As the year-end approaches, it’s time to take proactive steps to help lower your business’s taxes for 2024 and beyond. Deferring income and accelerating deductions to minimize taxes can be effective for most businesses, as is bunching deductible expenses into this year or next to maximize their tax value. However, if you expect to be in a higher tax bracket next year, consider the opposite: pulling income into 2024 and deferring deductions to offset higher-taxed income in 2025. Here are some other key strategies to consider:
Qualified Business Income (QBI) Deduction
Taxpayers other than C corporations may qualify for a deduction of up to 20% of their QBI. For 2024, if taxable income exceeds $383,900 for married couples filing jointly (half that 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, and/or the unadjusted basis of qualified property held by the business. The limitations are phased in. Adjusting income by deferring revenue or accelerating expenses could help maximize this deduction. In addition, this deduction is set to sunset after the 2025 tax year.
Cash vs. Accrual Accounting
More small businesses are eligible to use the cash method of accounting for federal tax purposes than were allowed in previous years, which can simplify deferring income. For 2024, businesses with average annual gross receipts below $30 million over the last three years qualify. By utilizing the cash method of accounting, taxpayers have more flexibility and control over their year-end income tax bill, with proper planning.
Section 179 Deduction
Consider making expenditures that qualify for the Section 179 expensing option. Businesses can expense up to $1.22 million for qualifying property placed in service in 2024. Expensing is generally available for most depreciable property (other than buildings), including equipment, off-the-shelf computer software, interior improvements to a building, HVAC, roofs, and security systems. A full deduction is allowed even if the asset is only in use for a few days at year-end.
Bonus Depreciation
For 2024, businesses can claim a 60% bonus first-year depreciation deduction on qualified improvement property and machinery and equipment bought new or used if purchased and placed in service this year. Similar to the Section 179 deduction, this applies even if assets are placed in service just before the year ends.
These are just a few year-end strategies that can help reduce your tax burden. It is also crucial to stay informed, as tax laws are expected to change in the coming years, with many current tax breaks scheduled to expire at the end of 2025. Stay alert to potential changes that could impact your business.