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The Ultimate Guide to Year-End Tax Planning for Small Business Owners

Updated: Dec 17, 2023

The end of the year is fast approaching, which means it's time for business owners to assess their current tax situation and consider any steps that could be taken before December 31st to maximize deductions and tax savings. Proper tax planning and preparation can lead to substantial benefits, especially with proposed legislation in Congress that could require revisions to any strategies you already have in place.

In this comprehensive guide, we’ll explore a range of tax planning tips, strategies, and frequently asked questions tailored specifically for business owners. Follow this advice to navigate the complex tax landscape and make smart decisions that can ultimately boost your bottom line.

Top Year-End Tax Planning Tips and Strategies For Small Business Owners and Real Estate Professionals

1. Take Advantage of Section 179 Deductions

Under Section 179 of the tax code, a business can currently expense the cost of qualified equipment up to $1,080,000 in 2020. The maximum annual deduction is phased out above a specific threshold for assets placed in service during the year. For 2020, the phase-out threshold and amounts were temporarily increased under the CARES Act.

Pro Tip: To maximize the deduction, purchase qualifying assets like machinery, vehicles, furniture, and technology before year-end. Many businesses may need machinery or other equipment, and purchasing the equipment before year-end can be a strategic tax strategy. The Section 179 deduction cannot reduce taxable income from all your business activities to less than zero for the year. This tax-saving approach allows you to not only invest in essential resources for your operations but also potentially reduce your tax liability, ultimately benefiting your bottom line. Planning ahead and making these acquisitions strategically can have a significant impact on your business's financial health while ensuring you're well-equipped for the challenges and opportunities of the coming year.

2. Capitalize on Bonus Depreciation

Bonus depreciation offers businesses a means of accelerating depreciation by allowing them to deduct a substantial portion of the cost of eligible assets in the year of purchase. The remaining cost can be spread out over several years through regular depreciation, ultimately phasing out.

Notably, the Tax Cuts and Jobs Act (TCJA) of 2017 ushered in significant changes to these rules. It introduced a remarkable 100% bonus depreciation provision, permitting businesses to immediately expense the entire cost of eligible property placed in service after September 27, 2017, and before January 1, 2023. Prior to TCJA, this allowance stood at 50%.

However, it's crucial to be aware that the 100% write-off for eligible property expired on December 31, 2022. Unless there are changes in legislation, the bonus depreciation percentage will undergo a gradual reduction over the coming years for property placed in service after December 31, 2022, and before January 1, 2027. This phase-out schedule is as follows:

  • 2023: 80%

  • 2024: 60%

  • 2025: 40%

  • 2026: 20%

  • 2027: 0%

Given this transition, savvy tax planning for 2023 should consider the changing landscape of bonus depreciation and its implications for businesses' year-end financial strategies.

Pro Tip: Seize the opportunity to benefit from this valuable tax break while it's still available. As the bonus depreciation percentages gradually phase out over the next few years, it becomes increasingly important to make the most of this tax incentive while it's at its most advantageous. To ensure you maximize your tax savings, consider discussing major purchases or significant improvements with experts at UnitedTax.AI.

3. Regular Depreciation

If any remaining acquisition cost remains after deducting bonus depreciation, the balance can be depreciated over time under the Modified Accelerated Cost Recovery System (MACRS). Depreciation reduces taxable income, providing valuable tax relief annually over the life of the asset.

Businesses typically depreciate a wide range of assets over time for tax and accounting purposes. Here's a list of common items that businesses often depreciate:

  1. Machinery and Equipment: This includes manufacturing machinery, office equipment, computers, and other tangible assets used in business operations.

  2. Vehicles: Company cars, trucks, and other vehicles used for business purposes are subject to depreciation.

  3. Buildings: Commercial real estate properties, office buildings, and warehouses are typically depreciated over a longer period.

  4. Furniture and Fixtures: Office furniture, fixtures, and interior improvements like lighting systems may be depreciated.

  5. Technology and Software: Computers, servers, software applications, and other IT infrastructure components can be depreciated.

  6. Leasehold Improvements: Renovations, alterations, or improvements made to leased commercial space are often subject to depreciation.

  7. Intangible Assets: While not "depreciated" in the traditional sense, intangible assets like patents, copyrights, and trademarks are amortized, which is similar to depreciation.

  8. Land Improvements: Improvements made to land, such as landscaping, parking lots, or fencing, may be depreciated separately from the land itself.

  9. Office Equipment: Printers, copiers, fax machines, and other office equipment can be depreciated over their useful life.

  10. Heavy Machinery: Construction equipment, farming machinery, and other heavy equipment used in specialized industries are depreciable assets.

  11. Fleet Vehicles: Businesses with large fleets may depreciate multiple vehicles used for various purposes.

  12. Aircraft and Boats: Companies involved in aviation, maritime, or recreational industries may depreciate aircraft and boats.

  13. Leased Assets: Businesses may depreciate assets they lease if they have a long-term lease agreement.

  14. Production Tools: Tools and equipment used in manufacturing or production processes may be depreciated.

  15. Shelving and Racking: Storage solutions like shelves and racks in warehouses or retail spaces may be depreciable.

Pro Tip: Maximizing depreciation is a crucial financial strategy for businesses looking to optimize their tax liabilities and cash flow. One key aspect of achieving this goal is to use the shortest recovery period available for each asset. This approach allows you to write off the cost of your assets more quickly, which in turn can lead to significant tax savings.

4. Expense Repairs and Maintenance

Strategically managing business expenses towards the end of the year can be a powerful tool for reducing taxable income and optimizing your overall financial situation. One essential aspect of this strategy involves distinguishing between capital improvements and deductible repairs. Here's a more detailed exploration of this concept:

Capital Improvements vs. Deductible Repairs: Understanding the distinction between capital improvements and deductible repairs is fundamental. Capital improvements involve substantial expenditures that enhance the value of a business property or extend its useful life. These expenses are typically not immediately deductible; instead, they are capitalized and depreciated over time. In contrast, deductible repairs are expenses incurred to maintain or restore property to its original condition, with the objective of keeping it in good working order. These costs can be deducted in the year they are paid.

Immediate Tax Benefits: By strategically paying for deductible repairs towards the end of the year, businesses can reduce their taxable income for that tax year. This can result in lower tax liabilities and potentially free up cash that can be reinvested into the business or used for other purposes. It's important to keep detailed records to substantiate these repair expenses, as documentation is essential to support your claims in the event of an audit.

Year-End Planning: As the end of the tax year approaches, businesses can review their properties and identify necessary repairs and maintenance work. By scheduling and executing these repairs before year-end, you can ensure that the associated expenses are eligible for immediate deduction. This proactive approach can help lower your taxable income and improve your financial position.

Strategic Expense Management: Beyond repairs, businesses can also consider other deductible expenses such as supplies, professional fees, and prepayments. By strategically managing when these expenses are incurred, you can optimize your deductions and minimize your tax liability. Collaborating with financial advisors or utilizing accounting software can assist in identifying opportunities for expense management.

Compliance and Record-Keeping: It's crucial to emphasize that proper documentation and compliance with tax regulations are essential when implementing this strategy. Accurate records of expenses, invoices, receipts, and other relevant documentation should be maintained to substantiate your deductions and demonstrate compliance with tax laws.

Pro Tip: Distinguishing between repairs and improvements in property maintenance is pivotal for financial management. Repairs maintain efficient operation and are immediately deductible, encompassing tasks like fixing broken windows or addressing wear and tear. Improvements, in contrast, enhance property value and require capitalization, such as adding new wings or comprehensive renovations. Understanding this distinction is crucial for effective financial planning, tax strategy, and property appraisal, enabling businesses and property owners to maintain assets, optimize financial strategies, and ensure tax compliance. Consulting financial professionals can assist in making informed decisions regarding these expenses.

5. Offset Passive Losses

Passive rental real estate activities are a valuable asset in tax planning strategies, offering a unique opportunity to harness passive losses strategically. The distinction between passive and active involvement in these activities becomes pivotal in optimizing your tax liability.

Pro Tip: If your business has excess passive losses, it's advisable to proactively seek out additional sources of passive income to offset these losses. One effective strategy is to explore opportunities in rental properties or investments, as these can generate income streams that align with passive loss deductions. By strategically balancing passive income and passive losses, you can optimize your tax position, reduce overall tax liability, and enhance your financial stability.

6. Maximize the Qualified Business Income (QBI) Deduction

The Qualified Business Income (QBI) deduction, introduced by the Tax Cuts and Jobs Act, is a significant tax benefit designed to provide relief to pass-through entities, including S-corporations, partnerships, and sole proprietorships. QBI is essentially the net income generated by a qualified business, and this deduction allows certain business owners to potentially reduce their taxable income by up to 20% of their qualified business income each year.

In tax planning, the QBI deduction is a valuable tool for optimizing tax liability, and it can be especially beneficial for owners of pass-through entities.

Pro Tip: For businesses seeking to harness the benefits of the Qualified Business Income (QBI) deduction, consulting with tax experts like UnitedTax.AI is highly recommended. Our expertise can help you assess whether your business income meets the eligibility criteria for this valuable deduction, which can amount to a significant reduction in your taxable income. It's important to note that specific rules and limitations may apply, especially for service professionals, so professional guidance can be instrumental in navigating these intricacies and optimizing your tax planning strategy effectively.

7. Deduct Property Management Fees

Outsourcing property management serves as a strategic tax planning move for property owners and real estate investors. When you delegate management responsibilities to professional firms, you gain significant tax advantages. Expenses related to property management, including management fees, are typically tax-deductible, effectively lowering your taxable income and reducing overall tax liability. This approach not only optimizes your tax strategy but also streamlines financial record-keeping, enhances operational efficiency, and frees up your resources for other investment opportunities, making it a valuable financial decision for property owners and investors.

Outsourcing property management not only ensures efficient property operation but also leverages tax deductions to improve your financial outlook. By tapping into these tax benefits, property owners can strategically minimize their tax liability while maintaining well-managed and profitable properties.

Pro Tip: Maintain detailed records of all expenses related to your rental properties. Management fees, maintenance and repairs, utilities, insurance, and taxes are generally deductible.

8. Time Real Estate Transactions

Strategic timing of real estate transactions can be a powerful tax planning tool for both business owners and real estate investors. By carefully planning the purchase and sale of properties, individuals can optimize their tax outcomes and potentially reduce their overall tax liability.

For instance, selling a property during a lower-income year can be advantageous, as it may result in lower capital gains taxes. By aligning the timing of property sales with your financial situation, you can potentially reduce the tax impact of capital gains, ensuring that you retain more of your profits.

Additionally, 1031 exchanges present a valuable option for deferring capital gains taxes altogether. Under Section 1031 of the Internal Revenue Code, investors can exchange one investment property for another of like kind, deferring the recognition of capital gains. This strategy allows investors to preserve their investment capital and potentially grow their real estate portfolios over time while deferring taxes until a future sale.

Pro Tip: When embarking on major real estate transactions, collaborating with both UnitedTax.AI and a qualified real estate professional is essential. These experts can provide valuable insights into the complexities of real estate transactions and the associated tax implications. By working closely with them, you can strategically time your transactions to optimize after-tax returns, ensuring that you make well-informed decisions that align with your financial goals and objectives. Their combined expertise can help you navigate the intricacies of the real estate market and tax laws, ultimately enhancing the profitability and efficiency of your real estate investments.

The Importance of Documentation

Supporting your tax deductions is crucial. Keep detailed, organized records of all expenses, asset purchases, and business uses of vehicles. Log mileage in a diary as you go and save receipts. Documentation will be needed to justify write-offs if ever audited or questioned by the IRS.

UnitedTax.AI can consult and help with strategic decisions throughout the year as new tax planning opportunities arise. They can provide guidance to ensure you maximize available deductions and fully comply with all filing requirements and deadlines. With proper diligence and tax planning, you can minimize your business’s tax liability and keep more of your hard-earned profits.

Frequently Asked Questions

Here are answers to some common year-end tax planning questions from small business owners:

What’s the deadline for deducting expenses?

To claim tax deductions for 2023, expenses must be paid or incurred by December 31, 2023. Keep detailed records to prove payment dates. For accrual method taxpayers, expenses are deductible when incurred, regardless of when paid.

When can I deduct bonus payments to employees?

Generally, year-end bonuses paid to employees in 2023 are deductible by the company in 2023 and taxable to the employees in 2023. But a calendar-year company on the accrual basis can deduct bonuses as late as March 15, 2024 on its 2023 return if paid by this date.

Can I still open and contribute to a SEP IRA or Solo 401(k)?

Yes, you have until the due date of your business's 2023 return, including extensions.

My business buys supplies online. When can I deduct them?

Online purchases are deductible in the tax year you pay for them, even if you don’t receive them until the following year. The key is proving when payment occurred.

Are start-up costs deductible in the current year?

Initially, you can deduct up to $5,000 of your startup costs in the first year when launching a new business. Any leftover expenses beyond this initial deduction limit are spread out over a 15-year amortization period.

Does it make sense to accelerate income or defer expenses?

It depends on your projected tax rates for 2023 and 2024. Deferring income and accelerating deductions make sense if you expect to be in a lower bracket next year. Seek professional advice about the best timing strategies for your situation.

Putting it All Together - Tax Planning Strategies

Consulting with UnitedTax.AI is the best way for business owners to identify personalized tax planning techniques that can maximize their bottom line. Use this year-end guide as a starting point to explore all avenues for reducing your 2023 taxes. With the right preparation and advice, you can approach tax season with confidence and drive more value to your business.


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