Article highlights:
- Accelerate business expenses.
- Review and adjust payroll
- Manage inventory and cost of goods sold
- Optimize Retirement Contributions
- Charitable contributions
- Business Advertising
- Filing Obligations and Compliance
- Tax credit and incentives
- Employee Gifts
- Disaster Loses
As the year comes to a close, small company owners have a unique chance to apply methods that can considerably lower their tax bill in the new year. Businesses that take preemptive efforts in the last months might not only reduce their tax burden, but also simplify their financial processes. Here is a complete guide of activities you may take to improve your tax status in 2024.
1. Accelerate business expenses
Accelerating company costs is one of the most efficient techniques to lower your taxable income. Consider buying office equipment, machines, automobiles, or tools before the year closes. This allows you to take advantage of Section 179 expensing and bonus depreciation.
Section 179 Expensing: This provision enables companies to deduct the whole purchase price of eligible equipment and software acquired or financed during the tax year. For 2024, the deduction ceiling is once again generous, enabling firms to deduct up to $1,220,000 in qualified property. This may include equipment, office furnishings, and some company cars. This maximum is phased out dollar for dollar whenever the amount of section 179 property put in operation during the tax year surpasses $3,050,000. This implies that in 2024, if a company puts $4,270,000 or more of expense-eligible property into service, it will no longer be able to claim section 179 expensing. Property eligible for 179 expensing includes machinery and equipment depreciated under MACRS regulations, regardless of the recovery time.
- Pre-packaged computer software,
- Qualified enhancements to building interiors,
- Roofing, HVAC, fire protection, alarm, and security systems.
Bonus Depreciation: In addition to Section 179, companies may utilize bonus depreciation to deduct a substantial amount of the cost of new and used commercial assets. In 2024, bonus depreciation permits 60% of an asset's cost to be expensed. This is decreasing from 80% in 2023 and will fall to 40% for purchases in 2025.
Qualifying property comprises physical property depreciated under MACRS with a 20-year or shorter recovery time, as well as the majority of computer software.
2. Review and adjust payroll
If you have staff, evaluating your payroll might result in further tax savings. Consider the following.
decent Compensation for S-Corporation Shareholders: If you own stock in an S-Corporation, make sure you pay yourself a decent wage. This impacts your Section 199A deduction and payroll taxes. The IRS mandates that S-Corporation stockholders be compensated reasonably for their efforts.
Year End Bonuses: Consider giving incentives before the end of the year. Bonuses are deductible in the year they are paid, which reduces taxable income. Year-end bonuses, on the other hand, are treated as additional earnings and are taxed and withheld accordingly. Make sure bonuses are routed via payroll to account for withholding taxes.
3. Manage inventory and the cost of goods sold
For firms that keep inventory, controlling year-end inventory levels might affect your taxable revenue. Consider the techniques below:
goods write-downs: If you have outdated or unsellable goods, consider documenting it. This lowers your taxable revenue by raising the cost of products sold.
Year-end inventory: From a tax standpoint, the value of your ending inventory influences your taxable income. A higher ending inventory raises taxable revenue by lowering the cost of goods sold (COGS), while a smaller ending inventory lowers taxable income by raising COGS. As a result, if your objective is to decrease taxable revenue, you may opt to maintain a lower inventory at year-end.
4. Optimize Retirement Contributions
Contributing to retirement plans is an effective strategy to decrease taxed income and prepare for the future. Consider the choices below:
SEP IRAs and Solo 401(k)s: Self-employed individuals may contribute up to 25% of their net earnings to a SEP IRA, with a maximum contribution limit of $69,000 in 2024. Solo 401(k) plans also have high contribution limits, permitting both employee and employer contributions.
Catch-Up Contributions: If you are over 50, take advantage of catch-up contributions to boost your retirement savings while lowering your taxable income.
Contribution Deadlines: SEP IRA contributions must be submitted by the due date on your company's tax return, including extensions.
Employee voluntary deferrals for 401(k) contributions must be made before the end of the calendar year (December 31, 2024) in order to be eligible for that tax year. Employer payments, such as matching or profit-sharing contributions, may be made by the employer's tax return due date for the 2024 tax year, including extensions.
5. Charitable contributions
Making charitable gifts before the end of the year may give tax advantages. C businesses may deduct charitable gifts straight from their corporate tax filings. The deduction is typically restricted to 10% of a corporation's taxable income.
However, sole proprietorships, partnerships, and S corporations cannot deduct charitable donations as business costs. Instead, the deduction is passed on to individual owners, partners, or shareholders, who may claim it on their personal tax returns if they itemize deductions. As a result, they have no effect on the business's taxable revenue or the owners' Social Security or self-employment tax liability.
In 2024, individuals may deduct monetary donations up to 60% of their adjusted gross income.
6. Business Advertising
Advertising costs are often seen as routine and essential company expenses. As a result, they are completely deductible on a business's tax return. This covers the expenditures connected with advertising the company via different media, sponsorships, and events whose main purpose is to publicize the business.
However, the line between advertising and philanthropic donations may be blurred. firm advertising is defined as a cost made to market a firm and produce income. charity donations are given with the intention of assisting a charity cause or organization without expecting a direct commercial gain in return.
For example, if a firm provides money to a local food bank without gaining any advertising or promotional benefits, this is considered a benevolent gift. The company does not anticipate to earn a direct financial benefit from the gift.
7. Filing Obligations and Compliance
As you prepare for the year's conclusion, verify that you are compliant with all filing duties.
Beneficial Ownership Reporting: If your company is obliged to submit beneficial ownership information, check that you have obtained the relevant information. This contains information about the persons who own or control the firm.
The FinCEN Beneficial Ownership Information (BOI) report filing has specified due dates that vary based on when a firm is formed or registered. Existing enterprises that were in existence before January 1, 2024 must submit their first BOI report by January 1, 2025. For new companies formed or registered between January 1, 2024, and December 31, 2024, the report is due 90 calendar days after the company gets real or public notice of its formation or registration. Beginning January 1, 2025, newly founded or registered enterprises will have 30 calendar days from the effective date of their establishment or registration to submit their first BOI reports. These dates are critical for ensuring compliance and avoiding any fines.
Prepare to file information returns, such as Form 1099-NEC for non-employee remuneration. Ensure that you have obtained Social Security Numbers (SSNs) or Taxpayer Identification Numbers (TINs) from all independent contractors. Independent contractors should be forced to fill out Form W-9 before commencing work. If this was not done initially, please sure to gather them so that the 1099-NEC papers may be completed correctly and on schedule in January.
Estimated tax payments: If you or your company is obliged to make estimated tax payments, keep them up to date to avoid fines.
8. Tax credits and incentives
Investigate possible tax credits and incentives that may lower your tax liability:
If your company participates in research and development activities, you may be eligible for the R&D tax credit. This credit may be used to offset both income tax and, in certain situations, payroll tax liabilities.
Energy Efficiency Credits: Think about investing in energy-efficient equipment or renewable energy solutions. The federal and state governments provide incentives to enterprises that undertake energy-efficient modifications.
9. Employee Gifts
Employee presents are a frequent practice in many businesses, particularly during the holiday season or as a sign of gratitude for hard work and commitment. However, when it comes to employee gifts, firms must consider the tax ramifications. In general, they are deducted by the company but may or may not be included in the employee's wage income, as discussed here.
Cash bonuses are frequently the most appreciated kind of present since they allow workers to spend the money as they see appropriate. Cash bonuses, on the other hand, are considered taxable income and must be withheld from payroll.
Gift cards and certificates are popular because they provide the receiver a degree of choice. However, if they are readily converted into cash, they are considered taxable income.
Non-Cash Gifts: Items like corporate products, Christmas hampers, or event tickets might be deemed de minimis fringe benefits if they are modest in value and provided rarely, making them non-taxable.
10. Disaster-related losses
A catastrophe loss is the financial loss experienced by a taxpayer as a result of a federally declared disaster. Taxpayers who encounter such losses in 2024 might decide to deduct the loss on their 2023 tax return rather than waiting until their 2024 return. This option may bring speedier financial relief by perhaps earning a tax refund for the previous year.
If your firm or you personally were hit by one of the numerous catastrophes in 2024, it may have an influence on your year-end tactics and overall tax preparation for 2024.
By following these measures in the closing months of the year, small companies may drastically lower their tax obligation in 2024. There are several ways to improve your tax efficiency, including increasing spending, controlling inventories, and investigating tax credits. Continue to be diligent and comply with your filing duties.
If you want to learn more about how these year-end initiatives might assist your company, please contact us today.
