Tis’ the season to get gifts for friends, battle traffic to buy the perfect turkey, and travel miles to see loved ones. We are forgetting one very important thing though. There’s one more task that small business owners can’t forget – end-of-the-year tax planning.

It’s true that tax planning is not very festive, but skipping it could seriously derail your plans for a Happy New Year. 

The end of the year is a wonderful time to consult your books and ensure that everything is in order. Think of it as a small investment of time to keep your small business on track and moving forward.  Making a checklist of what needs to be done helps you plan time in your schedule to get the job done. 

Don’t wait until the very last minute to begin your tax planning. Procrastinating makes it more likely you will find yourself in 2023 thinking if only I had done something about this last year.

There are a few tips to use which can significantly help in completing your tax planning, ultimately making tax time less stressful than it already is and potentially saving you money on your tax bill. 

Tip #1

Evaluate your financial strength and business structure. Set aside an hour or two and examine your financial statements for the year. Look at your balance sheet, profit and loss, and cash flow statements. Compare reports from year to year and month to month, identifying patterns of gains and/or losses, and digging into the root causes behind them.  

This is also a prime time to determine if your legal structure could use a change. For example, if you are a sole proprietorship, you may benefit from registering as a partnership or limited liability company. On the other hand, you might realize that changing from an S Corporation to a C Corporation could be more profitable to your business.

Tip #2

Accelerate or defer income. This accounting strategy could be a valuable addition to your end-of-year small business tax planning arsenal.

One idea is to “reduce” your current year’s earnings by postponing them to the next year. This could translate into savings on your taxable income, lessening your tax liability. 

Conversely, another option is to expedite the collection of revenues expected for the new year so that they can be received and recognized by December 31. This approach can be valuable when you anticipate that your earnings will be taxed at a higher rate in the next year.

How you apply either of these techniques depends on your accounting method. For instance, if your business uses the cash-basis accounting method, it might make more financial sense to defer your income. Always talk with a tax professional or accountant on how to best follow this strategy, making sure you stay in full compliance.

Tip #3 

Invest in necessary purchases. 

Repairs or maintenance made to property to keep it in regular working order can generally be fully expensed in the year incurred. Tangible personal property costing less than $2,500 per item can also be expensed under the IRS de minimis safe harbor rule. Moving up qualifying planned expenditures to the end of the year will increase your business expense, and decrease your net income and thus your anticipated tax liability. 

But what about that delivery van that is always in the shop? Is repair the only option?  It turns out that the cost of replacing the van with new or used equipment can be partially or fully deductible in the year of purchase. The IRS 2022 Section 179 deduction limit for businesses is $1,080,000.  For equipment purchases over that limit, businesses may qualify for Bonus Depreciation.

Rules for both programs are complex, so make sure you consult your tax adviser. The important takeaway here is that the timing of large equipment purchases can have a significant impact on a business’ tax liability.  

Tip #4

Consider what tax deductions you qualify for.  Somewhat a derivative of the previous tip, this involves having a knowledge of what deductions are applicable to your business and accurately deducting them.

This could include, but is certainly not limited to, travel expenses, charitable contributions, employee expenses, and the others.

Furthermore, you might consider writing off bad debts that have gone and will continue to go unpaid. Naturally, it is never ideal to have to write off an accounts receivable account. However, it can work in your favor during your small business tax planning, by reducing your business’ tax strain for the current year. 

Tip #5

Set up and/or contribute to a retirement plan. If your business does not have a retirement plan, this may be an excellent time to establish one to help reduce taxable income.

There are several choices for small business owners to select from, such as:

• 401K
• Simple IRA
• SEP (Simplified Employee Pension Plan) IRA

Some businesses elect to provide retirement contributions and end-of-year bonuses to their employees, thus taking advantage of the tax breaks that these generate. 

No two businesses are alike in structure or finances, so it is best to speak with a tax professional before initiating this particular tip.

Finally, end-of-year small business tax planning does not have to be difficult or exasperating. If you do give yourself plenty of time, create a checklist, and set a daily or weekly reminder of each task that must be done, it could be a seamless and simple process. Begin between middle to late November and work your way through the tips provided.

We recommend consulting with a tax advisor to better understand what will work well for your business.