September is a great month to start implementing tax planning strategies that could reduce your small business taxes for this year and next. For the majority of businesses, the traditional year-end tax planning strategy of deferring income and accelerating deductions to minimize taxes will probably yield the most significant results. In addition, owners should consider bundling deductible expenses into this year or the next to maximize their tax value.
If you anticipate being in a higher tax bracket next year, using the opposite approach might be more effective. For example, you could pull income into 2024 to be taxed at lower rates, and defer deductible expenses until 2025, when they can be claimed to offset higher-taxed income.
If you act before the year is over, the following tax planning strategies could help you save money on taxes.
Estimated Taxes
Make sure you make the last two estimated tax payments to avoid penalties. The third quarter payment for 2024 is due on September 16, 2024, and the fourth quarter payment is due on January 15, 2025.
Deduction for QBI
The QBI deduction applies to taxpayers who are not corporations and can include up to 20% of their eligible business income. For 2024, if taxable income exceeds $383,900 for married couples filing jointly (half that amount for other taxpayers), the deduction may be limited based on whether the taxpayer is engaged in a service-type business (such as law, health or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.
By postponing income or accelerating deductions to keep income below the dollar thresholds, taxpayers may be able to keep all or part of the QBI deduction (or be subject to a smaller deduction phaseout). And increasing W-2 wages before the end of the year might also allow you to increase your deduction. Consult with us first because this tax planning strategy is intricate.
When Should you Accelerate Income?
Accounting Methods: Accrual vs. Cash
For federal tax purposes, more small businesses are now permitted to utilize the cash method of accounting (instead of the accrual method) than in prior years.
Under current legislation, a taxpayer must (among other things) pass a gross receipts test in order to qualify as a small business. The gross receipts test will be satisfied for 2024 if average yearly gross receipts for a three-year testing period do not exceed $30 million.
Taxpayers who use the cash method may find it simpler to defer income by delaying billings until the next year, making early payments, or making certain prepayments.
Section 179 Deduction
Another tax planning strategy is making purchases that can be written off using the Section 179 expensing option. The expensing limit is $1.22 million, and the investment cap is $3.05 million for 2024. The majority of depreciable property (aside from buildings) is normally eligible for expensing, including equipment, off-the-shelf computer software, interior building renovations, HVAC, and security systems.
Many small and medium-sized businesses will be able to now deduct most or all of their expenditures on machinery and equipment due to the high dollar ceilings. Furthermore, the deduction isn’t prorated to reflect the portion of the year that an asset is in service. Put in service any eligible property by the end of 2024, and you can deduct the entire amount for that year.
Bonus Depreciation
For 2024, businesses also can generally claim a 60% bonus first-year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. As with the Sec. 179 deduction, the write-off is available even if qualifying assets are only in service for a few days in 2024.
Upcoming Tax Law Changes
It’s important to stay informed about any changes that could affect your business’s taxes. In the next couple of years, tax laws will be changing. Many tax breaks, including the QBI deduction, are scheduled to expire at the end of 2025. Plus, the outcome of the presidential and congressional elections could result in new or repealed tax breaks.
Check out some of our related posts below and set up an appointment with one of our tax advisors to create a strategy that works for you.
3 Tips to Reduce your Small Business Taxes
© 2022. Updated September 2024.