Maximize Deductions: Effective Year-End Tax Strategies for Business Owners

As 2024 nears its end, now is the time for businesses to assess potential year-end tax strategies that could help reduce what they owe. The effectiveness of these strategies depends on the specifics of your business structure, accounting method, and future financial outlook. Here’s a look at some impactful strategies to consider before closing the books on 2024.

Defer Income, Accelerate Deductions

A classic tax-saving approach is to defer income to next year and accelerate deductible expenses into this year. Here’s how:

• For Cash-Basis Businesses: You can defer income by delaying invoicing until year-end or accelerate deductions by paying certain expenses now. This can shift tax liability into the following year, reducing this year’s taxable income.
• For Accrual-Basis Businesses: While accrual accounting offers less flexibility in timing, there are still options. For example, you may be able to deduct bonuses accrued this year if they’re paid by March 15, 2025. Additionally, certain advance payments, such as licensing fees or membership dues, may be deferred to next year based on how they’re recorded.

However, this strategy isn’t one-size-fits-all. If you anticipate being in a higher tax bracket next year, the opposite approach—accelerating income and deferring deductions—might actually benefit your business.

Purchase Assets Before Year-End

Investing in equipment, machinery, or other fixed assets before year-end can generate valuable tax deductions. Typically, these assets are capitalized and depreciated over time, but specific provisions allow for immediate deductions.

• Section 179 Deduction: In 2024, you can deduct up to $1.22 million in qualifying tangible property costs, including certain computer software. The deduction begins to phase out when expenditures exceed $3.05 million, so planning your purchases carefully is essential.
• Bonus Depreciation: For 2024, you can immediately deduct up to 60% of the cost of eligible tangible property, such as machinery, off-the-shelf software, and some nonresidential building improvements. This percentage will drop to 40% in 2025 and to 20% in 2026, unless Congress extends it.

Both Section 179 and bonus depreciation can reduce your taxable income significantly if you have large asset purchases planned.

Establish or Contribute to a Retirement Plan

Setting up a retirement plan is another way to gain tax advantages while enhancing employee benefits.

• New Plan Credits: Small businesses may be eligible for tax credits to help offset the costs of establishing a new retirement plan, making this strategy even more appealing.
• Contribution Deductions: In some cases, you can deduct contributions made after year-end as long as they’re made by the tax-filing deadline. Certain plans, such as Simplified Employee Pensions (SEPs), can be both adopted and funded after year-end, with contributions deducted for this tax year.

In addition to tax benefits, a retirement plan can enhance employee recruitment and retention, making it a smart business decision beyond just tax considerations.

Think Holistically

Any year-end tax strategy should be considered within the broader context of the tax code and your business’s financial health. While these actions can be effective individually, they often interact with other provisions in ways that impact overall tax liability. Consulting a tax advisor can help you weigh these strategies and identify the most beneficial combination for your business.

Sidebar: Write Off Bad Debts

Reviewing your receivables at year-end to identify any bad debts may yield an additional deduction if debts are deemed uncollectible.

• Requirements: To claim a bad debt deduction, you must demonstrate that you’ve made reasonable efforts to collect the debt and that there’s no realistic expectation of payment, such as in cases where the debtor is bankrupt.
• Accounting Method: For accrual-basis businesses, bad debts can be deducted if the receivable was previously included in taxable income. Cash-basis businesses, however, cannot claim a bad debt deduction, as they do not recognize income until it’s received.

By strategically managing receivables, you can reduce taxable income and improve cash flow heading into the new year.

The HoganTaylor Tax Practice

If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com.

INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.