As we approach the end of 2024, small business owners have the opportunity to adjust their tax strategies to reduce their tax burden, maximize deductions, and prepare for the new year. Proactive tax planning not only helps save money but can also position your business for continued growth. In this blog, we’ll explore the 5 tips year-end tax planning for 2024, offering practical recommendations that can significantly impact your tax situation.
5 Tips:
1. Take Advantage of Charitable Donations
Donating to charitable organizations is a great way to give back to your community while potentially benefiting from tax deductions. For C-corporations, charitable contributions can be deducted directly from the business’s taxable income, which could result in substantial tax savings. However, for pass-through entities like sole proprietorships, partnerships, and S-corporations, donations will flow through to the owner’s personal tax return, meaning the tax benefits apply at the individual level.
For a donation to be deductible, it must be made to a qualified charitable organization. Keep in mind that not all contributions are deductible; donations to raffles, political causes, or non-qualified organizations won’t reduce your tax burden. However, if done correctly, charitable donations can not only offer potential tax savings but also provide an opportunity for your business to make a positive impact in your community.
2. Maximize Depreciation Deductions with Section 179
One of the most effective strategies for small business owners to reduce taxable income is through depreciation deductions. Under Section 179, the IRS allows you to deduct the full or partial cost of qualified property purchased during the tax year, instead of depreciating it over several years. This can be a great opportunity to reduce your taxable income if you plan on purchasing new or used equipment before the year ends.
For 2024, Section 179 allows businesses to deduct up to $1.16 million, with a phase-out threshold of $2.89 million. This is particularly helpful for small businesses looking to invest in machinery, vehicles, or other assets needed for growth. Additionally, businesses can take advantage of bonus depreciation, which allows for a 60% deduction on the cost of qualifying property in the year it is placed in service. It’s important to note that this percentage will decrease each year, making 2024 an excellent time to make qualifying purchases before the depreciation rate drops further.
3. Consider the De Minimis Safe Harbor Election
The De Minimis Safe Harbor Election is a lesser-known tax provision that can help small businesses deduct certain small-dollar expenses in the current tax year, instead of capitalizing and depreciating them over time. This can significantly simplify accounting and reduce the administrative burden for smaller purchases.
To qualify for the De Minimis Safe Harbor Election, the business must have a written accounting policy and an applicable financial statement (AFS). The maximum amount that can be deducted under this provision is $5,000 for businesses with an AFS and $2,500 for those without one. This election can be a great way to simplify your tax filings and reduce administrative work, especially if your business frequently makes small purchases like office supplies, furniture, or tools.
4. Review and Optimize Pass-Through Entity Taxes
If your business operates as a pass-through entity, such as an S-corporation, LLC, or partnership, there are specific tax strategies you should consider. One important planning tool is the Qualified Business Income (QBI) deduction, which allows business owners to deduct up to 20% of their business’s qualified income. This deduction can significantly reduce your tax burden, but it has limitations and specific requirements, such as W-2 wages and the nature of the business.
Additionally, many states offer specific tax deductions for pass-through entities (PTEs), which could further reduce your business’s taxable income. These state-specific deductions allow business owners to shift the state tax payment from the individual to the entity level, offering additional savings. It’s important to consult with a tax professional to determine whether this strategy is right for your business, as the rules vary from state to state.
5. Plan for Retirement and Employee Benefits
Investing in the future of your business and employees can also provide tax benefits for the current year. Consider contributing to an employer-sponsored retirement plan, such as a SEP IRA, SIMPLE IRA, 401(k), or profit-sharing plan. These contributions not only allow you to save for the future but can also be tax-deductible, reducing your taxable income.
Contributions you make for yourself and your employees can lower your tax burden, but it’s essential to be aware of the IRS limits and restrictions. It’s advisable to work with your accountant to ensure that your contributions don’t exceed the IRS limits and that you’re maximizing the tax advantages these plans offer.
