As the year draws to a close, small business owners have a valuable opportunity to implement tax strategies that can reduce their 2024 tax liability and position their businesses for success in 2025. From retirement planning to income deferral and timing bonuses, these strategies can help you make the most of current tax laws. Let’s explore some of the most effective year-end tax planning options available to small businesses.
1. Establish or Enhance a Retirement Plan
If your business doesn’t already have a retirement plan, now is the time to consider setting one up. Current rules allow for significant tax-deductible contributions:
- SEP Plans: Self-employed individuals can contribute up to 20% of their net self-employment income, with a maximum deductible contribution of $69,000 for 2024.
- 401(k) Plans: These plans allow self-employed individuals or small corporations to contribute up to 25% of salary, with additional matching contributions available.
- SIMPLE-IRAs: A great option for businesses with modest income, SIMPLE-IRAs can sometimes allow for larger contributions than SEP or 401(k) plans.
Evaluate Your Options: If your business has employees, remember that retirement plans may require you to include them. Contact us for guidance on choosing the best plan for your situation.
2. Adjust Business Income and Deductions Strategically
Timing your income and deductions can significantly impact your tax liability. Consider these strategies:
- Deferring Income: Postpone billing until 2025 or arrange for installment sales of property to push income into the following year. This is especially useful if you expect to remain in the same or a lower tax bracket next year.
- Accelerating Income: If you anticipate a higher tax bracket in 2025, accelerate income into 2024 by completing deals or collecting payments earlier.
- Accelerating Deductions: Pay expenses like rent, utilities, or equipment leases in advance to maximize deductions for 2024.
Key Tip: Contact us to explore strategies like like-kind exchanges for real estate or installment sales that defer taxable income.
3. Timing Year-End Bonuses
Both cash- and accrual-basis taxpayers can optimize bonus payments for tax savings:
- Cash-Basis Taxpayers: Pay bonuses before year-end if you expect to be in the same or lower tax bracket next year. If you anticipate a higher bracket in 2025, defer bonus payments until January 2025.
- Accrual-Basis Taxpayers: Deduct bonuses in the year they are accrued, as long as they are paid within 2 ½ months of year-end. For calendar-year taxpayers, this means bonuses must be paid by March 15, 2025, to count for 2024.
Planning bonus timing carefully can reduce your tax liability based on anticipated revenue changes.
4. Consider the Pass-Through Entity Tax Election (PTET)
For pass-through entities like partnerships, S corporations, or LLCs, the Pass-Through Entity Tax (PTET) election may allow you to deduct state taxes at the business level, bypassing the $10,000 SALT deduction cap on individual returns.
Currently, 35 states offer the PTET election, which can reduce the taxable income passed through to owners. Contact us to determine if this option is right for your business.
5. Employ Family Members
Hiring family members can be a smart way to reduce your business’s tax liability:
- Wages paid to your child under 18 are not subject to federal employment taxes.
- Your business can deduct the wages at your marginal tax rate, while the income is taxed at your child’s lower marginal rate.
For example, your child’s wages can be offset by their standard deduction of $14,600 for 2024, meaning they could receive this amount tax-free.
Key Tip: Ensure that family members are bona fide employees by keeping accurate time records, paying reasonable wages, and following payroll tax requirements.
6. Leverage Bonus Depreciation and Fixed Asset Purchases
Year-end asset acquisitions can provide substantial tax savings through Section 179 deductions and bonus depreciation:
- Section 179 Deductions: For 2024, you can deduct up to $1.22 million for qualifying property like equipment, off-the-shelf software, and certain real property improvements.
- Bonus Depreciation: Claim 60% first-year depreciation on qualified new or used assets placed in service by year-end.
Why Act Now? Bonus depreciation drops to 40% in 2025, so purchasing and placing assets in service this year provides the maximum tax benefit.
7. Keep an Eye on Tax Rate Trends
For sole proprietorships, partnerships, S corporations, or LLCs, your share of business income is taxed at individual rates. These rates are expected to remain stable in 2024 and 2025, with inflation adjustments bumping up tax brackets.
However, if legislative changes are on the horizon, your tax planning strategy may need adjustments. Contact us for the latest updates and how they could affect your business.
Bottom Line
Effective year-end tax planning requires a strategic approach tailored to your business’s unique circumstances. From retirement plan contributions to income timing and asset purchases, the right moves can significantly reduce your tax liability and position you for a strong start in 2025.
Need Help? Contact us today to discuss your year-end tax strategy and explore opportunities to maximize your savings. Let’s make this year’s tax planning work for your future success!
