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As the year draws to a close, now is the perfect time to consider year-end tax planning strategies. Tax laws for businesses continue to evolve, and staying proactive can help maximize your deductions, minimize your liabilities, and set you up for a stronger financial future. Here are key strategies for business owners to consider as we approach the end of 2024.
1. Review Depreciation Options
2024 has introduced significant changes to bonus depreciation and Section 179 expensing. Bonus depreciation, which previously allowed a full deduction for qualified assets, has phased down. To maximize deductions, consider investing in machinery, equipment, or technology that qualifies for Section 179 expensing. For 2024, the expensing limit has increased to $1.29 million, making it an opportune time to upgrade essential assets for your business.
2. Optimize Qualified Business Income (QBI) Deduction
Business owners with pass-through entities can benefit from the QBI deduction, which allows for a 20% deduction on qualified business income. Ensure that you’re staying within income thresholds and adjust strategies like timing income and expenses to maximize this deduction. For example, consider deferring income to remain under the threshold or accelerating deductions to reduce taxable income.
3. Manage Cash Flow with Year-End Inventory and Receivables
To reduce taxable income, look closely at your cash and accrual methods of accounting. If you operate on a cash basis, defer income by delaying invoicing until January, or accelerate deductions by prepaying expenses like rent or utilities. Accrual basis taxpayers can benefit by writing off obsolete inventory or confirming bad debt write-offs before year-end.
4. Leverage Net Operating Losses (NOLs)
If your business experienced a downturn this year, the rules on NOLs allow you to carry losses back or forward to offset taxable income in other years. This can result in a refund of previously paid taxes or a reduction in future taxes, so it’s worth consulting with a tax advisor to determine the best timing and strategy for NOLs.
5. Maximize Retirement Contributions
Not only do retirement contributions build wealth for you and your employees, but they also offer tax advantages. Consider contributing to a SEP IRA, SIMPLE IRA, or a 401(k) plan before the end of the year to reduce taxable income. As a bonus, catch-up contributions for those over 50 can further enhance tax savings.
6. Plan for Changes to Business Interest Deductions
The Tax Cuts and Jobs Act introduced limitations on business interest deductions. If you have significant business debt, look into how these rules may affect you, especially if Congress enacts new limits for 2025. It might be beneficial to pay down debt or restructure loans to mitigate interest deduction caps.
7. Take Advantage of Charitable Contributions
Giving back not only benefits the community but also offers potential tax savings. Cash donations are generally deductible up to 60% of your adjusted gross income, while non-cash donations have a 30% limit. Contributions made before December 31 can help lower your taxable income, so consider making donations if you haven’t already.
8. Utilize Health Savings Accounts (HSAs)
HSAs offer a tax-advantaged way to save for healthcare costs, which can be especially valuable for small business owners. For 2024, the contribution limit is $3,200 for individuals and $6,450 for families. Contributions can be made until the tax filing deadline, but getting them in before year-end can maximize the tax benefit this year.
9. Review Employee Benefits and Tax Credits
The Employee Retention Credit (ERC) moratorium may still impact some businesses. If you claimed ERCs during COVID-19, ensure that you’re prepared for possible interest recaptures and be aware of new tax credit opportunities, such as those for family leave or employee training. Additionally, consider year-end bonuses or fringe benefits like educational assistance plans, which may be deductible and boost employee morale.
10. Plan Ahead for Expiring Tax Provisions
Several provisions from the Tax Cuts and Jobs Act are set to expire soon, including lower tax rates and favorable treatment for pass-through entities. With potential tax rate increases on the horizon, explore strategies such as income deferral or asset sales to lock in current tax rates. Keeping abreast of pending legislation will help you make timely adjustments.
Final Thoughts
Year-end tax planning doesn’t have to be overwhelming. By taking steps now, you can potentially lower your tax bill, increase your cash flow, and set your business up for success in 2025. Consulting a tax professional who understands your specific needs can be invaluable as you navigate the complexities of the tax code. Start planning today to make the most of these opportunities and position your business for a prosperous new year!
