With Labor Day behind us, now is the time to take proactive measures that could reduce your small business taxes for this year and next. One common tactic is to defer income and accelerate deductions, which can be beneficial for many businesses. Another approach is to combine deductible expenses into either this year or next to maximize their tax impact.
Do you anticipate being in a higher tax bracket next year? If so, reversing these strategies might yield better results. For instance, you could shift income into 2024 to take advantage of lower tax rates and delay deductible expenses until 2025, when they can offset higher-taxed income.
Filed for an extension on last year’s taxes? The third quarter payment for 2024 is due on September 16, 2024, and the fourth quarter payment is due on January 15, 2025. Make sure you make these last two tax payments to avoid penalties.
Here are some additional strategies to consider that may help you save on taxes if you act soon.
1. Cash vs Accrual Accounting Practices
The cash and accrual methods of accounting are two primary ways businesses track income and expenses, and they differ mainly in timing. In the cash method, income is recorded when cash is received, and expenses are reported when they are paid. On the other hand, using the accrual method, income is recorded when earned and expenses are recorded when they are incurred. For example, if you send an invoice in December but don’t receive payment until January, under the cash method, the income would be reported in January. Under the accrual method, the payment would be recorded as income for December.
More small businesses can now use the cash method of accounting for federal tax purposes, a change from previous years. Under current law, a business qualifies as small if it meets certain requirements, including passing a gross receipts test. For 2024, this test is met if the business’s average annual gross receipts over the previous three years do not exceed $30 million.
Businesses using the cash method may find it simpler to defer income by delaying billing until the following year, paying bills earlier, or making specific prepayments.
2. Section 179 Deduction – Business Purchase Deduction
Consider making purchases that qualify for the Section 179 expensing option. For 2024, the expensing limit is $1.22 million, with an investment ceiling of $3.05 million. This option generally applies to most depreciable property (excluding buildings), such as equipment, off-the-shelf software, interior improvements to buildings, and HVAC or security systems.
The high limits mean many small and midsize businesses can deduct most or all of their expenditures for machinery and equipment. Additionally, the deduction is not 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.
3. Bonus Depreciation Deduction
For 2024, businesses can also claim a 60% bonus first-year depreciation deduction on qualified improvement property, as well as new or used machinery and equipment, as long as they are purchased and placed in service during the year. Similar to the Section 179 deduction, this write-off applies even if the qualifying assets are only in service for a few days in 2024.
4. QBI Deduction
Taxpayers other than corporations may qualify for a deduction of up to 20% of their qualified business income (QBI). For 2024, if taxable income exceeds $364,200 for married couples filing jointly (or $182,100 for single filers). These limits depend on factors such as whether the taxpayer is in a service-based business (e.g., law, healthcare, or consulting), the amount of W-2 wages the business pays, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. These limitations are gradually phased in.
To preserve some or all of the QBI deduction, or reduce the extent of the phaseout, consider deferring income or accelerating deductions to keep income below the threshold. Additionally, you could potentially increase the deduction by raising W-2 wages before the year ends. The rules governing this deduction are complex, so be sure to consult with us before making any decisions.
These are just a few year-end tax planning strategies to help your small business reduce its tax liability. With the upcoming presidential election in November, we anticipate potential changes to the tax laws, which could include the expiration of current provisions like the QBI deduction.
VAAS Professionals offers tailored tax planning solutions designed to fit your business’ unique needs. Interested in a customized plan? Now is the perfect time to get started. Contact one of our Tax Professionals to create a strategy that works for you.