Year-End Strategies to Reduce Tax Obligations for Businesses and Households
As the calendar year draws to a close, it’s a critical time for both businesses and households to minimize tax liabilities. Strategic planning before December 31 can yield significant savings and set you up for a better return when it’s time to file. Our team has compiled actions you can take to help mitigate your tax obligation for both your businesses and household, and we’ve put together a primer on deductions, credits, and smart financial moves you can make before the clock runs out in 2024.
For Businesses
1. Accelerate Expenses and Defer Income
Businesses operating on a cash basis can reduce taxable income by accelerating deductible expenses into the current year and deferring income until the following year.
How to Do It: Prepay expenses like rent, utilities, or office supplies wherever practical. Delay invoicing clients until January for services rendered late in the year. Be sure, however, that this strategy aligns with your cash flow needs to avoid liquidity issues.
“If you opt for an income deferment strategy, be sure aligns with your cash flow needs to avoid liquidity issues.”
2. Maximize Depreciation Deductions
The IRS allows businesses to deduct the full cost of qualifying assets under Section 179 of the tax code. Here are the rules in a nutshell:
What Qualifies: Equipment, office furniture, machinery, computers, software, livestock and certain vehicles used for business purposes.
FY 2024 Limits: The Section 179 expense limit for 2024 (returns filed in 2025) is $1,220,000, with a phase-out when asset purchases exceed $3,050,000.
3. Review Employee Benefits and Payroll Taxes
Enhancing employee benefits can provide tax advantages. Consider these strategies:
Offer Retirement Plans: Contributions to 401(k) or SEP IRA plans for employees are deductible. If you don’t have a plan in place, consider setting up a SIMPLE IRA or 401(k) before year-end.
Employee Bonuses: Bonuses paid by December 31 are deductible, provided they’re included in employee W-2s.
4. Use Tax Credits
Tax credits directly reduce tax liability and often provide better savings than deductions. Here are some examples that might be relevant to your business:
Research and Development (R&D) Credit: For businesses investing in innovation.
Work Opportunity Tax Credit (WOTC): For hiring individuals from targeted groups, such as veterans or those on public assistance.
Energy Credits: Consider credits for energy-efficient building improvements or purchasing electric vehicles for your fleet.
5. Conduct a Year-End Inventory Review
For businesses that sell products, reviewing inventory can help reduce taxable income.
Write Off Unsellable Inventory: Remove damaged, obsolete, or slow-moving inventory to claim a deduction.
Consider LIFO or FIFO: These are accounting methods used to value inventory and assign costs to goods sold. LIFO stands for “Last In/First Out,” and FIFO stands for (you guessed it) “First In/First Out.” Using the FIFO method of valuation, you can expect to have higher inventory value, because the first units acquired, which (considering inflationary trends) are normally the least expensive, leaving higher-value units in stock. Choosing the right accounting method depends on a lot of variables, not the least of which is what type of business you’re in and what kind of products you sell.
6. Utilize Net Operating Losses (NOLs)
If your business experienced losses in previous years, you might carry those losses forward to offset taxable income. It’s a way to have your business taxed on average profitability. Like all things tax-related, there are limits that vary based on the type of business you’re in.
For Households
1. Maximize Retirement Contributions
Contributing to retirement accounts not only enhances your financial security in the future, it also reduces your taxable income in the present. Here are the current contribution limits.
401(k): In 2024, the contribution limit is $23,000, with an additional $7,500 catch-up for those aged 50 or older.
Traditional IRA: Contributions of up to $7,000 (or $8,000 if 50 or older) may be tax-deductible.
“Contributing to retirement accounts not only enhances your financial security in the future, it also reduces your taxable income in the present.”
2. Take Advantage of Tax-Loss Harvesting
Tax-loss harvesting is a way to offset capital gains by selling underperforming investments to realize losses.
How It Works: By selling off a money-losing investment, you can use that loss to reduce your other taxable capital gains, up to $3,000. Excess losses can be carried forward to future years. There are limitations, however. For example, you can’t deduct losses created by a tax-deferred investment, such as a 401(k) plan or IRA. There is also no grace period; you must sell off your losing asset prior to the end of the calendar year. And, lest you think you can game the system, the IRS disallows any loss claimed if you repurchase the same or substantially identical asset within 30 days of claiming the loss.
3. Claim Tax Credits
Some of the most impactful credits for households include:
Child Tax Credit (CTC): Up to $2,000 per qualifying child under 17.
Earned Income Tax Credit (EITC): Available for low- to moderate-income earners, with maximum credit amounts based on income and family size.
Residential Energy Credits: Claim credits for installing solar panels, energy-efficient windows and other expenses that meet requirements detailed on energy.gov.
4. Make Charitable Contributions
Donations to qualified charities are deductible if you itemize deductions on a Schedule A.
Eligible Contributions: Cash, property, or appreciated securities.
Documentation Requirements: Ensure receipts or acknowledgment letters from charities are obtained for any donation over $250.
5. Prepay Deductible Expenses
You can reduce your adjusted gross income by electing to pre-pay certain expenses. Examples include:
Mortgage Interest and Property Taxes: Prepay January mortgage installments or property taxes if you’re below state and local tax (SALT) deduction limits.
Medical Expenses: Schedule and pay for upcoming medical procedures or treatments before year-end to meet the 7.5% adjusted gross income (AGI) threshold for deductions.
6. Use Flexible Spending Accounts (FSAs)
FSAs are use-it-or-lose-it accounts. Spend down your balances on eligible expenses like medical supplies or childcare before year-end unless your plan offers a grace period or rollover option.
Tax Planning for Both Businesses and Households
1. Review Your Tax Withholding and Estimated Payments
Ensure that enough tax has been paid throughout the year to avoid penalties. Adjust estimated payments or withholding to account for changes in income or deductions.
2. Plan for State and Local Tax (SALT) Deductions
The SALT deduction cap of $10,000 remains in place, so strategize around its limitations. Business owners may want to explore entity-level SALT workarounds available in some states.
3. Engage a Tax Professional
You knew this recommendation was coming, right? A trusted tax advisor like those on our team will help you navigate the labyrinth of IRS rules. You’ll ensure you maximize your available benefits and identify new strategies or overlooked opportunities tailored to your situation. We’re ready to help. Taking proactive steps now can make a substantial difference in your financial outcomes for the new year. Don’t put it off.
