2024 Year-End Planning for Small Businesses

As 2024 approaches its end, small business owners should take strategic steps to optimize their tax position, enhance cash flow, and plan effectively for the new fiscal year. This guide will walk you through some key tax planning tips.

1. Review Your Estimated Tax Payments

Review your estimated quarterly tax payments to ensure you have met your tax obligations for the year without overpaying or facing penalties for underpayment. Reviewing these payments helps determine if you are on track or if an additional payment is needed before the January 15, 2025 deadline to avoid underpayment penalties. Adjust your final payment based on your year-to-date revenue and expenses. Work with a tax professional to forecast your tax liability and align your estimated payments appropriately.

2. Maximize Deductions Through Year-End Purchases

Accelerate business expenses before December 31 to maximize tax deductions for 2024.  Eligible expenses such as office supplies, new equipment, and business software purchased before year-end can reduce taxable income. The Section 179 deduction allows immediate expensing of qualifying assets, while bonus depreciation can be applied to larger purchases.

By leveraging these deductions, businesses can lower their taxable income, effectively reducing their overall tax liability. Evaluate your current financial standing and consider purchasing necessary assets or prepaying for services, such as office supplies or professional fees, to qualify for deductions.

3. Review Your Retirement Plan Contributions

Ensure that your contributions to retirement plans such as a SEP IRA, SIMPLE IRA, or 401(k) are maximized by year-end to benefit from tax-deferred growth.  Contributions to qualified retirement plans are tax-deductible, reducing your taxable income for the year. For example, in 2024, the maximum contribution limits for 401(k) plans are $23,000 for individuals under 50 and $30,500 for those 50 and older due to catch-up contributions.

Maximizing contributions can result in significant tax savings and bolster your retirement fund. Small businesses may also consider establishing a SEP IRA or SIMPLE IRA plan if one is not already in place. Review contribution limits and deadlines with your financial advisor or plan administrator and make the necessary adjustments before the year's close.

4. Utilize Tax Credits Available for Your Industry

Identify and claim any tax credits for which your business may qualify, such as the Research and Development (R&D) tax credit or credits for energy-efficient upgrades. Tax credits directly reduce the tax liability dollar-for-dollar and can result in significant savings. For example, the R&D credit incentivizes businesses that invest in innovation and process improvement. Energy credits apply to businesses that make qualifying energy-efficient property upgrades.

5. Optimize Inventory Management

Conduct a thorough review of your inventory to identify slow-moving or obsolete stock, and consider writing down inventory value.  Inventory write-downs reduce taxable income by reflecting the loss in value of unsellable stock. This adjustment must be made before December 31 to count for the current tax year. Conduct a year-end inventory assessment and work with your accountant to document any value adjustments accurately.

6. Evaluate Income Deferral and Expense Acceleration

Consider deferring income to 2025 and accelerating deductible expenses into 2024.  Deferring income that you would receive late in December to January means it will be taxed in 2025, while accelerating expenses can reduce your 2024 taxable income.  This strategy can be especially useful if you expect to be in the same or a lower tax bracket in 2025. To implement, delay invoicing or negotiate payment schedules with clients.

7. Evaluate Pass-Through Entity (PTE) Tax Options

Assess the advantages of electing PTE tax status at the state level or optimizing the tax treatment for partnerships, S-corporations, and other pass-through entities.  Pass-through entities do not pay federal income taxes at the business level. Instead, income is passed through to the individual owners, who report it on their personal tax returns. Recently, many states have introduced PTE tax elections as a workaround to the federal $10,000 cap on state and local tax deductions. By electing to pay state taxes at the entity level, owners may bypass this limitation and potentially claim a full deduction.

For business owners, leveraging PTE tax options can optimize tax liabilities by allowing a full deduction of state taxes. This is particularly beneficial for entities operating in states with high income taxes. Ensure that the election is made within the required timeframe to apply for the 2024 tax year.

This article is only a summary of the many tax strategies for small businesses. Taking action on these tips can help small business owners close out 2024 on a strong financial footing and prepare for a more efficient and prosperous 2025. If you need assistance implementing any of these strategies, contact us at info@mkhstaxgroup.com