It might seem a bit early to think about your 2023 business taxes, but as the year draws to a close, it's the perfect time to take a closer look at your company's financial situation and make some strategic moves to minimize your business' tax liability come next April.
Year-end tax planning for your business isn't something you do at the last minute; it's a series of thoughtful steps you start taking right now. In this two-part blog series, we'll explain eight key actions your business can take during this last quarter of the year to save money on its 2023 taxes.
And, most importantly, note that these opportunities are only available if you have already begun to determine how much net profit you will have for the year, so if you haven't reconciled your books, or been looking at your profit and loss statement on a monthly basis, that's the place to start.
1 | Make Large Purchases Before December 31
One effective way to reduce your business's taxable income is by making substantial business-related purchases before the end of the year. Any expenses that are considered “ordinary and necessary” to run your business can be deducted from your business's income, like office supplies, software, or licensing fees.
For example, section 179 of the tax code also allows you to deduct the full cost of qualifying equipment in the year it was purchased, up to certain limits. Purchasing machinery, vehicles, office furniture, and more can be deducted. Doing so can significantly reduce your company's taxable income for the current year.
The purchase price of large assets such as a machine or a vehicle can also be deducted slowly over several years as depreciation instead of taking the entire deduction in the year you buy the item. Work with your tax professional to determine whether deducting the entire purchase price this year will give you the biggest tax break or whether it makes more sense to deduct the item's depreciation over time.
If you have major purchases to make for your business this year, consider looking for energy-efficient options to qualify for additional tax credits.
2 | Defer Business Income
If you expect to owe fewer taxes next year, deferring income due to your business until next year is a valuable tax planning strategy that can help reduce your company's tax liability.
To do this, you can delay billing clients and customers you serve in November and December until January. This will push the income generated through those services into the next tax year. If delaying billing until the new year is impractical for your business, consider offering customers the option to pay in installments. By doing so, you can spread the income over two tax years.
Lastly, while more business is always a good thing, don't be afraid to book new client meetings, projects, or deadlines into January. Doing so may not only give your business a tax advantage but can also help you enjoy a less hectic end of the year and provide you with time to assess your business's progress in 2023 and your goals as a business owner for the coming year.
3 | Accelerate Expenses
Similar to deferring income, accelerating expenses involves the art of timing—deducting certain expenses in the current year instead of waiting for the next. By doing so, you can rev up your tax savings and watch your company's tax liability decrease.
If your business uses the accrual method of accounting, consider reducing your year-end inventory. This allows you to claim the cost of goods sold and reduce your taxable income.
If you plan to give year-end bonuses or provide additional employee benefits, doing so before December 31 can help you lower your business's taxable income for the current year.
Another simple way to accelerate expenses is to prepay recurring business bills such as rent, insurance, or subscriptions for the upcoming year. For example, if you previously paid for your liability insurance monthly, consider paying the entire premium in advance. This advance payment allows you to deduct the expenses in the current year, effectively lowering your taxable income and allowing you to enter the new year with fewer recurring expenses to worry about.
4 | Contribute to Your Employees' HSAs (Health Savings Accounts)
A Health Savings Account (HSA) can be a wonderful benefit for employees and a way to reduce your business's taxable income. Contributions to your employee's HSAs are tax-deductible, and the earnings grow tax-free for your employees.
To make the most of this tax-advantaged account, consider maximizing your company's contributions to employee HSAs before the year ends. For the 2023 tax year, the maximum contribution to an HSA account is $3,650 if the employee has self-only health insurance coverage or $7,300 for family coverage. If the employee is 55 or older, they can also make an additional $1,000 catch-up contribution.
This maximum contribution can be a combination of employee and employer contributions, so making an additional contribution to employee accounts not only reduces your company's taxable income but also builds a valuable fund for your employees' future healthcare expenses.
5 | Make Charitable Contributions
Giving back to your community or supporting causes you care about is not only rewarding but can also provide tax benefits for your business. If it looks like your business will owe taxes this year and doesn't have an immediate need for new equipment or materials, this may be a great time to contribute to a charitable organization that is important to you.
Doing so will help support a good cause and allow you to deduct the donation from your company's taxable income. You can also use the donation as an advertising opportunity. Schedule a company fundraising event or get into the community and agree to match donations made by other businesses. This will double the benefit the charity receives and create more awareness of your business in the community.
If you make any charitable donations, keep detailed records of your donations, including receipts and acknowledgments from the charities. If you donate non-cash items (such as clothing, household goods, or materials) make sure to document their fair market value.
If you aren't sure how to document your donations or aren't sure if a charitable donation will be advantageous to your business this year, be sure to discuss this with your tax professional.
6 | Consider Tax-Loss Harvesting
Tax-loss harvesting is a strategy designed to offset capital gains by selling underperforming investments. This technique can help you minimize the taxes your company owes on investment gains.
The first step is to identify investments in your company's portfolio that have experienced losses and then sell those investments to realize the losses. By selling underperforming investments, you can now use the lost capital to offset any capital gains from other company investments that are doing well.
It's important to remember that there are rules and limitations when it comes to tax-loss harvesting. Consult with a financial advisor or tax professional to ensure you execute this strategy correctly and in a way that aligns with the overall financial goals of your business.
7 | Deduct Financing Costs
As a business owner, you're no stranger to borrowing funds to support your business, but did you know you can get a tax deduction from your loans? While you can't write off a business loan or loan payment itself, you can deduct business loan interest from your company's taxable income.
Let's imagine your company makes a $600 per month payment towards a business loan. In this payment, $400 goes toward principal and $200 goes toward interest. Your business can potentially deduct that $200 per month from its taxable income.
To make this happen, your business will need to be able to prove it is liable for the loan debt, have proof of repayment, and show that the funds were spent on something for your business rather than just being kept in a bank account.
8 | Establish and Contribute to an Employee Retirement Plan
Retirement planning is crucial for long-term financial security, and potential employees gravitate toward businesses that offer employer-sponsored retirement plans or pensions. The good news is that providing a retirement plan for employees not only attracts good people but can help lower your company's taxable income.
If your business is eligible, it may be able to claim a tax credit of up to $5,000 every year for the first three years that it offers a retirement plan. Retirement plans such as an SEP, SIMPLE IRA, or qualified plan (like a 401(k)) are eligible for the tax credit. In addition to the tax credit, businesses can deduct contributions to employee retirement accounts each year from their taxable income.
This is a great opportunity to offer more value to employees, which makes it easier for your company to attract and keep better workers, and the tax benefits are especially helpful to smaller companies who want to offer employee benefits while watching their bottom line.
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The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.