What Year-End Tax Strategies Are Available to Business Owners?

Posted on November 22, 2023

Before you know it 12/31/23 will be gone and we will be onto 2024. One thing we talk about often is that once the clocks turns to 1/1 a vast majority of tax strategies are no longer available.

Today we are going to go through some of the top strategies you want to be thinking about the last few weeks here, before year-end.

Now lets hit on the year-end specific items you should be thinking about as we close out the year.

Prepay Expenses Using the IRS Safe Harbor

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

  • Under this safe harbor, your 2023 prepayments cannot go into 2025. You are allowed to prepay 12 months of qualifying expenses under the safe-harbor rule.
  • Qualifying Expenses: Lease payments on vehicles, rent payments (office or machinery), and business insurance premiums.
  • Example: You pay $1,000 per month in rent and would like a $12k deduction this year. On Friday, 12/29/2023 you mail a rent check for $12,000 to cover all of your 2024 rent.
    • You deduct $12,000 (the year you paid the money).
    • The landlord reports taxable income of $12,000 in 2024 (the year they received the money).
    • A win-win situation, just don’t surprise your landlord because if they receive the money in 2023 they will need to pay taxes on that in 2023.

Stop Billing Customers, Clients, and Patients

Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2023. (We assume that you or your business is on a cash basis and operates on the calendar year.)

  • Customers, clients, patients, and insurance companies often times don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.
  • Example: A business attorney generally bills his clients at the end of each week; however, in December he sends no bill. Instead he gathers up those bills and sends them the first week of January. Bingo! They just postponed paying taxes on their December 2023 income by moving that income to 2024.
    • Caution: If you have clients that are known to have issues getting you paid in time this is a strategy you likely will not to use for them. Most importantly you want to ensure you still get paid.

Buy Office Equipment

Planning to make some equipment purchases? Do it now instead of later. With that being said, let me be very clear. Do not go out and buy things you do not need just for a tax deduction!

  • With bonus depreciation now at 80 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 80% percent of the cost in 2023.
  • Qualifying bonus depreciation and Section 179 purchases include new and used personal property such and machinery, equipment, computers, desks, chairs, other furniture, and certain qualifying vehicles.
  • Here is an article we did on depreciation.

Now, we also want to mention something important here. Bonus depreciation in 2023 is at 80% but that will be reduced each year. Bonus depreciation amounts in future years, without any law changes, will be:

  • 2023: 80%
  • 2024: 60%
  • 2025: 40%
  • 2026: 20%
  • 2027: 0%

For example, if you purchase $100,000 in equipment for your business and place it in service in 2023, you can deduct $80,000 in 2023 using bonus depreciation. If you wait until 2024, you’ll only be able to deduct $60,000 (60 percent) in Year 1.

Does this mean you should rush out and purchase business property before 2023 ends to take advantage of the 100 percent bonus depreciation? Not necessarily. For many businesses, an alternative is not going away: IRC Section 179 expensing.

Something you will want to consider or talk to your accountant about though.

Use Your Credit Cards

Assuming you have a business credit card, you get the deduction on the day of charge, NOT when paid.

  • If you are a single-member LLC or sole prop, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.
  • If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.
  • But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31. Look at our accountable plan article and Podcast episode for more information on this.
  • Caution: Don’t just spend to spend. Ultimately you do not want to be wasting money on things you do not need but if you plan to purchase items in early 2024 why not purchase those now via a CC to get them on the books and pay for it later.

Don’t Assume You Are Taking Too Many Deductions

The IRS code was written the way it was for a reason, so you can utilize it to your advantage.

  • If your business deductions exceed your business income, you have a tax loss for the year. This a “net operating loss,” or NOL.
  • If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.
  • What does this all mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

This is exactly what we talk about each and every week on the Small Business Tax Savings Podcast. How can you ensure you are maximizing your deductions and strategizing to pay the least amount in taxes as legally possible.

Convert to a Roth IRA

Consider converting your 401(k) or traditional IRA to a Roth IRA, especially if you are in a down income year.

You first need to answer this question: How much tax will you have to pay to convert your existing plan to a Roth IRA? With this answer, you now know how much cash you need on hand to pay the extra taxes caused by the conversion to a Roth IRA.

Here are just some reasons you should consider converting your retirement plan to a Roth IRA:

  1. You can withdraw the monies you put into your Roth IRA (the contributions) at any time, both tax-free and penalty-free, because you invested previously taxed money into the Roth account.
  2. You can withdraw the money you converted from the traditional plan to the Roth IRA at any time, tax-free. (But if you make that conversion withdrawal within five years of the conversion, you pay a 10 percent penalty. Each conversion has its own five-year period.)
  3. When you have your money in a Roth IRA, you pay no tax on qualified withdrawals (earnings), which are distributions taken after age 59 1/2, provided you’ve had your Roth IRA open for at least five years.

Make Use of the 0% Tax Bracket

In the old days, you used this strategy with your college student. Today, this strategy does not work with the college student, because the kiddie tax now applies to students up to age 24. Check out our Blog and Podcast on that specifically.

But this strategy is a good one, so ask yourself this question: Do I give money to my parents or other loved ones to make their lives more comfortable?

If the answer is yes, is your loved one in the 0 percent capital gains tax bracket? If so, you can get extra bang for your buck by giving this person appreciated stock rather than cash.

Other Year-End Strategies

As part of TaxElm we take the items here and dig even deeper. We talk about:

  • Year-End Business Strategies
  • Year-End Vehicle Purchases
  • Year-End Medical Strategies
  • Year-End Family Strategies
  • Year-End 199A Strategies
  • Year-End Retirement Strategies
  • Year-End Stock Strategies

Alright, so hopefully the content we have been pushing out the past couple months has provided you with a ton of ammo to ensure that you are paying the least amount in taxes as legally possible this year.

Time is running out so get to it now, today, and as always, make this the year you pay the least amount in taxes as legally possible!

  • The Time Is NOW To Start Paying Less In Taxes. Join Our Tax Minimization Program (w/ Stress Free Bookkeeping Training)! What you’ll get:
    • Library of Tax Strategies, Implementation Guides, Videos, Downloads, etc.
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