The year-end is a busy time for small businesses — from finalizing your books to forecasting for the year ahead. But it’s also a key time to take action to help lower your taxes. Read on for tax-saving strategies that may help your business save this year and next:
- Did you know that taxpayers (excluding corporations) may receive a deduction of up to 20% of their qualified business income? If your taxable income exceeds $340,100 for a married couple filing jointly, the deduction may be limited based on paid W-2 wages, the unadjusted basis of qualified property (e.g. machinery and equipment) and whether you’re engaged in a service-type business or trade (e.g. accounting, law, health or consulting). Note that the limitations are phased in for those with taxable income up to $50,000 above their threshold, as well as for joint filers with taxable income up to $100,000 above the threshold. You may be able to claim a portion or all of this deduction by accelerating deductions or deferring income. You may also boost your deduction by increasing W-2 wages before year-end.
- Compared to earlier years, more small businesses can use the cash method of accounting, rather than the accrual method. Your business may prefer this method as it’s easier to shift income to other years. To qualify, you must satisfy a gross receipts test, ensuring that your average annual gross receipts don’t exceed $27 million.
- Excluding large corporations, a corporation that expects a small net operating loss (NOL) for 2023, and substantial net income in 2024, may accelerate a portion of its 2024 income or defer a portion of its 2023 deductions to create a small amount of net income for 2023.
- The liberalized business property expensing option may give you an opportunity to save if your business possesses property and off-the-shelf computer software that’s depreciated. It covers interior improvements to a building, such as elevators, HVAC, security systems and more. For tax years beginning in 2022, the expensing limit is $1,080,000, while the investment ceiling limit caps at $2,700,000.
- Your business may also can claim a 100% bonus first-year depreciation deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service. It applies to machinery and equipment purchased used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described in the expensing deduction.
- To expense the costs of certain lower-cost assets, materials and supplies, you may take advantage of the de minimis safe harbor election, also known as the book tax conformity election). To qualify, the cost of a unit of property can’t exceed $5,000 if you have an applicable financial statement (AFS). The cost of a unit must not exceed $2,500 if there’s no AFS.
- For optimal tax affect, you may choose to strategically time employees’ year-end bonuses. Cash-basis employers may deduct bonuses in the year paid, while accrual-basis employers may deduct bonuses in the accrual year, as long as the bonus is paid within two months following the end of the employer’s tax year. If you’re an accrual employer looking to defer deductions to a higher-taxed year in the future, you may change your bonus plan before year-end to establish the payment date after the 2.5-month window.
At Magone & Company, our goal is to get you thinking about potential moves that can minimize your small business’s tax liability now and in the future. For tax planning guidance or assistance, give us a call today at (973) 301-2300.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.