your income, you also assume the risk as a general creditor of the business.
Income deferral is a bit different if you are part of an accrual-basis business. The strategy differs, but the principle is roughly the same. You’ll want to match your income with your expenses to minimize the tax liability on your profits. As with the cash-based businesses, this needs to be done before December 31st in order to take effect.
When done strategically, tax deferral and acceleration can be one of the most effective ways to reduce small business taxes at year-end.
Maximize Deductions Before December 31
The end of the year is the best time to maximize your deductions. As we’ve discussed before, deductible items include anything bought for or done to improve the business.
This can include things like purchasing office supplies, equipment, or software for the company, as well as any sort of maintenance, rent, and utilities. It may also be beneficial to see if the insurance you are using counts as a deductible.
Taking note of and maximizing your year-end business deductions can help lower tax liability when April comes. Just like with the income deferral, this needs to be done before December 31st in order for you to make the most of this year-end tax tip.
Contribute to Retirement Plans
Retirement accounts are powerful tools for lowering taxes while building long-term wealth. There are a few common options offered to small business owners, and each comes with unique retirement contributions tax benefits.
Setting up a retirement account before December 31 can significantly reduce your taxable income, regardless of whether you are a business owner or an employee.
A few common retirement accounts are:
- SEP IRA – Flexible contributions for self-employed individuals
- SIMPLE IRA – Easy to set up, with lower administrative costs
- Solo 401(k) – High contribution limits for owner-only businesses
This year-end tax planning strategy can be beneficial and potentially allow high-income earners to save more in their Roth accounts. If it is permitted by your employer, max out your 401(k) contributions and then contribute up to your after-tax account limit. This will include your employer’s matching.
From here, convert the rollover funds into your Roth IRA or Roth 401(k). For more information about how to do this, set up a free 15-minute consultation with one of our consultants today.
Take Advantage of Tax Credits
Another one of our end-of-year tax strategies for LLCs comes in the form of tax credits. Unlike deductions, which reduce taxable income, tax credits directly reduce the amount you owe.
There are a few common business tax credits to be aware of:
- Work Opportunity Tax Credit (WOTC) for hiring certain employees
- Energy-efficiency credits for qualifying upgrades
- Research & Development (R&D) credits for innovation-related expenses
Not all businesses will be eligible for tax credits, and not every tax credit will be applicable to every business. It’s important to review what tax credits apply to your small business in order to minimize your overall owed taxes.
Review Depreciation and Asset Purchases
The IRS allows generous write-offs through the Section 179 deduction and bonus depreciation. Section 179 of the U.S. Tax Code states that certain depreciable assets to be deducted in their entirety in the year it is put into service, rather than depreciating over the next several years.
If you’re planning to purchase any sort of machinery, vehicles, or technology for your business, doing so before year-end may allow you to deduct most (or all) of the cost this year.
Check Estimated Tax Payments
Missing IRS deadlines can lead to costly penalties and penalty abatement paperwork if the tax deadline isn’t met. Before the year-end, business owners should review their tax payments to ensure that they’ve met their quarterly obligations.
If you’ve been keeping organized and accurate records, these penalties can be avoided long before they happen. Making an additional estimated payment can prevent underpayment penalties, which are an often-overlooked part of IRS small business tax deadlines.
Plan Charitable Contributions
Donations to charities not only support causes you care about, but they also offer potential tax savings. Generally, you can deduct cash donations made to certain qualified charities up to 60% of your adjusted gross income. This can also include appreciated long-term assets.
Whether you operate as a C corporation or an LLC, you may be able to claim a charitable contributions tax deduction if you’ve maintained proper receipts, documentation, and accurate records of the donations made.
Consult a Tax Professional Before Year-End
While all of the strategies are valuable, every business is unique. There is no one-size-fits-all year-end tax strategy that works perfectly for every small business owner.
A CPA or tax advisor can help provide last-minute tax tips for business owners that better align with your structure, cash flow, and growth goals.
Take Action Now for Maximum Savings
Year-end tax strategies are all about maximizing your business’s financial health and lowering your tax liability. From accelerating deductions to leveraging credits and retirement plans, these end-of-year tax tips, when implemented early on, can significantly lower your tax bill.
Don’t wait until tax season to find out what you could have done differently. Review your Business Year-End Tax Checklist today and speak with one of our DeMar Consulting Group tax professionals to create a strategy that works for you and your business.
Still have questions about how small businesses can save on taxes before year-end? Ready to contact us for a free 15-minute consultation and start the new year on the right financial footing.
