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's 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.

Set 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.