While many people celebrate the end of the year to usher in a fresh start, business owners often use the same time to finish a multitude of last-minute bookkeeping duties to maximize annual profits. Business owners generally have limited time to reduce their tax liability before the end of the calendar year. The choices they make in the last months of the year usually decide how much a company will owe when it is time to file its taxes. By taking a proactive approach now, companies can maintain cash flow and put the business in a better position for the new year.
Review Retirement Plan Contributions
Companies that sponsor a 401(k), a SEP IRA, or a profit-sharing plan are usually able to raise their contributions before the deadline to reduce their taxable income. It is important for employers to learn the contribution limits for the current tax year and to check if their plan documents permit extra employer contributions. In many cases, businesses that do not currently have a retirement plan can still set one up before the end of the year to help incur substantial deductions.
Evaluate Equipment and Asset Purchases
The Section 179 and bonus depreciation rules enable businesses to deduct the cost of qualifying equipment, software, and other assets that they buy and put into use during the tax year. Business owners planning capital expenditures for the coming year should decide whether it is financially sensible to make those purchases before the new year.
Accelerate Deductions and Defer Income Where Appropriate
Businesses using the cash basis method have some flexibility to over the timing of their income and expenses. With this tax strategy, companies can pay existing invoices to vendors, make advance payments for some expenses, or postpone invoicing until January to shift taxable income from one year to the next. This approach is most effective if the business anticipates falling into a similar or lower tax bracket the following year, making it vital for owners to consider both situations before taking any action.
Review Entity Structure
The type of business entity chosen several years ago might not be the most tax-efficient now. Owners of S corporations, partnerships, and LLCs should make sure their reasonable compensation calculations are properly documented. Those businesses thinking about changing to a different type of entity should start discussing this with their legal advisor well before the end of the year, as some elections have strict filing deadlines.
Claim Available Tax Credits
Many companies fail to take advantage of the entitled credits, such as the Research and Development (R&D) tax credit, the Work Opportunity Tax Credit for qualifying new employees, and the energy-efficiency credits associated with building improvements. Carrying out a year-end review of credits can identify opportunities to reduce tax liability by the same amount, providing more value than the standard deduction.
Fund Employee Bonuses Strategically
Any business planning to give out year-end bonuses should confirm when the payments will be made and how they will be taxed. A business using the accrual method of accounting might be able to deduct bonuses that are paid within the first two and a half months of the next year, provided that the bonus had been properly accrued and the obligation was determined by the end of the year. Since documentation is important, the owners should consult their tax accountant to check whether they are eligible.
Review Charitable Contributions
Before the year ends, businesses donating to qualified charitable organizations should ensure their contributions are properly documented. As long as they are arranged correctly, corporate charitable gifts can qualify for tax deductions, and some companies use donor-advised funds or private foundations as part of their long-term giving strategy.
Confirm Estimated Tax Payments
Businesses making quarterly estimated tax payments should compare their year-to-date income with the original forecasts. If there is a major change in profitability during the year, it could mean a penalty for underpayment is coming unless the fourth-quarter payment is modified. By looking at this figure now, one can avoid incurring a penalty in April.
Plan Around the Qualified Business Income Deduction
Pass-through business owners who may be eligible for the Qualified Business Income (QBI) deduction should review their taxable income forecasts. Since different types of businesses are affected by the deduction in different ways at different income levels, preparing a projection at year-end can help owners understand their current position and identify possible adjustments.
Talk to Counsel Before the Year Closes
Tax planning works best when it starts early and involves both a company’s accountant and its attorney. Many of these strategies intersect with contract terms, entity governance documents, and compliance obligations, all of which require legal review. Greenspoon Marder’s tax practice group works with business owners to evaluate these opportunities and structure decisions that withstand scrutiny.
This publication is provided by Greenspoon Marder LLP is issued for informational purposes only and is not intended to be construed or used as general legal advice nor a solicitation of any type. Please contact the author(s) or your Greenspoon Marder LLP contact if you have any questions regarding the currency of this information. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer’s legal qualifications and experience.
