In Summary
- Businesses should actively reduce current tax liability by strategically timing income and expenses (e.g., prepaying costs) and leveraging generous provisions like the Section 179 deduction and 60% bonus depreciation for asset purchases, while also claiming valuable federal tax credits such as WOTC and the R&D Tax Credit.
- With several key Tax Cuts and Jobs Act provisions—including the current bonus depreciation rate and the 20% Qualified Business Income (QBI) deduction—set to phase down or expire after 2025, companies should act now to maximize benefits, review Net Operating Losses (NOLs), and ensure they maximize contributions to retirement plans before year-end.
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As the closing weeks of the year quickly approach, many Denver businesses are focused on the coming new year. Budgets are being developed, initiatives reviewed, and strategies outlined and confirmed. All eyes are targeting ways to drive bottom line growth by delivering new services, expanding product offerings, and engaging customers. However, it is also time for year-end tax planning to make important moves to reduce overall liabilities. This often includes leveraging depreciation opportunities, capturing federal tax credits, and taking advantage of Net Operating Losses (NOLs). Since each business is different the most beneficial approach will also vary. To help clients, prospects, and others, Hanson & Co has provided a summary of the key considerations below.
Strategic Tax Planning
- Timing Income and Expenses –One of the most effective strategies is to manage the timing of income and expenses. Businesses may benefit from accelerating deductible expenses into the current year by prepaying rent, utilities, or operational costs. For example, a manufacturing firm might prepay for materials or renew a software subscription early. Conversely, deferring the income to the following year can reduce the current year’s taxable income, particularly if the business expects to fall to a lower tax bracket in the next fiscal year. Businesses must carefully balance these strategies to avoid creating cash flow challenges.
- Leveraging Depreciation Rules – Current tax laws allow businesses to take advantage of generous depreciation provisions. Under Section 179, businesses can deduct up to $1.22 million of qualifying purchases immediately, rather than depreciating them over time. For instance, a construction company could use Section 179 to reduce the cost of new vehicles or heavy equipment. Additionally, organizations can claim 60% bonus depreciation on assets placed in service by December 31, 2024. These rules can provide tax savings, especially for companies investing in large-scale equipment or technology.
- Maximizing Retirement Contributions – Contributing to retirement plans is another effective way to reduce taxable income. Those offering 401(k) plans or SEP-IRAs can make contributions that benefit both the company and employees. For example, a small business owner contributing the maximum amount to their SEP-IRA (25% of the employee’s compensation, or $69,000 for 2024) can greatly reduce taxable income. Those without a plan may consider establishing one before December 31, 2024. Some plans, such as SIMPLE IRAs, can be set up quickly and still qualify for contributions in the current tax year.
- Inventory Management Strategies – Inventory can also play a role in year-end tax planning. Management should review stock for obsolete or unsellable items and write them off to claim a deduction. Additionally, companies may reassess their inventory accounting methods, such as switching from FIFO (First-In, First-Out) to LIFO (Last-In, First-Out), to optimize taxable income based on inventory valuation.
- Charitable Contributions – Charitable giving can reduce taxable income while supporting worthy causes. Businesses can deduct donations made to qualified organizations, including cash, inventory, or appreciated securities. Proper documentation is required to substantiate these deductions.
- Addressing Net Operating Losses – Net Operating Losses (NOLs) from previous years can offer tax relief when properly applied. Businesses should determine whether losses can offset the current taxable income or be carried forward to future years
- Estimated Tax Payments – Ensuring compliance with estimated tax payment requirements helps avoid underpayment penalties. Individuals should evaluate year-to-date income, deductions, and payments to determine if additional installments are necessary before the end of the year.
Additional Opportunities for Tax Savings
Tax credits provide dollar-for-dollar reductions in tax liability and often go underutilized. Consulting a tax advisor can help businesses identify eligibility and maximize savings. Key credits for 2024 include:
- Work Opportunity Tax Credit (WOTC): Rewards businesses for hiring from targeted groups, such as veterans or SSI recipients, with credits ranging from $2,400 to $9,600 per eligible employee.
- Energy-Efficient Commercial Building Deduction (Section 179D): Provides up to $5 per square foot for energy-efficient upgrades, including LED lighting, HVAC systems, and improved insulation.
- Research and Development (R&D) Tax Credit: Supports businesses investing in innovation or process improvements. Eligible expenses include wages, supplies, and contractor fees, and startups can offset payroll taxes with this credit.
- Disabled Access Credit: Offers up to $5,000 annually for small businesses making accessibility improvements, such as installing wheelchair ramps or adaptive technologies.
Planning for 2025 and Beyond
Several key provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire after 2025, making proactive planning especially important this year:
- Bonus Depreciation Phase Out: The 60% bonus depreciation rate for 2024 will decrease further in 2025 and phase out entirely in 2027.
- Corporate Tax Rate: The current 21% corporate tax rate for C corporations may increase if TCJA provisions sunset.
- Qualified Business Income (QBI) Deduction: Businesses structured as pass-through entities, such as S corporations or LLCs, may want to plan for potential changes to the 20% QBI deduction.
Contact Us
Year end is an opportune time to make strategic decisions now that can result in bottom line savings. For this reason, it is important to consult with a qualified advisor to determine the best strategies for you. If you have questions about the information outlined above, or need assistance with another tax or accounting issue, Hanson & Co can help. For additional information call 303-388-1010 or click here to contact us. We look forward to speaking with you soon.