How Small Businesses Can Tackle Year-End Tax Planning Effectively

As the year winds down, many small business owners find themselves juggling holiday sales, end-of-year reports, and looming tax deadlines. While it’s tempting to push tax planning to January, taking a proactive approach now can save both money and stress in the long run. With tax laws in flux, provisions of the 2017 Tax Cuts and Jobs Act (TCJA) set to expire, and inflation impacting business expenses, being prepared is more critical than ever.

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Effective tax planning not only helps mitigate financial risks but also strengthens a business’s foundation for growth in the new year. Here’s how small businesses can navigate year-end tax planning and make the most of the current tax landscape.

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Understand the Tax Landscape: Key Updates for 2024

The tax code can feel like a maze, and staying informed about recent legislative changes is critical for small business owners. The TCJA brought significant changes, including the expansion of bonus depreciation and limitations on interest expense deductions. These provisions are beginning to phase out, which will impact tax-saving opportunities for many businesses by 2025.

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“Business owners need to understand how these changes affect their financial strategies,” Ben Rizzuto, Retirement Director at Janus Henderson told CNBC. “Taking a closer look at how deductions and credits apply to your operations this year can create opportunities for tax savings.”

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Consulting a tax professional can help identify opportunities to optimize your tax strategy under the current rules. For example, businesses expecting higher future tax rates may benefit from accelerating income into 2024. Similarly, early planning can ensure your business takes full advantage of expiring provisions, such as 100% bonus depreciation.

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Maximizing Deductions and Credits

Deductions and credits remain essential tools for reducing taxable income. Section 179 deductions, which allow businesses to deduct the cost of qualifying equipment, are a popular strategy for year-end planning. Investing in machinery, technology, or other assets before December 31 can significantly reduce your 2024 tax burden.

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Additionally, tax credits can provide substantial savings. The Work Opportunity Tax Credit (WOTC), for instance, offers incentives for hiring individuals from certain target groups. Renewable energy credits can also benefit businesses looking to lower their carbon footprint while saving on taxes.

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“Understanding which deductions and credits apply to your business is critical,” notes Margaret Nichols, CPA at Schwab Tax Services. “These tools can help small businesses preserve cash flow and reinvest in their operations.”

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Strategic Income and Expense Management

Strategic timing of income and expenses can significantly impact a business’s taxable income. For businesses anticipating lower tax brackets in the next fiscal year, deferring income can help reduce this year’s tax liability. For example, delaying invoicing for services performed in late December until January can shift revenue into the next tax year.

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On the expense side, prepaying certain costs like office rent, utilities, or marketing expenses can accelerate deductions. This approach is particularly helpful for businesses that want to lower their taxable income for 2024.

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It’s also essential to consider the impact of TCJA provisions limiting interest expense deductions. Understanding how these rules apply to your business can help inform decisions on debt management and financing.

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Practical Tax Planning Strategies You Can Start Today

Tax planning doesn’t have to be overwhelming. Here are actionable steps small business owners can implement before year-end:

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• Conduct a Year-End Review: Assess your income, expenses, and profit margins for the year. Use this data to identify areas for deductions and ensure your financial records are accurate and up-to-date.
• Leverage Bonus Depreciation: Take advantage of the 100% bonus depreciation for qualified property placed in service before the phaseout begins. This can reduce taxable income significantly.
• Explore Retirement Plan Contributions: Plans like SEP IRAs or Solo 401(k)s allow for tax-deductible contributions, supporting long-term financial security for you and your employees.
• Evaluate Tax Credits: Research opportunities like the WOTC or renewable energy credits to offset tax liabilities. Consulting a tax professional can help identify applicable credits.
• Plan for Future Changes: Stay ahead of upcoming expirations in TCJA provisions. Being proactive now can mitigate future tax burdens.

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Conclusion

Year-end tax planning is more than a routine task—it’s a strategic opportunity to improve your business’s financial standing. By understanding recent tax changes, maximizing deductions and credits, strategically managing income and expenses, and implementing practical steps, small business owners can set themselves up for a successful and stress-free new year. The time to act is now; waiting until January could mean missing out on valuable savings and opportunities.

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Sources

BlackRock

CNB Business Banking

Charles Schwab

Bloomberg Tax

IRS

Forbes

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