Yearend Tax Planning Opportunities You Don’t Want To Miss

Yearend tax planning opportunities can help small business owners make important financial and tax decisions while there is still time to act. While tax preparation looks at what has already happened, tax planning looks ahead and identifies strategies that may help reduce taxes, avoid surprises, and improve financial decision-making before December 31.

By the time your tax return is prepared next spring, many tax-planning opportunities may no longer be available. That’s why fall is a good time to review your expected income, tax liability, and available planning strategies.

Here are some of the key areas small business owners should review before December 31.

Make Sure Your Books Are Up to Date

Good tax planning starts with accurate financial information. Before projecting your tax liability, your accounting records should provide a reasonably accurate picture of your income and expenses for the year.

This is a good time to review your books for items such as:

• Transactions that haven’t been properly categorized
• Business expenses that may be missing
• Fixed-asset purchases
• Loans and financing activity
• Payroll and owner compensation
• Owner contributions and distributions
• Accounts receivable that may be uncollectible

Cleaning up these items now makes your year-end tax projection more reliable and can also make tax preparation easier.

Project Your Current Year Tax Liability

Once your books are current, your CPA can project your taxable income and estimated tax liability. This review may uncover yearend tax planning opportunities and give you time to take appropriate action before the year closes.

A tax projection can help answer questions such as:

• How much taxable income are you expecting for the year?
• Have you paid enough through withholding and estimated tax payments?
• Are you likely to owe a significant amount when your return is filed?
• Are there actions you can take before year-end that could reduce your tax liability?

Knowing the answer in September or October gives you much more flexibility than discovering a large balance due when your tax return is prepared.

Review the Timing of Income and Expenses

Depending on your business and accounting method, there may be opportunities to appropriately manage the timing of certain income and expenses.

For example, a business may need to consider whether to make planned purchases before year-end, when certain expenses should be paid, or how the timing of customer payments will affect taxable income.

The goal isn’t simply to move income or expenses from one year to another. Your CPA can help determine whether a timing strategy actually makes sense based on your current and expected future tax situation.

Consider Equipment and Other Major Purchases

If your business is already planning to purchase equipment, vehicles, technology, or other significant assets, the timing of those purchases may affect your taxes.

Depreciation rules may allow some or all of the cost of qualifying property to be deducted more quickly. However, purchasing something solely to obtain a tax deduction usually doesn’t make financial sense.

Year-end planning provides an opportunity to coordinate necessary business purchases with the potential tax consequences.

Review Owner Compensation

For S corporation owners, year-end is an important time to review compensation.

S corporation shareholder-employees generally must receive reasonable compensation for the services they provide to the business. Reviewing wages before the final payroll of the year gives you an opportunity to make adjustments if necessary.

Compensation decisions can affect payroll taxes, retirement-plan contributions, and the owner’s overall tax situation, so this review should be part of the broader year-end tax-planning process.

Evaluate Retirement-Plan Contributions

Retirement plans can provide valuable tax benefits while helping business owners and employees save for the future.

Depending on your situation, year-end planning may include reviewing contributions or opportunities involving a 401(k), SEP IRA, SIMPLE IRA, traditional IRA, or other qualified retirement plan.

Different plans have different contribution limits, deadlines, and requirements. Some decisions must be made before year-end even when the contribution itself can be made later.

Look Beyond the Business Return

Business owners shouldn’t consider their business taxes in isolation. Your business income flows into your overall personal tax picture.

A year-end review may also consider:

• Capital gains and losses
• Charitable contributions
• Retirement income and contributions
• Itemized deductions versus the standard deduction
• Investment activity
• Other sources of household income
• Available business and individual tax deductions and credits

Looking at the complete picture can help identify planning opportunities that might be missed when business and personal taxes are considered separately.

Identify Decisions That Must Be Made Before Year-End

Some yearend tax planning opportunities require action before December 31. Once the year closes, your options become more limited, which is why it is important to begin the planning process early.

Once the year closes, your options become more limited. Tax preparation can accurately report what happened during the year, but it generally can’t change decisions that needed to be made months earlier.

That is why proactive tax planning can be especially valuable for business owners whose income, compensation, investments, or business activities have changed during the year.

Don’t Miss These YearEnd Tax Planning Opportunities

Yearend tax planning opportunities vary depending on your business, income, investments, and overall tax situation. Reviewing your finances before the end of the year can help you make informed decisions while you still have time to act.

If you are a current Walton CPA client or a business owner interested in proactive tax planning, contact us to discuss whether a year-end tax-planning meeting is appropriate for your situation.