Another year is quickly coming to an end. This memorandum is intended to give you some ideas on saving taxes for 2024. However, it is general in nature and may not specifically apply to you. We should discuss any strategy that you may consider before year-end.
The first decision you must make is whether or not you should employ a tax reduction strategy for 2024. Not everyone should implement an aggressive year-end tax reduction strategy. Here are a couple of things to consider:
- NEVER spend money that you wouldn’t ordinarily spend just to reduce your tax bill. Remember, $1 spent does not equal $1 worth of tax savings. $1 spent creates a $1 deduction, which (depending on your tax bracket, business structure, state located, and various other factors) will only lead to $.00 – $.45 worth of tax savings. So, while tax deductions are great, they never provide an equal return for the dollars spent. This means you should never spend money just to increase your deductions.
- You may not want to accelerate expenses into the current year. For example, if you have had a year with a lower than average income, and expect your income to pick back up next year, you may actually want to do the exact opposite by deferring as many expenses into 2025 as possible. By way of example, if you expect to be in the 12% federal tax bracket this year and the 22% bracket next year, you would save $2,000 by delaying $20,000 of expenses until next year. Another reason not to accelerate expenses into the current year would be if by doing so would cause cash flow problems. Remember, when you’re out of cash, you’re out of business!
If you do decide to employ some year-end tax strategies, make sure you are actually spending money on deductible items and not just moving money around.
A common misconception surrounding year-end business tax planning is the “zero out your business bank account by December 31st” strategy. If done properly, the “zero out strategy” can be an effective way to defer current year taxes. However, simply zeroing out your bank account will not necessarily result in any tax deferrals if you pay the wrong types of expenses. The following payments will not reduce your income taxes:
▪ Paying yourself a bonus
▪ Paying yourself a distribution (whether as a shareholder, partner, or otherwise) ▪ Repaying a loan to yourself
▪ Paying down credit card balances
▪ Paying down credit lines or other loan balances
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If you are going to put a tax reduction plan in place, you must actually pay deductible expenses, purchase equipment or other depreciable property that improves or maintains the operation of your business, or defer the receipt of income.
Here is a list of some specific things you can do to lower your taxes for 2024: Stock Up on Supplies
Increase expenses by stocking up on inventory and general operating supplies. If you do not have excess cash, in certain instances you can use a credit card for these purchases.
Pre-Pay
Pre-pay certain types of expenses, such as:
▪ Various types of insurances
▪ Rent or your mortgage
▪ Subscriptions and memberships
▪ General accounts payable
Set Up a 401k Retirement Plan
You can save on taxes by setting up a 401(k) for yourself and your employees. Tax benefits of a 401(k) plan include:
▪ You can claim a tax credit for the cost of setting up and administering a 401(k) plan, up to $500 a year for each of the first three years the plan is in existence. ▪ The amounts you set aside from your business for yourself and employees are deductible as a business expense (up to specified limits).
▪ The money that goes into these accounts is tax-deferred.
Write-Off Bad Debts (this applies to accrual basis taxpayers only)
Uncollectible debts can be written off before the end of the year. Here is how this process works:
▪ During the year, you have accounts receivable which you collect…and some receivables you are having trouble collecting.
▪ At the end of the year, run an Accounts Receivable Aging Report to see who has not paid you for a long time.
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▪ If the customer is no longer active or has stopped paying, you may be able to eliminate this customer’s remaining balance from your sales, thereby reducing your income.
Write-Off Obsolete Equipment
Obsolete or damaged equipment can be written off (to the extent it is not already fully depreciated) Here is how this process works:
▪ You should have a list of all equipment in your company, including office equipment and any equipment you use to make products. Go through this list and mark equipment that is: (1) obsolete or worthless, or (2) damaged, but still usable. ▪ For items that are obsolete or worthless, list each item.
▪ For items that are damaged, but still usable, list each item and the reduction in value for each item. For example, if you have a computer that you purchased for $1,000 and it’s sitting in a back room because you bought a new computer, you can expense the remaining amount that has not been depreciated. If a piece of equipment cost $1,000 and you feel its value is only $300 because of damage, you can deduct up to $700 as an expense (to the extent that it has not already been depreciated to below its current value of $300).
▪ The total of all these write-offs and write-downs can be taken as an expense on your tax return. The assets are then reduced in value.
Give Employees Bonuses or Gifts – Reduce Your Business Taxes
The end of the year is a great time to pay bonuses to employees or give gifts and parties. In addition to receiving a tax deduction for these expenses, you also receive a great deal of goodwill – especially around the holidays.
Buy Office Equipment, Etc.
With bonus depreciation now at 60 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31st, and get a deduction for up to 100 percent of the cost in 2024.
Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles). It also includes certain improvements made to real estate.
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If you anticipate needing some additional equipment, etc. that you will need relatively early in the new year, you may want to consider making these purchases ahead of schedule so you can take the deduction in the current tax year.
Use Your Credit Cards
If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct this 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 or partnership, and the corporation or partnership has a credit card in the business name, the same rule applies – the date of charge is the date of deduction.
However, if you operate your business as a corporation or partnership and you are the personal owner of the credit card, the corporation must reimburse you or otherwise pay for the expense directly before the end of the year if you want the business to realize the tax deduction in the current year.
Stop Billing Customers, Clients, and Patients
Finally, an easy strategy to reduce your taxable income for this year is stop billing your customers, clients, and patients until after December 31st. This assumes that your business is on the cash basis for tax reporting purposes, and that you have ample cash on hand to get by for a few weeks or so without receiving any income. If your business operates on the accrual basis, we would need to discuss this strategy more fully.
