Now’s the Time to Start Year-End Tax Planning for 2024

As the year draws to a close, you’ll want to make critical tax-planning decisions that can significantly impact your company’s financial standing. Whether it involves purchases, deferring expenses, maximizing credits, or adjusting tax payments, now is the time to plan before the start of the 2025 tax season.

By carefully analyzing the current year’s financial landscape, you can take full advantage of credits, deductions, and payments. You can minimize tax liabilities and enhance fiscal health. Below, we look at critical items to consider during your year-end tax planning.

What Is Year-End Planning & Why Does it Matter?

Year-end tax planning is a strategic approach individuals and businesses take to review their financial activities before the year concludes. This process is important, not just because it gives you a head start on tax season.

Year-end tax planning is about the opportunity to make impactful decisions. Once the calendar flips, it’s too late for maneuvers that could have favorably influenced your tax situation.

Preparation is not just about crunching numbers. It’s about being ready for cash flow implications. Businesses often get caught up in the excitement of profitability, only to be blindsided by substantial tax bills. Effective tax planning can prevent these surprises.

8 Considerations When It Comes to Year-End Tax Planning

1. Adjustments to IRS Interest Rates

A change in 2023 that is still affecting 2024 is the interest rate charged by the IRS and states related to tax underpayments which will remain elevated at 8%. The elevated interest is not just a matter of higher costs; it also comes with tax implications.

The interest charged by the IRS is considered a penalty, not a deductible expense. This reality can have a substantial impact on your financial planning. When interest on a loan isn’t deductible, you can’t reduce your taxable income with the interest you’ve paid, leading to a higher net interest cost.

2. Bonus Depreciation

Bonus depreciation is a tax incentive that allows your business to deduct a large percentage of the purchase price of eligible assets. Examples include:

• Tangible personal property: Machinery, equipment, computers, appliances, and furniture used in a business
• Qualified improvement property: Improvements made to the interior portion of a nonresidential building after the building is placed in service
• Certain vehicles: Heavy vehicles used in business, like trucks and SUVs, which have gross vehicle weight ratings above 6,000 pounds
• Computer software: Off-the-shelf computer software that is readily available for purchase by the general public, subject to a non-exclusive license and not substantially modified

Recently, the bonus depreciation rate has decreased from 100% to 60% and is set to continue declining in the upcoming years. Purchasing eligible assets in the current tax year can secure a more favorable bonus depreciation rate. It reduces taxable income compared to future years when the rate will be lower. As the bonus depreciation percentage decreases, taxpayers will rely more on Section 179 expensing.

3. Pass-Through Entity Tax Prepayments (e.g., S Corp, Partnerships)

Tax prepayments involve paying some or all of your anticipated state tax liability before the year ends, which can be a smart financial move.

For pass-through entities, the income earned is not taxed at the corporate level but is passed through to the owners’ tax returns. For certain pass-through entities, the state tax ultimately owed by the individual owner could be paid and deducted at the entity level.

4. Multi-State Taxes

If your company operates in multiple states, it is important to review the tax rules for each state annually. Some states may have different filing deadlines, tax rates or regulations regarding what income is taxable. Here’s what you need to be aware of:

• Current tax laws: Many states have stepped up their enforcement of tax laws, particularly for businesses operating in multiple jurisdictions. Businesses face a heightened risk of audits and penalties for non-compliance.
• Remote employees: Most states now require companies with employees working within their state boundaries to file in the state.
• Sales revenue: Most states now have added minimum sales revenue thresholds, under which companies may be required to collect and remit sales tax returns or file income tax returns despite having no physical presence in such states.

5. Changes to Retirement Plan

Year-end is the ideal time for reviewing changes to retirement plans, especially for small employers considering setting up 401(k) plans:

• Contribution limits: Review annual contribution limits for retirement plans. These often change year-to-year and affect your tax planning.
• Tax credits: Small employers setting up a 401(k) for the first time can benefit from new and enhanced tax credits. These credits, designed to offset setup and administrative costs, can be substantial.
• Employee contributions: Consider increasing the match for employee contributions. This can boost employee morale and retention.
• Auto-enrollment features: Implementing auto-enrollment can increase participation rates, benefiting both employees and the plan’s overall health.
• Vesting schedules: Review and adjust your plan’s vesting schedules. It can be a strategic tool for employee retention.

If your employees are nearing retirement age, remind them of catch-up contributions, which allow older employees to save more. Ensure the investment options within the plan are diverse and align with your employees’ retirement goals.

6. Accelerate Deductions and Defer Income

Accelerating deductions means prepaying or incurring deductible expenses before the year ends. It increases your deductions for the current tax year. It could involve making charitable donations, paying business expenses in advance, or purchasing necessary equipment.

Deferring income involves delaying the receipt of income until the next tax year. It might include postponing invoicing or deferring certain payments.

These strategies help manage your taxable income, potentially placing you in a lower tax bracket for the current year. By accelerating deductions, you reduce your taxable income now, which can decrease your current tax liability. Deferring income has a similar effect, as it keeps your current year’s income lower, again potentially lowering your tax rate and tax bill.

Including these strategies allows for greater control over your tax situation, letting you optimize your financial decisions based on your business’s performance and future projections.5

7. QBI deduction

The Qualified Business Income (QBI) deduction allows you to deduct up to 20% of your qualified business income from taxable income. For example, if your business earns $100,000 of QBI, your QBI deduction could be $20,000. The QBI deduction has certain limitations, particularly relating to wages paid by the business.

One key limitation is that QBI deduction can’t exceed 50% of the total wages paid by the business. So, if your business pays $10,000 in wages, the maximum QBI deduction you could claim would be $5,000, not the full 20% of your business income.

Consider how increasing your wage expenses might maximize your QBI deduction. However, you must balance this with your business’s overall profitability and cash flow.

Also, there may be additional limitations for specified service trades or businesses.

8. Residential Energy Credits

For homeowners, review your home improvements for the year to determine whether you qualify for any of the residential energy credits. The current credit replaces the previous lifetime limit of $500 with an annual cap of $1,200, making it more lucrative for homeowners to make ongoing upgrades. Investing in energy-efficient windows, insulation or heating systems not only reduces energy costs but also offers annual tax benefits.

Including these credits in your year-end tax planning allows you to plan for home improvements and get a tax subsidy in the process.

Work With Your CPA Sooner Rather Than Later

Collaborating with your CPA for year-end planning means you can leverage their expertise to identify tax breaks and ensure compliance. Their timely guidance in December can help you minimize taxes, avoid penalties and optimize cash flow, resulting in more cash in hand as the year concludes.

At BGM, we guide your business through the intricacies of year-end tax planning with tailored strategies and expert insights.

BGM Provides Year-End Planning and Tax Return Services

Our comprehensive approach extends beyond business tax filing. We offer year-end planning services, aiming for holistic financial wellness for your business.

BGM Analyzes Your Company’s Financial Situation All Year

Continuous financial analysis is vital. For strategic tax planning, we monitor your company’s financial health throughout the year, not just at tax time.