As the year comes to an end, now is the time for business owners to dive into tax planning. Implementing these strategies before the year is over can maximize your deductions, improve cash flow, and set you up for a smooth tax season. Here's how to get ahead:
1. Review Tax Projections & Adjust Withholdings
Taxes for business owners are a year-round task. At this point, you should review your estimated tax payments to ensure they match your projected income. This is especially important if your revenue has fluctuated. Over-withholding can strain your cash flow, while under-withholding could lead to a surprise tax bill.
2. Choose The Right Tax Election
If you’re operating as a sole proprietor, LLC, or partnership, electing to be taxed as an S-Corp could help reduce your tax liability. When taxed as a sole proprietor or partnership, all business profits are subject to self-employment taxes (Social Security and Medicare). However, with an S-Corp election, you can pay yourself a reasonable salary, which is subject to payroll taxes, while the remaining profits can be distributed as dividends—free from self-employment tax.
3. Maximize Retirement Contributions
Contributing to retirement accounts such as a SEP IRA, SIMPLE IRA, or Solo 401(k) can significantly lower your taxable income. If your income places you in a higher tax bracket this year, maximizing pre-tax contributions can provide immediate tax relief.
Alternatively, if you expect lower income, consider after-tax (Roth) contributions for tax-free growth. You can also split your contributions—use pre-tax contributions to lower your bracket and shift the remainder to Roth accounts for future tax-free income.
4. Leverage Business Deductions
Make sure you're taking full advantage of all available business deductions. This includes expenses like office supplies, marketing, employee benefits, and business travel. If you need equipment or software, the Section 179 deduction allows you to deduct the full cost of qualifying assets in the year of purchase, reducing your taxable income.
If you’re considering large business purchases, assess whether it makes sense to buy now to lock in the deduction before year-end.
5. Tax Loss Harvesting for Investments
If your business holds investments in a taxable brokerage account, consider tax loss harvesting. Selling underperforming assets allows you to offset gains from other investments, reducing your overall tax burden. You can deduct up to $3,000 in losses against ordinary income, and any excess losses can be carried forward to future years.
6. Optimize the Qualified Business Income (QBI) Deduction
Many millennials business owners have never even heard of QBI. The Qualified Business Income (QBI) deduction allows eligible business owners to deduct up to 20% of their qualified business income from a pass-through entity, such as an LLC, S-corp, or sole proprietorship. However, this deduction has limitations based on your income level and the nature of your business. If your taxable income exceeds $182,100 (single) or $364,200 (married filing jointly) for 2024, your QBI deduction may start to phase out. There are strategies for those who do phase out and there will be a separate blog post specifically on QBI since it can be a great benefit when optimized.
7. Charitable Contributions
Charitable donations can help reduce your tax liability. You can generally deduct up to 60% of your adjusted gross income (AGI) through donations to qualified organizations. If you exceed this limit, any unused portion can be carried forward for up to five years. Consider donating cash, inventory, or even services to take advantage of the available tax breaks.
8. Deduct Medical Expenses
If your business offers health insurance or you’ve personally incurred significant medical expenses, you may be eligible to deduct unreimbursed medical costs that exceed 7.5% of your AGI. Keep all receipts for eligible expenses to maximize your deductions, especially if you provide healthcare coverage for your employees.
9. Reassess Your Cash Flow
Review your cash flow compared to last year. Did you earn more? Spend less? Managing cash flow effectively is essential to sustaining and growing your business. Use any surplus cash to reinvest in your business or optimize your personal finances. Potential areas to allocate extra funds include:
SEP IRAs, SIMPLE IRAs, or Solo 401(k)s for retirement savings
Health Savings Accounts (HSAs) for tax-advantaged healthcare savings
Taxable brokerage accounts for additional investments
529 plans for education savings
Final Thoughts
Effective year-end tax planning for business owners is all about being proactive. Adjusting your tax withholdings, maximizing retirement contributions, optimizing the QBI deduction, and leveraging business deductions are all things we work with our clients on year-round.
Disclaimer: None of this should be seen as advice. This is all for informational purposes. Consult your legal, tax, and financial team before making any changes to your financial plan.