The end of the year is a busy time for business owners. Not only is it time to take stock of financial reports, cash flow statements, and plan for the future, but it’s also a period when the focus must shift to efficient tax management.
Proper year-end tax planning drives long-term growth, ensures compliance, and helps businesses save money. In fact, rather than viewing it as an unnecessary burden, if more organizations were to make corporate tax planning strategies a part of their model, the impact on bottom lines could be tremendous.
So, how do business owners pay less taxes?
In this article, we’ll highlight three tips on how to invest business profits to avoid taxes, identify appropriate credits, and maximize deductions. Crucially, we’ll also look into the role that small business funding plays in implementing these strategies. It’s a lot to cover, so let’s dive right in.
Tax Strategy 1: Maximize Deductions and Credits
All businesses are eligible for deductions or tax write-offs.
For example, most equipment purchases that are found to be essential for operations qualify for a tax break. Under IRS Section 179, the full price of depreciating assets like machinery, computers, or cars can be deducted from the year they were purchased.
Similarly, several other expenses are covered, including operational costs like rent, utilities, and salaries. Depending on your business, you could also be eligible to write off advertising expenses, business meals, insurance, legal fees, and more.
Maximizing these deductions must be a key component of all corporate tax strategies, as they can have a huge impact on bottom lines.
There are also several tax credits business owners must consider when drafting end of year tax strategies. Some, like the Work Opportunity Tax Credit, are available to businesses that employ individuals from targeted groups. Others, like the Opportunity Zones Credit, are available to businesses that support investment in distressed areas.
Moreover, there are multiple industry-specific credits that are often overlooked. The R&D credit, for instance, covers all expenses related to the design, development or innovation of new ideas, products, techniques, or software. The Inflation Reduction Act of 2022 also introduced several additional credits for green energy initiatives.
Once all deductions and credits are assessed, business owners must ensure they qualify for as many tax breaks as possible. And this is where business funding comes in.
To be eligible for a Section 179 deduction in 2024, for example, the equipment must have been purchased or leased the same year. By securing financing for equipment, businesses can make these purchases before December 31, 2024, and benefit from a tax break. Similarly, a line of credit can help businesses fund R&D projects, invest in green initiatives, or fund expansions into opportunity zones.
Clearly, a little small business tax planning goes a long way.
Tax Strategy 2: Defer Income and Accelerate Expenses
Deferring income is another common tax tip for small businesses looking to reduce their burden for the current year. How you do this depends on your organization’s working model. Businesses that work on a cash system can consider deferring outstanding invoices for the following year. Those that work on an accrual system, which recognizes income once a job is complete, can choose to delay shipments.
Similarly, if you’re looking to reduce your burden for 2024, put off investments that will result in capital gains — such as selling real estate — until 2025.
On the flipside, if you’re looking for a year end tax tip to decrease your future burden, or have unused deductions to use this year, you could consider accelerating your expenses until December. To make this business strategy work, send out invoices early, complete projects before time, or consider pre-paying suppliers for products and services that aren’t due until the following year.
These two end of year tax strategies are especially effective if you identify that the tax rates for the following year will be higher or lower — or in case of any potential changes to tax policies. While efficient forecasting can help assess the appropriate path forward, funding can help you implement either of these tax saving options. A business line of credit, for example, can help manage cash flow, either to increase spending in the following year or tide over the period when invoices are unpaid.
Tax Strategy 3: Invest in Retirement Plans
A retirement plan doesn’t just benefit employees, it is an extremely effective tax planning tip for year end for employers as well. Now, under the recent Secure 2.0 law, startups that haven’t yet implemented a retirement savings plan for employees will have more incentive to do so.
From 2023 onwards, business owners with 50 or fewer employees can qualify for up to $5,000 in tax credits to offset 100% of the costs of setting up and administering a retirement plan. Employers can receive credits of up to $1,000 per employee to offset their contributions into the savings plan.
Furthermore, all employer contributions are also tax deductible. Depending on the type of plan, the participants, and the amount you contribute, you may qualify for several other credits — such as the auto-enrollment credit that allows businesses to claim $500 a year for the three years after they introduce the feature.
With that said, not all businesses can afford to increase employee contributions before the end of the year. In this case, it may be worth securing business financing to ensure that you have enough capital. Not only will this help reduce your tax liability, it can also:
- Helps attract and retain talent
- Improves productivity of your staff
- Secure employees’ long term financial security
Bonus Tip: Review Depreciation Options
Of all the tax tips for business owners, accelerated depreciation is the most complicated to understand and calculate. But it’s also one of the most critical small business tax strategies.
Rather than deducting the cost of equipment and property over time, accelerated depreciation can help write off significant purchases by the end of the year and reduce your liability for the following years. This has proven to be extremely beneficial for organizations as it helps manage immediate cash flow concerns.
In the U.S., there are a couple of ways to accelerate depreciation.
The first, as we mentioned briefly earlier, is Section 179, which defines property as anything from HVAC equipment to roofing and beyond. In 2023, the deduction limit was $1,116,000, while the phase-out threshold was $2,890,000. In 2024, to claim the full deduction, the total purchase price of eligible property was increased to $3,050,000.
The second approach is known as bonus depreciation. It allows businesses to immediately write off a certain percentage of the price of an asset. In 2022, the TCJA authorized 100% first year bonus depreciation, but will phase it out over a five-year period. So, in 2023, 80% of the price can be claimed, and in 2024, 60%.
Businesses looking to take advantage of bonus depreciation will need to acquire assets before the provision is phased out by 2027. To help make such significant investments, and reduce your future tax burden, consider looking out for various financing options.
To weigh the costs of securing a loan vs the benefits of tax reductions, compare the figures using a small business loan calculator.
How to Save Taxes in the U.S. and Canada
At the end of the day, the best tax saving strategies require a lot of planning. Businesses across North America must familiarize themselves with the specific policies on deductions and credits, assess whether to defer income or accelerate expenses, and invest in their employees to unlock even more tax breaks.
Moreover, it wouldn’t be possible to implement any of these tax tips for small businesses without funding. Organizations can leverage a wide variety of equipment loans, credit lines — or even specific small business funding for women — to maintain cash flow and make investments that improve their future financial standing.
Learn more about business funding options:
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