The 10 Essential Tax Planning Tips for Your Business

Are you familiar with the feeling of finding yourself with a huge tax balance and wondering, "Was there really nothing I could have done about this?" Well, now is your time to act! Read on for tax-saving strategies to implement before 2024 comes to a close.

Year-end tax planning is the practice of trying to maximize tax returns, avoiding tax penalties, and make the most of any possible tax deductions. Tax planning reduces your tax liability by employing effective strategies that explore ways that not only decrease taxes but, in some cases, secure a more solid future and retirement. Whether you earn $50,000 annually or $500,000:  proper tax planning can be beneficial for everyone.

There are a number of tax strategies out there that can help reduce your tax balance. Following is a brief guide on some options that you can benefit from:

1. Electing to be treated as an S-Corporation

• If your business is currently a C Corporation, you may want to consider switching to an S Corporation. Although a C Corporation is taxed at 21%, which may be less than your personal tax bracket, you will be paying taxes again when the corporation issues dividends. With an S Corp, you generally do not pay taxes on distributions, plus you can use your personal deductions to offset your tax balance.
• While on the topic of S Corporation - now is a good time to review whether you are taking out a reasonable salary as required by the IRS.

2. Health Insurance Expenses

• Employers can offer company health insurance where the employees can choose to opt in. They will get a pretax deduction on their paycheck, and the employer pays a portion of the cost as a business expense.
• Self-employed individuals can deduct 100% of their insurance expenses on their personal tax returns even without 'itemizing' their tax returns. (However the insurance cost will still be subject self-employed taxes)

• Cash basis filers calculate income based on when they actually receive the money or when the money leaves their account.
• Review and pay your open bills. This can be beneficial since you will be able to pick up the expenses in the current year.
• Prepay expenses for up to 12 months, using the IRS Safe Harbor for up to 12 months. Examples include expenses such as lease payments, rent, and insurance premiums.
• Stop billing customers - If possible, try to push off getting paid in December and wait for January. (Make sure to only use it with clients that you know are going to pay you)
• Be aware of "Constructive Receipt" - this applies when a business has access to utilize the funds that are received for goods and services despite the funds not being physically received or deposited. In this case, you will need to pay taxes on the income.

• An accrual basis filer is a business set up to track and record money they will earn or spend in the future as soon as the deal is made, using the date of the invoice or bill, not when they actually get or pay the money.
• Therefore, ensure that all bills with dates prior to year-end are entered and dated correctly so the expense can be picked up in the current year. 

5. Use your Credit Cards to pay your business expenses

• Do you have business expenses that need to be paid but don't have the available funds in your bank? Use your credit card. Using your credit card before year-end will allow you to use those expenses even if your credit card balance is unpaid. This works for both cash-basis and accrual-basis filers as well. (This can be an issue for some S-corps, so you might want to discuss it with your accountant).

• Do you have old computers in the office that needed to be replaced for a while but have been pushing it off? Now is a good time to buy them! The IRS allows businesses to take an immediate deduction by taking the "bonus deprecation" and making the "section 179" election for business expenditures related to some depreciable assets. This allows a business to lower its current year's tax balance rather than depreciating it over time.
• In order to utilize this bonus depreciation, it needs to be placed in service before year-end.
• Want to learn more about claiming your car as a business expense? Read this post.
• Bonus depreciation for 2024 is 60%. It will drop to 40% in 2025, and 20% in 2026. After 2026, the deduction will no longer be available

• If you occasionally have your kids working for you, you may want to consider adding them to payroll. They will not pay federal income taxes on the first $13,850 in 2024, and state taxes will likely be very low. In turn, this will save you income taxes on $13,850.
• If you are a sole proprietor, or you and your wife have a partnership, you can save even more taxes. If your kids are minors, you and your kids won't need to pay Social Security and Medicare taxes, which will save you an additional 15.3%.
• Check this article to learn more.

• As a real estate professional, you can offset your regular income with losses from renting out property. Provided that you qualify to be a real estate professional AND you materially participate in the business activity.
  1. Qualification Requirements: To qualify as a non-passive real estate professional,
     • 750-Hour Rule - You will need to have a log of 750 hours per year.
     • More Than Half of Professional Time in Real Property Businesses: In addition to the 750-hour requirement, you must spend more than half of your personal service work hours in real property businesses in which you materially participate. 
       
  2. Material Participation: Once you satisfy the real estate professional test, you will need to determine if the taxpayer is materially participating in rental activity. Material participation means being involved in the operations of the activity on a regular, continuous, and substantial basis. The IRS has seven tests to determine material participation, and you must meet one to qualify. 

• Quick background; The QBI deduction allows you to deduct 20% of your taxable income; however, this will get phased out based on your income. ($383,901 for joint filers in 2024). Once you reach the threshold, your ability to claim the pass-through deduction gets limited by 50% of payroll and you might not get to enjoy the full 20% tax break. Therefore, in order to qualify based on payroll, you should increase your wages.
• The formula for a wage increase for QBI is as follows: take the business net income > add back payroll > calculate it by .285, and you'll get the total wages to maximize on QBI. Note that if there are any losses on the personal tax return, which would decrease the AGI, the QBI will be calculated on the lesser of business income or AGI. But this is a good start.

• Pensions are a great way to put away money for retirement while also serving as a business expense. You can invest the money from the pension, and since it's tax-deferred, the money grows faster as there isn't anything eating away at it.
• There are 3 types of business retirement plans. 1 IRA-based plan such as a SEP IRA, 2 Defined contribution plans such as a 401(K), and 3 Defined benefit plans.
  
• Check this blog post for a summary of how a pension can help you save on taxes.

Looking for more tax savings tips? In this article, we discussed more tips that you can implement on your personal tax return.

Disclaimer: This article was written in an oversimplified manner designed to help you as a business owner. You should discuss this with a tax professional prior to implementing these strategies.