Year End Tax Planning for Small Business Owners

Jovan Johnson, MBA, CFP®, CPA/PFS

Tax planning is an essential part of growing an efficient and effective business. After all, if you are overpaying in taxes there is less cash flow available to be used towards growing your business. A common mistake many new entrepreneurs make is being reactive when it comes to tax planning. It is always better to plan at the beginning of the year versus at the end. However, all is not lost. In this article, I provide some year end tax planning strategies for small business owners.

1.) Run a tax projection for next year

Consider running a tax projection for next year to determine the expectations for your income and expenses. There may be some tax planning opportunities if you expect to be in a lower or higher tax bracket next year.

If you expect to be in a lower tax bracket next year:

• • Defer income to next year

Consider ways to defer some of your current year’s income to next year. For example, maybe you can wait until December 31st to send a client an invoice with the expectation that you will receive the payment in January of the next year.

• • Accelerate deductions into the current year

Consider ways to prepay some of next year’s expenses this year. For example, maybe you can prepay your business insurance coverage for next year.

If you expect to be in a higher tax bracket next year, you can just perform the reverse of both options listed above. Running a tax projection and implementing these strategies could save you hundreds or thousands of dollars in taxes.

2.) Set up and fund a self-employed retirement plan

If you have not already done so, set up and fund a self-employed retirement plan. You can stash away some serious cash and potentially receive a tax benefit along the way. Retirement plan contributions may be the most valuable tax break available to you.

If you are a solopreneur with no employees, consider setting up an individual/solo 401(k) plan or SEP IRA.

Solo 401(k):

• Employee: For 2024, you can contribute up to $23,000 to a solo 401(k) plan, plus an additional $7,500 if you’re age 50 or older.
• Employer: You can contribute up to 20-25% of compensation not to exceed $69,000 for the 2024 tax year.
• You can make contributions as both the employer and employee not to exceed $69,000 (combined) for the 2024 tax year ($76,500 if age 50 or older).
• Depending on the custodian, you may be able to make Roth and after-tax contributions.
• Depending on the custodian, you may be able to take loans from your solo 401(k).
• You cannot have any full-time employees.
• You must set up the solo 401(k) by December 31st, however, you have until the tax deadline (April or October if the return is extended) to fund the account.

SEP IRA:

• Employer: You may contribute up to 25% (accounting for exemptions, this works out to be about 20% of earnings for self-employed individuals) of your net self-employment income but you cannot exceed $69,000 for 2024.
• Because of recent tax law changes, both pre-tax and Roth contributions are allowed.
• No catch-up contributions are allowed.
• May be a little easier to set up than a solo 401(k).
• You have until the tax deadline (April or October if the return is extended) to set up and fund a SEP IRA.

3.) Update your bookkeeping

If you have not been keeping up with your financials, now is the time to get back on track. You do not want to be rushing in April to organize all your financial information. With messy financials, you limit the opportunity for tax planning and to qualify for quality business loans. Also, you will have no clue how your business is doing. Take some time to organize your income and expenses that occurred throughout the year. This may require you to perform tasks such as reconciling your bank and credit card accounts, documenting/saving receipts, and ensuring that all your business transactions are separated from your personal transactions.

If you need help with organizing your financials, a solid accountant or bookkeeper can assist. If you are going at it alone, make sure you have quality bookkeeping software such as QuickBooks that can make your life easier. This will allow you to focus on what you do best and generate more profit.

4.) Catch up on quarterly estimated tax payments during Q4

As an entrepreneur (sole proprietor, S corp shareholder, or partner) you are required to pay quarterly estimated taxes to the IRS if you expect to owe tax of $1,000 or more when your return is filed. Depending on the state you live in, you may have to pay quarterly estimated taxes to your state as well. Your quarterly estimated tax payments should be enough to cover self-employment taxes (Social Security & Medicare), federal taxes, state taxes, and local taxes (if applicable). The IRS quarterly due dates are April 15, June 15, September 15, and January 15. If the 15th lands on a Saturday, Sunday, or legal holiday, the tax is due the next business day.

If you find yourself in a situation where you earned business income throughout the year but have not paid any estimated taxes or paid too little, consider the following. Project out your income and expenses for the year then estimate how much you may owe in taxes and pay in as much as you can by the January 15th deadline. You want to avoid penalties and interest if possible. Going forward, either calculate your quarterly estimated taxes on your own, hire a qualified accountant or bookkeeper, or use a simpler approach such as saving 30-35% of your net profits in a business savings account to pay quarterly tax payments. With the simple approach, you may overpay in taxes, but it does make things simple for you. Once you feel comfortable with calculating a more accurate number or hiring an accountant, you can adjust.

5.) Re-evaluate your business entity selection

Is your current business entity selection still serving you? Evaluate where your business is today and consider all the entity options. There is no one-size-fits-all approach when it comes to selecting the best business entity. There are many factors to consider such as revenue, expenses, qualified business income deduction, self-employed retirement plans, etc. If this is something you want to implement in the new year, start evaluating now.

After all, it may be worth it. Having the right business structure could save you hundreds or thousands in taxes.

Final Thoughts

Tax planning should be a priority for your business as taxes play a key role in owning a business. Planning for taxes does not have to be super complicated. If you spread the planning throughout the year, you won’t be so stressed trying to cram it in at the end of the year. If you do not like spending your free time worrying about taxes, consider hiring a qualified professional to take this off your plate. This will allow you to focus on what you do best, growing your business and generating profits. Year end tax planning for small business owners is a nonnegotiable.

If you would like to learn how to implement year end tax planning strategies for small business owners, feel free to check out our services page.

Disclosures

None of the information provided is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.