Year-End Income Tax Planning Tips for Businesses, Owners

The standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most small businesses, as will the bunching of deductible expenses into this year or next to maximize their tax value.

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end.

• Consider elections to pay state entity-level tax for pass-through entities (PTE) before year-end, to claim a current-year state tax deduction against federal taxable income while avoiding the state and local tax (SALT) deduction limitation that applies to individuals who itemize deductions.

• Pass-through entities (S corporations or partnerships) and sole proprietorships may qualify for a deduction of up to 20% of their qualified business income (significant limitations apply).

• If you are considered a small business with average gross receipts that don’t exceed $29 million, you may have an opportunity to adopt a more favorable method of accounting for income tax purposes that was previously not available to you (i.e., cash basis). Cash-method taxpayers may find it easier to manage taxable income. For example, holding off on billings until next year, accelerating expenses by paying bills early, or making certain prepayments may reduce taxable income for 2023.

• Consider acquiring capital equipment that qualifies for 80% first-year bonus depreciation and/or Section 179 first-year expensing elections. Under current tax law, the available bonus depreciation deduction decreases each year until it phases out completely for 2027.

• Maximize your contributions to retirement plans and consider year-end accruals for any contributions that are deductible in 2023 but not payable until 2024.

• Consider recognizing a bonus to owners and paying it before year-end to deduct it on the 2023 tax returns.

• For accrual-basis employers, determine any accrued bonuses for non-owner employees by year-end, deductible in 2023 but paid within 2½ months of year-end.

• Determine if there is any opportunity to accelerate or defer income and/or deductions between 2023 and 2024.

• Consider eligibility for employment and/or income tax credits resulting from paid family or medical leave, hiring of disadvantaged workers, or other employee retention programs.

• For 2023, C corporations may deduct qualified charitable contributions up to 10% of taxable income.

For additional details about the above-noted items and other potential year-end planning opportunities, please contact your Walker & Armstrong tax professional.