As the year draws to a close, it’s essential for business leaders to evaluate their tax strategies, especially with the upcoming election potentially signaling changes to the U.S. tax code. Preparing for shifts in tax policy can help you secure your business’s financial health, maximize deductions, and avoid costly surprises come tax season. Here’s how to build an end-of-year tax strategy that positions your business for 2025 and beyond.
1. Stay Informed on Potential Tax Policy Changes
The 2024 election results may lead to changes in tax policy that could affect corporate, individual, and capital gains tax rates, among other areas. Keeping track of these changes helps you anticipate shifts that could impact your business operations and financial planning.
- Monitor Legislative Updates: Tax legislation evolves quickly, particularly following elections. Work with a tax advisor to stay up-to-date on any policy discussions or proposals that may impact your business, such as corporate tax rate adjustments, changes to deduction limits, or new tax credits.
- Assess Potential Tax Rate Changes: If corporate tax rates are expected to increase, consider accelerating income into the current tax year to take advantage of lower rates. Alternatively, if reductions are anticipated, you might defer income to benefit from potentially lower rates in 2025.
- Evaluate Expiring Provisions and Incentives: Certain tax incentives may be scheduled to expire, including some pandemic-related benefits. Review these provisions to maximize them before they phase out, including any deductions or credits related to equipment, hiring, or other qualifying expenses.
2. Maximize Available Deductions and Credits
As the year ends, your business has a final opportunity to take advantage of deductions and credits to reduce its tax liability. Here are some essential areas to review for potential savings.
- Section 179 and Bonus Depreciation: The Section 179 deduction allows businesses to deduct the full purchase price of qualifying equipment or software in the year it’s placed in service, rather than depreciating it over several years. Additionally, bonus depreciation may be available for certain assets. Evaluate your capital expenditures to determine if accelerating these purchases makes sense.
- Research and Development (R&D) Credit: If your business invests in new products, processes, or technology, you may be eligible for the R&D tax credit. Qualifying expenses can include wages, supplies, and contract research. Consult with a tax professional to confirm eligibility and maximize the credit.
- Employee Retention Credit (ERC): Although many pandemic-era credits have expired, the Employee Retention Credit remains available in some circumstances. For businesses eligible for retroactive ERC filings, reviewing payroll records could reveal additional savings.
- Energy Efficiency Tax Credits: With a growing focus on sustainability, tax credits are available for businesses that invest in energy-efficient property improvements. If your business has installed solar panels, wind turbines, or other qualifying green energy systems, you could benefit from tax incentives designed to support these investments.
3. Optimize Timing for Income and Expenses
Strategic income and expense timing can offer substantial tax savings. Consider shifting revenue and expenses between tax years to minimize your liability.
- Accelerate Deductions: If tax rates are expected to increase, accelerating expenses can provide deductions in the current year, reducing your taxable income at a lower rate. Common strategies include prepaying rent, purchasing supplies, or paying bonuses before year-end.
- Defer Income Where Possible: Conversely, if tax rates are expected to decrease, consider deferring income to the next year. Delaying invoicing, for instance, allows you to report revenue in a potentially lower tax year.
- Review Inventory and Cost of Goods Sold (COGS): For businesses with significant inventory, end-of-year inventory valuation directly affects taxable income. Consider options such as “last-in, first-out” (LIFO) or “first-in, first-out” (FIFO) accounting methods to manage inventory costs strategically in line with anticipated changes in income.
4. Consider Retirement Contributions and Employee Benefits
Contributions to retirement and benefit plans not only support your employees but also offer tax advantages for your business. Review these opportunities before year-end to maximize tax-efficient savings.
- Fund Retirement Plans: Contributions to retirement plans, such as 401(k)s or SEP IRAs, are deductible and can reduce taxable income. If your business is profitable, maximizing employer contributions before year-end can lower your tax bill while enhancing employee benefits.
- Evaluate Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs): For businesses offering HSAs or FSAs, encourage employees to maximize contributions, as these accounts offer tax-free savings for qualifying medical expenses. If your business contributes to employee HSAs, these contributions are tax-deductible.
- Explore Non-Qualified Deferred Compensation (NQDC) Plans: NQDC plans allow highly compensated employees to defer a portion of their income until a later date, potentially aligning with lower tax years. Though contributions aren’t immediately deductible, NQDCs can be part of a longer-term tax strategy, especially if higher income taxes are anticipated.
5. Review Capital Gains and Losses
With potential changes to capital gains tax rates on the horizon, it’s critical to review your investment portfolio and capital assets. Carefully managing gains and losses can reduce tax exposure and optimize returns.
- Harvest Tax Losses: If your business has capital losses on investments or assets, offsetting gains with losses can reduce your overall tax liability. This is especially helpful for businesses that actively trade or invest in assets that may have depreciated in value.
- Time Capital Gains Wisely: If capital gains tax rates are expected to rise, consider selling appreciated assets before year-end to lock in current rates. Alternatively, if a reduction in rates is expected, deferring asset sales until next year could result in tax savings.
- Use Installment Sales for Asset Disposition: For larger asset sales, an installment sale allows you to spread the gain over several years, potentially reducing the tax impact by spreading income across tax years with different rates.
6. Plan for Tax-Advantaged Charitable Giving
End-of-year charitable contributions not only support worthwhile causes but also provide tax benefits for your business. Leverage charitable giving strategically to optimize your tax position.
- Donate Appreciated Assets: Rather than selling appreciated assets and donating the proceeds, consider donating the assets directly. Doing so allows your business to avoid capital gains tax while receiving a deduction based on the asset’s fair market value.
- Establish a Donor-Advised Fund: If your business plans to make regular charitable contributions, a donor-advised fund provides immediate tax benefits for contributions, while allowing you to distribute funds over time. This strategy is particularly useful in high-income years.
- Maximize Corporate Giving Deductions: The IRS allows businesses to deduct cash donations up to 10% of taxable income. For non-cash donations, such as goods or services, the deduction limit varies, so confirm eligibility and deduction limits with a tax advisor.
7. Prepare for Potential Changes in State and Local Taxes
Beyond federal taxes, state and local tax (SALT) rules can significantly impact your business. Many states are revisiting SALT policies, especially with federal SALT deduction caps in place. Planning ahead can help you navigate the implications of state and local tax changes.
- Consider SALT Cap Workarounds: Some states have enacted SALT deduction cap workarounds, allowing pass-through entities to elect entity-level taxation that bypasses the federal SALT cap for individual taxpayers. Consult your tax advisor to see if your business qualifies.
- Review Payroll Taxes and Compliance: As states adjust payroll taxes and employer contributions, ensure compliance and assess any potential cost changes to your business.
- Plan for State Tax Credit Opportunities: Many states offer credits for specific investments, such as research and development, job creation, or environmental initiatives. Reviewing your eligibility for state tax credits can offer meaningful savings in addition to federal credits.
8. Collaborate with a Tax Professional for Tailored Planning
The tax landscape is complex and changes frequently, especially in a period of potential policy shifts. Working with a tax professional ensures that you’re making informed decisions based on current and anticipated tax regulations.
- Conduct a Year-End Tax Review: A tax advisor can help identify missed opportunities or overlooked deductions, as well as verify compliance with tax code changes. They can also provide insight into strategies that suit your specific financial and operational needs.
- Prepare for Scenario Planning: Tax advisors can help you prepare for multiple potential tax scenarios based on proposed legislation. This proactive approach helps your business remain agile and adaptable in a shifting tax environment.
- Use Technology for Tax Optimization: If your business has not yet invested in tax management software, doing so can simplify tax preparation and planning. From tracking deductible expenses to generating financial reports, technology streamlines tax compliance and helps you avoid costly errors.
Preparing for potential tax changes requires thoughtful planning and a proactive approach. By maximizing deductions, adjusting income and expense timing, reviewing investment strategies, and staying informed on potential policy shifts, you can minimize tax liability and protect your business’s financial health.
In a climate of regulatory uncertainty, these end-of-year tax strategies allow you to position your business advantageously, ensuring financial stability as you enter 2025. Working with a tax advisor can add an extra layer of expertise, allowing you to capitalize on the latest tax strategies tailored to your unique business needs.