Year-End Tax Planning for Business Owners

For optimum results, tax planning for small businesses should be a year-round process. Yet, many business owners tend to wait until the year-end approaches to plan their taxes when they have a clearer picture of their financial situation. That’s much better than waiting until tax filing season when there

are few opportunities to achieve significant tax savings.

Working with their CPA or tax professional, here are seven tax-saving strategies that most business owners should consider before the year’s end.

Defer year-end income

If your business uses the cash method of accounting as a sole proprietor, S-Corp, or partnership, it’s possible to defer income into the next year to save on current taxes. This can be accomplished by delaying invoices, so payments are not received until 2023. This would not be advisable if you anticipate that your tax rate will increase in 2023.

Accelerate deductions

If you anticipate purchasing supplies or inventory early next year, you can capture the business deduction for 2022 by making the purchases in December. You can also prepay your January utilities or rent in December for current deductions.

Take advantage of the Section 179 deduction

If you are planning any significant equipment purchases, such as a new computer, a company car, or machinery, accelerate the purchase into the current year to take full advantage of the Section 179 depreciation allowance that allows for accelerated depreciation and a deduction of the total purchase price in the current year.

Write down your inventory

Any inventory sitting on your shelves at the end of the year could be costing you more than if you were to write it off. While you first must offer the inventory for sale, if it doesn’t move, you can take it from the shelf and deduct its fair market value.

Donate inventory to charity

A better option for your excess inventory may be to donate it to charity. A deduction for the fair market value can be taken, resulting in more cash flow through tax savings than if the item were sold at a salvage price or simply junked.

Establish a retirement plan

If you have not established a retirement plan, this would be the time to do so, as any contributions made this year can be deducted from your gross income. It would be important to understand the contribution timing requirements because some retirement plans require contributions to be made by October.

Consider a change in your business structure

Depending on where you see your business going next year, you could benefit from a change in your business structure—from a sole proprietorship to an S-Corp or C-Corp. This can be beneficial if you anticipate significant profit increases going forward. Changing your business structure is a major decision with potential long-term implications for your personal and business taxes, so it is advisable to seek the guidance of your CPA or a business planning expert.

This is just an outline of year-end tax-saving strategies, all requiring your deep understanding of whether they are suitable for your situation. Before considering any tax-saving strategy for 2022, it would be essential to work with your CPA or tax professional to see if it has an adverse impact on your 2023 taxes and beyond.

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