Year-end Tax Planning Strategies For Businesses
Now is a good time to consider year-end strategies to help reduce your business’s 2024 income taxes. The effectiveness of a particular action depends on the circumstances of your business. Here are several possibilities.
Defer income, accelerate deductions
A tried-and-true tactic for tax minimization is to defer income to next year and accelerate deductible expenses into this year. For example, a business that follows the cash method of accounting can defer income by postponing invoices until late in the year or accelerate deductions by paying certain expenses this year.
Businesses that use the accrual method have less flexibility in timing, but there are still actions you can take. For example, you can deduct year-end bonuses accrued this year even if you don’t pay them until next year (no later than March 15, 2025). You might also be able to defer until next year income from certain advance payments, including licensing fees, subscriptions and membership dues, depending on how the payments were recorded.
Deferring income and accelerating deductions may not suit every business. The opposite approach is sometimes more beneficial, such as if you anticipate being in a higher tax bracket next year.
Purchase assets by year end
One effective way to generate tax deductions is to buy equipment, machinery and other fixed assets. Ordinarily, these assets are capitalized and depreciated over several years, but there are ways to deduct more of these asset costs immediately. For example, in 2024, under Section 179 you can deduct $1.22 million in qualifying tangible property and certain computer software costs, subject to phaseout when expenditures exceed $3.05 million in 2024.
Similarly, under bonus depreciation, you can deduct up to 60% of the cost of eligible tangible property, including most equipment and machinery, plus off-the-shelf computer software and certain improvements to nonresidential building interiors placed in service in 2024. Unless Congress takes action to increase the bonus deduction limit, it will drop to 40% in 2025, to 20% in 2026 and to 0% in 2027.
et up a retirement plan
Establishing a retirement plan is an effective way to generate tax benefits. It can also improve employee recruitment and retention efforts.
Certain employers are entitled to tax credits for starting a new plan. Whether you started a new plan or already had one in place, depending on the type of plan, you may be able to take 2024 deductions for contributions made after year end. Some plans, including simplified employee pensions, can be adopted and funded after year end but deducted for this year.
Write off bad debts
Review your receivables to determine whether any bona fide business debts have become worthless or uncollectible. If so, you may be able to reduce 2024 taxes by claiming a bad debt deduction.
You must show you’ve taken reasonable steps to collect the debt and that there’s no realistic expectation of payment (such as if the debtor is in bankruptcy). You must also show that the debt was charged off this year.
Finally, the receivable must have been previously included in taxable income. Thus, an accrual-basis business can deduct an eligible bad debt if it’s already accrued the receivable, but a cash-basis business can’t.
See the big picture
Whichever year-end tax strategies you explore, consider how they interact with other tax code provisions. Contact the office for help determining the best combination of year-end planning strategies for your business.
Year-end Tax Planning Moves For Individuals During the holiday season, income taxes probably aren’t top of mind for most taxpayers. But along with the festivities, it’s a good time to consider tax strategies that may reduce this year’s taxes, and possibly future years’ taxes as well. Here are three tax planning moves that might trim the fat off your 2024 taxes.
- Donate stock to charities
If you itemize deductions and want to donate to IRS-approved public charities, you can combine your generosity with a revamping of your taxable investment portfolio. Here are some tax-smart principles to follow:
Sell underperforming stocks and donate the proceeds. Stocks worth less than they cost can be sold at a tax-saving capital loss. You can then donate the sales proceeds to charity and claim a charitable deduction.
Donate appreciated stocks. If you’ve held a stock for over a year and donate it to charity, you can claim a deduction for its market value while avoiding capital gains tax you’d owe if you sold it. Stocks held for less than a year can also be donated, but the deduction is limited to cost basis.
- Prepay higher education bills
If you paid higher education expenses for you, your spouse or a dependent, you may qualify you for one of the following credits:
The American Opportunity credit. This credit is equal to 100% of the first $2,000 of qualified postsecondary education expenses, plus 25% of the next $2,000, for the first four years of postsecondary education in pursuit of a degree or recognized credential. The maximum annual credit is $2,500 per qualified student.
The Lifetime Learning credit. This credit is equal to 20% of up to $10,000 of qualified education expenses. The maximum credit is $2,000 per tax return.
For 2024, both credits phase out if your modified adjusted gross income (MAGI) is between:
$80,000 and $90,000 for unmarried people, or $160,000 and $180,000 for married couples filing jointly. Various other restrictions also apply. If you’re eligible for either credit and your 2024 expenses don’t already exceed the applicable limit, consider prepaying college tuition for academic periods from January through March 2025.
If your credit will be partially or fully phased out because of your MAGI for 2024, consider whether there’s anything you could do to reduce your MAGI so you could maximize your 2024 education credit. (Reducing your MAGI could also increase the benefit of certain other tax breaks.)
- Consider a Roth conversion
If you anticipate being in a higher tax bracket during retirement than you are now and have a traditional IRA, consider a Roth conversion. The downside is that this will generate a current tax cost. Why? Because a conversion is considered a taxable liquidation, followed by a nondeductible contribution to a Roth account. However, post-Roth conversion, all qualified withdrawals from the account will be federal-income-tax-free. Qualified withdrawals occur after:
The Roth account has been open for over five years, and You’ve reached age 59½, become disabled, or passed away (withdrawals made to a beneficiary). A Roth conversion makes it possible to avoid potentially higher future tax rates, because you’ve already paid the tax.
For more ideas
Federal tax law may be uncertain for the next year or so because many of the Tax Cuts and Jobs Act provisions are scheduled to expire at the end of 2025 but could be extended. There also could be other tax law changes as a result of the election. Contact the office to discuss tax planning moves that may work for you.