With Labor Day behind us, now is the perfect time to take proactive steps to reduce your small business’s taxes for both this year and next. A common strategy involves deferring income and accelerating deductions to minimize taxes, while bunching deductible expenses into one year or the next can also maximize their tax impact.
However, if you expect to be in a higher tax bracket next year, opposite strategies may be more effective. For example, you might want to pull income into 2024 to take advantage of lower tax rates, and defer deductible expenses to 2025 when they could offset higher-taxed income.
Here are additional ideas that can help you save on taxes if you act soon:
Estimated Taxes
Ensure you make the final two estimated tax payments to avoid penalties. The third quarter payment for 2024 was due on September 16, 2024, and the fourth quarter payment is due on January 15, 2025.
Qualified Business Income (QBI) Deduction
Non-corporate taxpayers may be eligible for a deduction of up to 20% of their QBI. For 2024, this deduction may be limited for married couples with taxable income over $383,900 (or half that amount for other taxpayers). The limit depends on several factors, including whether the business provides services (like law, healthcare, or consulting), the amount of W-2 wages paid, and the unadjusted basis of qualified property, such as machinery and equipment. These limitations phase in above the threshold.
You may be able to preserve some or all of the QBI deduction—or reduce the phaseout—by deferring income or accelerating deductions to keep taxable income below the thresholds. Additionally, increasing W-2 wages before year-end could increase the deduction. Since the rules are complex, it’s important to consult with us before making any decisions.
Cash vs. Accrual Accounting
More small businesses can use the cash method of accounting for federal tax purposes than in previous years. To qualify as a small business under current law, a taxpayer must meet a gross receipts test, which for 2024 means average annual gross receipts over the prior three years must not exceed $30 million. Businesses using the cash method may find it easier to defer income by postponing billing or by paying expenses early.
Section 179 Deduction
Consider purchasing assets that qualify for Section 179 expensing. For 2024, the limit is $1.22 million, with a phaseout beginning at $3.05 million. This deduction generally applies to most depreciable property (excluding buildings) such as equipment, software, HVAC, and security systems.
The high deduction limits allow many small and midsize businesses to write off most or all of their investments in machinery and equipment. The deduction applies to qualifying property placed in service anytime in 2024, even if it’s just before year-end.
Bonus Depreciation
For 2024, businesses can claim a 60% bonus depreciation deduction on qualifying improvement property, machinery, and equipment, whether new or used. Like Section 179, the bonus depreciation is available even if assets are in service for just a few days in 2024.
Upcoming Tax Law Changes
These are just a few strategies that could help you reduce your tax liability. Reach out to your team at Accavallo & Company LLC to develop a customized tax plan and to stay informed about future tax law changes. Many tax breaks, including the QBI deduction, are set to expire at the end of 2025. Additionally, the results of upcoming elections could lead to new or repealed tax laws that may impact your business.
