Tax Planning Essentials for Small Businesses

As we approach the end of 2024 and enter the new year, smart business owners are focusing on tax-saving opportunities. As a small business owner, navigating the complex world of taxes can feel daunting, but smart planning can lead to substantial savings. Did you know that nearly 93% of small businesses overpay on their taxes due to missed deductions and credits? With the right strategies, you can avoid common pitfalls, optimize your tax position, and reinvest those savings to fuel growth in 2025.

The following actionable tax strategies will help to ensure your business starts the new year on a strong financial footing. From avoiding penalties with timely estimated tax payments to taking advantage of underutilized deductions and credits, these tips can help you keep more of what you earn while staying compliant with tax regulations.

Ensure Timely Estimated Tax Payments

The first rule of tax planning is to avoid penalties! Avoid penalties by making your final estimated tax payment for 2024 on or before January 15, 2025. Even if earlier payments were missed or underpaid, catching up by this deadline can reduce penalties and prevent additional interest from accruing. While it may not eliminate penalties for earlier underpayments, paying the full amount now minimizes future charges.

Maximize the Qualified Business Income (QBI) Deduction

The Qualified Business Income (QBI) deduction, introduced under the Tax Cuts and Jobs Act (TCJA), is a significant tax benefit for eligible small business owners. It allows qualified taxpayers to deduct up to 20% of their qualified business income, reducing taxable income and potentially saving thousands of dollars. Understanding and strategically managing your business’s finances can help you maximize this valuable deduction. 

Who Qualifies for the QBI Deduction?

The QBI deduction is available to individuals, trusts, and estates with income from pass-through entities such as sole proprietorships, partnerships, LLCs, and S corporations. However, eligibility and the deduction amount are influenced by factors like taxable income, business type, and W-2 wages paid.

For 2024, the deduction begins to phase out when taxable income exceeds $383,900 for married couples filing jointly and $191,950 for single filers. Once taxable income surpasses these thresholds, additional limitations apply, including caps based on W-2 wages paid and the unadjusted basis immediately after acquisition (UBIA) of qualified property.

For businesses within specified service-based businesses (healthcare, law, accounting, consulting, etc.), the deduction completely phases out at $483,900 for joint filers and $241,950 for single filers.

Strategies to Optimize QBI

• Keep taxable income below the phase-out range by deferring income, accelerating deductible expenses, or contributing to tax-deferred retirement plans.
• For higher incomes, consider increasing W-2 wages paid. Bonus payments before year-end can help meet wage thresholds, enhancing your deduction.
• Explore retirement plan contributions to manage taxable income, like maximizing contributions to tax-deferred accounts, such as a 401(k) or SEP IRA.
• Invest in certain property. If your business relies on property for operations, acquiring additional qualified property can increase your UBIA, which is especially valuable when taxable income exceeds the phase-out thresholds. Examples of qualified property include machinery, equipment, and real estate used in the business.

Maximizing the QBI deduction requires strategic tax planning and a thorough understanding of its rules. Proactive planning and expert guidance can ensure you fully benefit from this powerful deduction.

Leverage Section 179 and Bonus Depreciation

By purchasing qualifying assets before year-end, you can deduct a significant portion of their cost. Two major opportunities exist for 2024:

• Section 179 Deduction: Deduct up to $1.22 million in qualifying equipment and software. This applies to new equipment, off-the-shelf software, and nonresidential property improvements like HVAC or security systems. It is limited to taxable income, with the excess carried forward.
• Bonus Depreciation: This deduction offers accelerated depreciation for eligible assets. Deduct 60% of eligible property costs in 2024 (drops to 40% in 2025). It covers assets not eligible for Section 179, like used equipment or assets with a recovery period of 20+ years, and is not limited by taxable income.

By combining the two, you can maximize Section 179 deductions first, then apply bonus depreciation to the remaining assets. Review state laws, as they may differ from federal rules.

For lower-cost tangible property, you can simplify tax filings by applying the De Minimis Safe Harbor Election. If you have Applicable Financial Statements (AFS), you can deduct up to $5,000 per item or invoice. Without an AFS, you can deduct up to $2,500 per item or invoice. To do this, you need to ensure you have written accounting policies in place at the start of the tax year and apply them consistently.

Review Inventory and Accounts Receivable

Ensure an accurate physical inventory count and write-off bad debts.

• Conduct a physical inventory count to identify excess, obsolete, or damaged items. Writing these off reduces taxable income.
• Analyze accounts receivable to write off bad debts, further lowering taxable income. This can be done in conjunction with updating collection procedures.

Maximize Retirement Contributions

Retirement savings offer dual benefits for small business owners: securing your financial stability for the future and providing significant tax advantages today. By contributing to retirement accounts, small business owners can lower taxable income, reduce overall tax liability, and attract and retain employees. If not doing so already, a business can start a plan to maximize retirement contributions such as the following,

• SEP IRA: For sole proprietors and businesses with few or no employees. Employers can contribute up to 25% of an employee’s compensation or $69,000 (whichever is lower) for 2024. Contributions are tax-deductible, and there are no administrative costs or filing requirements.
• SIMPLE IRA (Savings Incentive Match Plan for Employees): Best for businesses with fewer than 100 employees. Employees can defer up to $17,000 in 2024, with an additional $3,500 catch-up contribution for those 50 and older. Employers must match contributions (up to 3% of compensation) or make a 2% nonelective contribution. These plans have low setup and maintenance costs, and both employee and employer contributions are tax-deductible.
• 401(k): Suitable for businesses of all sizes. Employees can contribute up to $23,000 in 2024, with an additional $7,500 catch-up contribution for those 50 and older. Combined employee and employer contributions can reach $69,000. 401(k)s offer flexibility in contributions, Roth options for after-tax savings, and higher contribution limits than other plans.

Employer contributions are deductible, reducing taxable income while supporting employee retention. To maximize tax benefits, contribute the highest amount allowed under your chosen retirement plan. Employer contributions, such as matching funds or profit-sharing, not only maximize your tax savings but also enhance employee satisfaction and retention. If eligible, combining a solo 401(k) with a SEP IRA or profit-sharing plan can help maximize contributions. This strategy is especially beneficial for high-income earners or those nearing retirement.

Make Charitable Contributions

By donating to a registered 501(c)(3) organization you can receive tax benefits:

• C Corporations: Can deduct up to 10% of taxable income (carry forward excess for 5 years).
• Pass-through entities: Deductions pass to individual owners, subject to AGI limits.

Donating appreciated assets (e.g., stocks) provides additional benefits by avoiding capital gains taxes. Keep good records. All cash donations over $250 require a written acknowledgment, and property donations over $500 require the filing of Form 8283.

Evaluate Tax Credits and Deductions

The IRS offers several tax credits designed to benefit small business owners, providing valuable opportunities to reduce your tax liability. Unlike deductions, tax credits directly reduce the amount of income tax you owe on a dollar-for-dollar basis. Here are a few common credits for which small businesses may qualify:

• Research and Development (R&D) Tax Credit: This credit is for businesses of all sizes, not just those in tech or science fields. If you develop new products, processes, or software, you may qualify. The credit can apply to wages, supplies, and contract research expenses related to R&D activities. Startups can use this credit to offset payroll taxes.
• Small Business Health Care Tax Credit: If you pay health insurance premiums for yourself or your employees, you could qualify for a tax credit that covers a significant portion of your premium costs.
• Energy-Efficient Commercial Building Deduction (Section 179D): Businesses that improve energy efficiency in their commercial buildings may qualify for the credit. It allows a deduction for installing energy-saving lighting, HVAC systems, or building insulation, which can reduce utility costs and taxes.
• Work Opportunity Tax Credit (WOTC): This credit is available to employers who hire individuals from specific target groups facing employment barriers, such as veterans or individuals receiving public assistance.
• Retirement Plan Startup Costs Credit: Applies to small businesses that establish a new retirement plan, such as a 401(k) or SIMPLE IRA. A credit of up to $5,000 is available for plan setup costs, plus an additional $500 for including automatic enrollment.
• Disabled Access Credit: Businesses that incur expenses to improve accessibility for people with disabilities, such as installing ramps or modifying facilities, may qualify for a credit of up to $5,000.
• Family and Medical Leave Act (FMLA) Tax Credit: If you provide paid family and medical leave to employees and currently have employees on it, a credit of up to 25% of wages paid is available for employees on qualifying leave.
• If you currently are located or are willing to relocate your business to certain areas there is the Federal Empowerment Zone Employment Credit. This is a credit for businesses located in federally designated Empowerment Zones that provides a credit for hiring employees who live and work in these areas.

Many of these federal credits can be paired with state credits and deductions for additional benefits. All the above credits can provide meaningful financial relief and encourage positive business practices. Be sure to review eligibility criteria or consult a tax professional to take full advantage of these opportunities.

Don’t go it alone

Remember that every business's situation is unique, and these strategies should be tailored to your specific circumstances. Consulting with a qualified tax professional can help ensure you're maximizing available benefits while maintaining compliance with current tax laws.

Don't wait until the last minute to implement these strategies. Review your financial position, identify applicable opportunities, and develop a comprehensive plan that aligns with your business goals. Early planning gives you the flexibility to make adjustments and maximize potential tax savings before year-end deadlines arrive.

DealStream, its authors and affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.