Essential Year-End Tax Planning Checklist for Your Business

As the end of the tax year approaches, small business owners need to finalize their tax strategies to maximize deductions and reduce liabilities. The last few months of the year provide unique opportunities to optimize tax positions, but careful planning is essential. This guide outlines a comprehensive checklist for effective year-end tax planning, helping you make the most of deductions, benefits, and available credits. Let’s explore how to wrap up the year on a solid financial footing.

Maximize Business Deductions

Maximizing deductions is one of the most impactful ways to lower taxable income. Here are some critical strategies to consider before the year’s end:

1. Business Expenses and Section 179 Deductions

Small businesses can use the Section 179 deduction to immediately expense qualifying equipment and asset purchases instead of depreciating them over time. For 2024, the deduction limit is $1.16 million, and eligible purchases include vehicles, machinery, computers, and office furniture. To qualify, the equipment must be operational by December 31, so any planned purchases should be made soon.

Additionally, consider the “Bonus Depreciation” provision, which currently allows 80% of qualified equipment costs to be deducted in the first year. By using Section 179 and bonus depreciation together, businesses can substantially reduce their taxable income and reinvest the savings in their growth.

2. Review and Pay Outstanding Bills

Review any outstanding bills and expenses, such as utility bills, rent, and vendor invoices. Paying these bills before year-end can help maximize deductions for this tax year. Even prepaying certain expenses, such as leases or insurance premiums, can be a strategic move, as these payments often qualify for deductions.

3. Charitable Contributions

Charitable donations made by businesses are deductible, whether made as cash contributions or donations of goods. Keep detailed records of all donations, including the recipient’s information and the value of goods donated. Donating old inventory or obsolete equipment can also clear up storage space while providing a valuable tax deduction.

Review Payroll and Employee Benefits

Employee-related expenses can provide significant tax benefits. Ensuring payroll accuracy and considering year-end bonuses can reduce both tax liabilities and employee turnover. Here’s how to make the most of these opportunities:

1. Ensure Payroll Accuracy and Deductible Employee Benefits

Payroll should be reviewed to ensure all employees’ information is correct, including withholdings, deductions, and compensation records. An accurate payroll reduces the risk of IRS penalties and helps prevent missed deductions related to employee compensation and benefits.

2. Year-End Bonuses and Additional Benefits

Providing bonuses or holiday gifts to employees can be an effective way to boost morale and retain talent, while also qualifying as a deductible expense. Bonuses distributed before December 31 can help reduce taxable income for the business. If you offer non-monetary holiday gifts, remember that gifts under $25 per employee are generally deductible.

3. Health and Retirement Benefits

If your business provides health insurance or retirement benefits, verify that all eligible employees are enrolled and that employer contributions are up-to-date. Certain employer contributions, like Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), may be deductible and can also provide tax-free benefits for employees.

Utilize Tax-Advantaged Accounts and Retirement Planning

Contributing to tax-advantaged accounts not only provides immediate tax deductions but also secures long-term savings for you and your employees. Here’s how to leverage these accounts effectively:

1. Retirement Plans: IRAs, 401(k)s, and SEP-IRAs

Contributions to retirement plans like Simplified Employee Pension IRAs (SEP-IRAs), 401(k) plans, or individual IRAs can provide substantial tax benefits. For small business owners, contributions up to $66,000 (depending on the type of plan and income level) can be deductible. For self-employed individuals, the Solo 401(k) is an excellent option, allowing both employee and employer contributions, which increases the potential deduction amount.

Make sure all contributions are made before the year’s end to benefit from 2024 deductions. If you don’t have a retirement plan set up, consider establishing one before December 31 to start claiming deductions.

2. Health Savings Accounts (HSAs)

For businesses with High Deductible Health Plans (HDHPs), contributing to an HSA is a valuable tax-saving tool. Contributions to HSAs are deductible, and funds used for qualifying medical expenses are tax-free. In 2024, individuals can contribute up to $3,850, and families can contribute up to $7,750. Employers may also contribute to employee HSAs, providing tax-free healthcare benefits while reducing taxable income.

Claim Available Tax Credits for Small Businesses

Tax credits are powerful tools because they directly reduce your tax bill, dollar-for-dollar. Here are some beneficial credits small businesses should consider:

1. Work Opportunity Tax Credit (WOTC)

The WOTC rewards businesses that hire employees from certain target groups, such as veterans, long-term unemployed individuals, and those receiving public assistance. Depending on the employee and hours worked, the WOTC can provide up to $9,600 per eligible employee. Be sure to file the required IRS forms within 28 days of the employee’s start date to claim this credit.

2. Research and Development (R&D) Tax Credit

The R&D tax credit is available to businesses that invest in research and technological improvements. Activities such as developing new products, improving processes, or enhancing software may qualify. The credit can offset income tax or, for some small businesses, even payroll taxes. R&D credits are often underclaimed, so if your business engages in innovation, consider consulting a tax advisor to ensure you take full advantage.

3. Energy Efficiency and Sustainability Credits

Businesses making investments in energy-efficient improvements may qualify for tax credits, such as the Business Energy Investment Tax Credit (ITC). Upgrading to energy-efficient HVAC systems, solar panels, or insulation can qualify you for a tax credit of up to 30% of the installation cost. These credits help offset capital improvement expenses and contribute to long-term energy savings.

Schedule a Year-End Tax Planning Consultation

Navigating the complexity of year-end tax planning can be overwhelming, especially with the added pressure of deadlines. Professional tax guidance can ensure that your tax strategy is optimized and compliant with IRS regulations.

1. Benefits of a Tax Consultation

A tax professional can help you identify missed deductions, confirm the accuracy of your filings, and maximize your tax credits. They will also review your records for compliance issues, ensuring that your business is ready for any potential IRS audits. The cost of a consultation is often outweighed by the tax savings identified, making it a wise investment for businesses of all sizes.

2. Setting Up for Next Year

A consultation not only optimizes your current tax filing but can also set you up for success in the coming year. By discussing upcoming tax law changes, planning for expected cash flow, and adjusting estimated payments, you can avoid tax surprises in 2025.

3. Review Estimated Tax Payments

For businesses required to make estimated tax payments, ensure your last payment is accurate to avoid underpayment penalties. Working with a tax advisor can provide clarity on the exact amount needed for the final payment, so there are no surprises come tax season.

Wrapping Up: Stay Ahead of Year-End Tax Planning

End-of-year tax planning is essential for small businesses to secure their financial position and minimize tax liability. By taking a proactive approach, you can maximize deductions, benefit from available credits, and secure employee benefits, all while setting yourself up for a smoother tax season.

If you’re ready to enhance your year-end tax strategy and ensure every opportunity is optimized, reach out to Bernstein Tax Group for a free consultation. With our expertise, you’ll have a tailored plan that not only reduces your tax burden this year but also sets your business on the path to financial success in the years ahead.