Optimize Your Small Business With Effective Year-end Tax Planning Strategies

The end of the year is a busy, if not the busiest, time of year for small business owners. You’re gearing up for the start of a new year and trying to wrap things up before the year comes to a close. One thing that should be on your mind during this time of year—aside from holiday shopping, parties, and gifts—is year-end tax planning.

‘Tis the season for year-end tax planning

The end of the year is prime time for wrapping up your accounting books and preparing to push your business forward. But without careful end-of-year tax planning, you could wind up setting your company back and making tax time more stressful than it already is.

Not sure where to start with your year-end tax planning? No worries. Follow the small business end-of-year tax checklist below to get the ball rolling before the new year. 

year-end tax planning

1. Don’t wait until the very last minute

All business owners are guilty of procrastinating at some point or another. “I’ll do it tomorrow” turns into “I’ll do it next week.” Then all of a sudden, you’re left scrambling to get what you need done at the eleventh hour.

When it comes to year-end tax planning, the last thing you want to do is put it off until the last minute. As you prepare to roll into the new year, don’t delay tax planning. The earlier you start, the better off you will be come filing time.

To avoid last-minute tax planning, set aside time in your schedule each week at the end of the year (e.g., each week in December) to sit down and chip away at your tax planning duties. You can even set reminders for yourself (e.g., on your phone or calendar) to take a step back from other tasks and spend time working on your year-end tax planning. So, mark your calendar and get a head start! As soon as you know it, tax season will be here yet again. 

2. Assess your business’s financial health

Year-end is the perfect time to assess your business’s financial health. To find out how well your business is doing, take a look at your financial statements:

You can use your financial statements to see if your company had gains or losses throughout the year. Dig into the causes behind each gain or loss and use your findings to make adjustments for the new year and set financial goals. You can also use your statements to see where you may need to cut back expense-wise and help build your budget for the new year.

Compare this year’s statements to previous years to see where you stand and whether you improved financially. Comparing your statements from year to year lets you see how far your company is progressing and if your finances are healthy. It can also help you spot financial issues and fix them before they snowball out of control.

3. Defer or accelerate income

Want to lessen your tax liability? Consider deferring income. The income you receive by December 31 counts as income for the current year. You can lessen your current year tax liability by postponing income to after January 1.

Pushing payment due dates after January 1 delays it from being counted as income until the following tax year, giving you more time to pay taxes on business income.

If you expect to be in a lower tax bracket next year, you might also want to defer income because you’ll pay taxes at a lower rate.

The way you defer income depends on your accounting method. For example, if you use cash-basis accounting, you can delay income by sending your invoices later than usual. You can also make the due dates on your invoices for next year instead of the current year. With cash-basis accounting, you record income when you receive it. So, income won’t show up on the current year’s tax return if you receive it the following year.

Don’t defer income if you have an immediate need for the cash. Assess your expenses before deciding to postpone income.

You may also opt to accelerate income to the current year. If business is booming and you’re expecting to be in a higher tax bracket next year, consider accelerating income. By accelerating income, you invoice and collect more payments this year so that more income is taxed at your current tax rate.

Check with an accountant to determine whether it’s worth it for you to defer or accelerate any income.

4. Determine what tax deductions you’re eligible for

Before closing your books at year-end, find out which tax deductions you’re eligible for. Know the deductions that apply to your business and how to correctly deduct them. 

Some common small business tax deductions include:

  • Home office
  • Employee expenses
  • Business use of a car
  • Travel expenses
  • Charitable contributions

Each business expense has its own method for deducting. Follow the IRS rules before claiming a tax deduction.

If you take advantage of a business tax deduction, keep accurate accounting records to prove your deductions are for business expenses.

5. Make necessary purchases

Want to maximize deductions? Who doesn’t? One way to maximize deductions is to spend money on items your small business needs before the year comes to an end.

Here are some tax-deductible things you may want to purchase before the end of the year:

  • Office supplies (e.g., paper)
  • Equipment (e.g., computer)
  • Company vehicle
  • Machinery

Think about what kinds of items you need to purchase before year-end. Is your printer on its last leg? Are you running low on supplies? Create a list of purchases you can make this year to get the most out of your deductions and reduce this year’s taxes.

6. Establish a retirement plan

Does your business have a retirement plan? If not, now may be the best time to set up or contribute to a retirement plan.

Establishing or contributing to a retirement account can help reduce your taxable income. Business owners have different types of retirement plans to choose from, including:

  • 401(k)

Let’s see one of the plan options in action. Say you set up a 401(k) plan before the end of the year. Because you set one up, you can deduct any contributions made to the plan when you file your tax return.

Keep in mind that every business’s tax situation is different. Before making the leap and establishing a retirement plan for your business, do your research and discuss your options with a tax professional.

7. Evaluate your accounting process

Your recordkeeping process plays a big role in how efficiently you file your taxes. The more organized and up-to-date your books are, the easier it is to fill out your business tax return. With a solid accounting process, you can avoid mistakes, potentially receive a higher refund, and enjoy hassle-free tax filing.

When it comes to accounting processes, every business is different. Some options you have for recordkeeping include:

  • Manually tracking account information (e.g., spreadsheet)
  • Utilizing accounting software alongside an accountant
  • Hiring an accountant to handle your books for you

Maybe you find that your current method doesn’t give you enough bang for your buck. Or, maybe you’re looking for a way to streamline your books so you don’t have to do it all yourself. Whatever the case may be, year-end is a great time to evaluate your accounting process.

Not sure if you should make the switch to another process? Compare your options below:

Manually recording transactions can be time-consuming. And, it can make your books more prone to errors. But, it is the cheapest accounting solution. If you’re looking to cut back on costs, recording transactions by hand may seem attractive, but keep in mind that mistakes are expensive.  

Accounting software helps you complete bookkeeping tasks quickly, organize transactions, and calculate account totals without having to spend an arm and a leg. By automating your accounting records, you can keep your records organized and have more time for other business tasks. And, you can easily access reports to pass along to your accountant.

Hiring an accountant to do all of your bookkeeping is the most expensive accounting solution. If you hire an accountant, you don’t need to worry about managing your books or making accounting errors. Your accountant compiles financial statements and calculates totals for you. But, keep in mind that those perks may cost you a pretty penny if you don’t do any of the day-to-day legwork (e.g., use accounting software for organized books).

8. Consult a tax preparer

To ensure you’re roaring and ready to go for the new year, set up a time to talk with your accountant or tax preparer before the year comes to a close.

Tax professionals are a great resource for small businesses. They can give you advice to help you get a higher tax refund and lower your liabilities. Not to mention, tax preparers can help you steer clear of mistakes on your tax return, allowing you to avoid headaches and financial problems down the road.

Talk to a tax professional to find out what kind of records you need and to get an estimate of your tax liability. Give yourself an ample amount of time to meet with your tax preparer and discuss your taxes. Remember, tax professionals are busy at year-end, too.

9. Claim bonus depreciation 

If you’re like many other business owners, you’ve probably purchased equipment, furniture, etc. for your business. Typically, tax rules require you to depreciate certain items over their useful life. However, bonus depreciation allows you to write off 100% of those costs on your 2021 return.

Thanks to changes with the Tax Cuts and Jobs Act, business owners can now get a first-year bonus depreciation for qualified used and new property that was acquired and placed during the 2021 business year. 

If you’re on the fence about buying a new piece of equipment, purchasing some furniture, or upgrading your computers before year-end, consider making the move before the year is over.

Keep in mind that not all assets qualify for bonus depreciation. Before making any purchases and attempting to claim bonus depreciation, consult an accountant to ensure you’re making the right move. 

Need help getting your books roaring and ready to go for the new year?

Check out our FREE guide, Are Your Books Ready for Year-end?, for a list of must-do year-end accounting tasks.

Tips for smooth small business year-end tax planning

Want this year’s tax planning to go off without a hitch? Keep the following tips in mind:

  • Be proactive
  • Don’t panic
  • Create a checklist (or just use ours!)
  • Set reminders for yourself
  • Take things one step at a time (aka do a little bit each day or week)
  • Consult a tax professional with questions
  • Ask for help, if needed

Year-end tax planning doesn’t have to be a stressful process. As long as you come up with a game plan and don’t put off your tax planning tasks, you’ll survive the dreaded year-end tax planning season and be on your merry way.

This article was updated from its original publication date of November 22, 2016.

This is not intended as legal advice; for more information, please click here.

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