Year-End Tax Planning Strategies
Business owners know the anxiety that can come from a large tax bill at tax time. The good news? You can use year-end tax planning strategies to help lower your tax burden.
Tax planning at year-end sets your business up for success during tax season.
In this post, we’ll explore how you can prepare your business for next tax season by taking advantage of tax planning strategies, including deductions, credits, and the merits of good record-keeping.
Review Your Current Financial Position
The first step in any tax strategy is reviewing your current financial situation. Going over your business finances gives you insights that are vital to an effective tax plan. Without this step, you could wind up using tax strategies that don’t make the most sense for your business—thus leaving tax savings on the counter.
To get a better idea of the financial health of your business, take a close look at the company’s:
Profit and Loss (P&L) statement
Current cash flow
The P&L statement will help you see the financial health of your business in regard to sales, revenues, and profits. Your cash flow then gives you further insights into the financial well-being of the business.
Tax Planning Strategies to Consider
Maximizing Deductions
Many common business expenses qualify for deductions, including:
Office supplies purchases
Advertising and promotions expenses
Employee salaries and benefits
Certain business travel expenses
Business Insurance
A key year-end tax planning strategy for almost any business is double-checking your expenses to maximize deductions. While this should include looking over your already-incurred expenses, part of this strategy involves making year-end purchases to reduce tax liability.
Let’s say your business had a great year and profits are way up. The downside is your tax liability is also likely to increase. You planned to purchase new office furniture in the new year.
However, you decide to purchase it before year-end so you can deduct the expense and lower your tax liability for this year.
In addition to deductions, you should consider tax credits and other incentives to help reduce your tax burden, such as:
Pass-Through Entity Tax Credits: The pass-through entity tax (PTE) allows partnerships, S Corporations and LLCs to elect to be taxed at the entity level for state income tax purposes.
R&D Credits: The IRS offers a research and development (R&D) tax credit for costs related to research, development, and improvement of products, processes, software, and more.
Energy-Related Credits: There are a number of energy-related credits and incentives available for businesses that make energy-conscious decisions. For example, a deduction for energy-efficient commercial buildings.
Asset Depreciation
Major business assets, such as company vehicles or heavy equipment, depreciate over time. Traditionally, business owners deduct the cost of the asset throughout the useful life of the asset.
However, this isn’t the only way to deduct equipment purchases. In many cases, it makes more sense for businesses with qualifying equipment purchases to use the Section 179 deduction or bonus depreciation.
Both of these methods let you deduct the cost of certain business equipment right away rather than spreading out the deduction over several years.
The main difference between a Section 179 deduction versus bonus depreciation is how the deduction is calculated. Section 179 deductions use a dollar amount based on the purchase price of the equipment.
Bonus depreciation, on the other hand, lets the business deduct a percentage of the asset’s depreciation instead of a specific dollar amount. However, the maximum percentage amount for bonus depreciation is scheduled to phase out by 2027.
Managing Capital Gains and Losses
One of the most underrated tax planning strategies is tax-loss harvesting. This strategy uses capital losses to offset gains.
Tax-loss harvesting works by selling an investment at a loss and claiming the capital loss. This loss then offsets capital gains on investments that are making money. Capital losses can also potentially be used to deduct taxable income.
Another strategy for maximizing tax savings on investments is simply timing the sale of your investments correctly. For example, after purchasing securities, you may be able to save significant money in taxes just by holding the security for a year. After a year, investment gains switch from short-term to long-term, which generally have lower taxes.
Retirement Contributions
Most workers know the value of maximizing retirement contributions for tax savings. Many employees use a 401(k) plan to lower their taxable income and reduce taxes.
Like employees, the businesses that offer these retirement plans can use contributions to maximize tax savings. Employer contributions to qualified retirement plans are generally tax deductible.
However, business owners need to understand the restrictions to retirement contribution deductions, including deduction limits. Be sure to check with your trusted tax accountant to calculate how much you can deduct.
Keep Good Records
Accurate record-keeping is essential to tax planning strategies. While good record-keeping processes won’t directly lower your tax liability, they can help keep you organized and on top of deductions, credits, and incentives.
Luckily, modern tax and accounting software and technologies make it easier than ever to maintain accurate bookkeeping records for your business.
For example, you can use business accounting software to track expenses and cash flow. At the end of the year, your software produces a report detailing all of your business expenses and potential tax deductions. This ultimately saves you time rather than manually scouring your records for potential tax savings.
State and Local Guidelines
While many business owners focus on their federal tax liabilities, it’s also important to remember state and local liabilities. This includes staying up-to-date on changes to state and local tax laws.
Depending on your state, you may face more or less of a tax burden based on state laws.
State income tax, for example, can swing widely between states. Additionally, if you do business in multiple states, you’ll need to consider the tax implications of your business classification and differing state laws.
Consult with a Tax Professional
The final—and most important—of our tax planning strategies is to work with a knowledgeable tax professional.
As a business owner, you likely already wear many hats. Adding an accountant to your responsibilities will only increase your stress. In addition, you may not have access to or knowledge of the latest tax rulings or strategies, which could lead to a higher tax liability.
Accounting Made Accessible is your trusted resource for year-end tax planning. We work with business owners to develop a customized tax strategy that maximizes your tax savings.
Learn how you can save on taxes by booking a free strategy call today!