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 2024 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. Increased Interest Rates on Tax Underpayments
One of the big changes affecting 2023 is the interest rate charged by the IRS and states relating to tax underpayments. In recent years, the IRS underpayment rate has been as low as 3% or 4%. Some taxpayers have been able to enjoy lower borrowing costs by delaying tax payments and using the government’s low-cost lending rate. However, the landscape has shifted significantly, with these rates now climbing to around 8%. This increase 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 cost of interest.
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 depreciation tax rate has decreased from 100% to 80% 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.
3. Pass-Through Entity Tax Prepayments (e.g., S Corp, Partnerships)
Tax prepayments involve paying some or all of your anticipated 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. By prepaying taxes on this income, you benefit from a deduction in the current tax year. The income you report on your tax return can be reduced by the amount of tax you’ve prepaid.
4. Multi-State Taxes
If your company operates in multiple states, it is important to annually review the tax rules for each state. Some states may have different filing deadlines, tax rates or rules 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. You 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 where 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 Plans
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 whether to increase the match for employee contributions. It 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.
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’ll need to balance this with your business’s overall profitability and cash flow.
Also, there may be additional limitations for specified service trades or businesses.
8. The Inflation Reduction Act
The Inflation Reduction Act introduces various tax credits, especially in areas promoting energy efficiency and sustainability. These credits are integral to year-end tax planning due to their potential to significantly reduce tax liabilities.
For homeowners, the Act enhances residential credits for energy-efficient improvements. It 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 or vehicle purchases to maximize these credits. Additionally, purchasing an electric vehicle now qualifies for a credit, incentivizing eco-friendly choices.
Work With Your CPA Sooner Rather Than Later
Collaborating with your BGM 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.
We guide your business through the intricacies of year-end tax planning with tailored strategies and expert insights.
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