With the third estimated tax payment behind us, it’s time for small businesses to focus on year-end tax planning. Proactive steps now can help lower your taxes for this year and next. Common strategies include deferring income and accelerating deductions, or bunching deductible expenses to maximize their value.
However, if you expect to be in a higher tax bracket next year, the opposite approach of pulling income into 2024 and deferring deductions to 2025 might make more sense.
Here are a few key points to consider:
Estimated taxes
Make sure to plan ahead for your fourth quarter estimated tax payment. It’s due on January 15, 2025 so mark your calendar and pay on time to avoid penalties.
QBI deduction
If you're not a corporation, you might be eligible for the Qualified Business Income (QBI) deduction, but income thresholds apply.
Non-corporate taxpayers may qualify for a deduction of up to 20% on their qualified business income (QBI). In 2024, if taxable income surpasses $383,900 for married couples filing jointly (or half that for other filers), the deduction may be subject to limitations.
These limits depend on factors like the type of business (e.g., law, health, or consulting), amount of W-2 wages paid, and/or unadjusted basis of qualified property like machinery and equipment. The phase-in of these limits could affect your deduction.
To preserve or maximize your QBI deduction, consider deferring income or accelerating deductions to stay below the threshold. You could also increase W-2 wages before the year’s end. Since the rules are complex, it’s best to consult with a tax professional before making any decisions.
Cash vs. accrual accounting
More small businesses now qualify to use the cash method of accounting, which allows them to defer income by holding off billing or prepaying expenses. If your average annual gross receipts from the last three years are under $30 million, you’re in luck!
Section 179 deduction
Need new equipment? The Section 179 deduction lets you expense up to $1.22 million in 2024. It applies to machinery, software, HVAC systems, and more–perfect for small businesses looking to invest before year-end.
The high dollar ceilings mean that many small and midsize businesses will be able to deduct most or all of their spending on machinery and equipment. Plus, the deduction isn't prorated based on how long the asset is in service during the year. So, even if you put eligible property into service in the final days of 2024, you can still claim the full deduction for the year.
Bonus depreciation
For 2024, you can claim a 60% bonus depreciation on qualified property. Whether it's new or used equipment, or building improvements, this write-off applies even if the asset is only in service for a few days in 2024.
Upcoming tax law changes
With potential changes to tax laws on the horizon, it’s worth having a strategy tailored to your business. Many current tax breaks, including the QBI deduction, are set to expire in 2025, and election outcomes could reshape the landscape even further. Now’s the time to act–get in touch with your Smolin advisor to start planning ahead.