Top Year End Tax Planning Tactics for Small Business Owners

  • Accracy
  • 26th Nov, 2023

Year end tax planning is a great way to reduce the cost of your tax bill, but you need to make these moves before Dec. 31. Taxpayers don't need to be experts on all things tax law to get the most out of their next return. Here are six common small business tax moves that can help you cut your tax bill.

Top Year End Tax Planning Tactics for Small Business Owners
Tax Tips

Defer business income until January

Tax season is often best understood as, "The bigger the bottom line, the bigger the bill." It's no surprise, then, that one of the most common tax-planning strategies is to "reduce" your earnings in one year by deferring that income to the next year.

If you operate on a cash basis and have a bunch of invoices to send or accounts receivable to chase, consider waiting until January 2023. Any business income you defer until the new year won't be taxable until 2024 (meaning you'll have to pay taxes on it, but not for another year).


Salvage bad debt deductions

No one wants to write off accounts receivables as bad debt. But if you do, it can save you money on your federal taxes.

If you use the accrual bookkeeping method and someone owes you money that you can't collect, you may have what's known as "bad debt." The IRS allows you to deduct the cost of bad debt from your tax return, but you need to prove that you took reasonable steps to collect the debt. To be deductible, the amount owed to the taxpayer must have already been included in the taxpayer's income.

When determining your business's taxable income, you deduct its bad debts from gross income"¦ Business bad debts may be deducted in part or in full. You can claim a business bad debt using either the specific charge-off method or the nonaccrual experience method.

Use the final weeks of 2022 to attempt to collect all outstanding payments, and be sure to keep a detailed record of your debt collection efforts. Anything that feels like a lost cause can result in tax savings.

Find full instructions on claiming bad debt as a tax deduction on the IRS website.

Further reading: Bad Debt Expense: Definition and How to Calculate It

Make office improvements and repairs

The cost of making minor repairs to your business premises should be tax-deductible so, if you can, make all necessary repairs before December 31.

The IRS categorizes the cost of property maintenance as either "repairs" or "improvements."

You can generally deduct the cost of a routine repair within a single year.

On the other hand, the cost of improvements generally needs to be depreciated over a period of up to 27.5 years. Changes to a property are classified as "improvements" when they include "betterment, adaptation, or restoration."

Be careful if you're improving a home office area. Even in light of the pandemic, there are strict rules for what qualifies as a home office. Mainly, the space must be used solely for business purposes. A garage used solely to house inventory? Home office. But if you also park your car in there? Not a home office.

Before approving any expenditure on office maintenance and repairs, it's a good idea to have your CPA or tax advisor determine whether it can be deducted as a "repair" or as an "improvement." With a premium tax subscription, you get unlimited, on-demand access to consultations with our tax professionals. They'll help you with questions just like these to ensure your tax bill is as small as it can be.

Take advantage of new business deductions

Did you start a new business or venture in 2022? As long as your start-up expenses did not exceed $50,000, you can generally deduct $5,000 in business start-up costs during your first year of business. If you incurred over $50,000 in start-up costs, your available first-year deductions will be lowered by the amount that you exceed $50,000. For example, if you spent $52,500, you'd only be able to deduct $2,500.

To qualify for this tax deduction, the venture must launch before year-end and be an ongoing activity.

Also, if you researched a business that failed to launch, you may still be eligible for a tax deduction. Whether you're able to deduct the costs incurred here depends on the specificity of the research you completed. If you were investigating a specific business to create or acquire, you might be able to deduct these expenses on your personal or corporate tax return.

Alternatively, if you don't have a specific business in mind and nothing comes of your research, you can't deduct the costs you incurred during research or investigation.

This deduction is complex, so consult with your CPA—or, if you're a Accracy premium subscriber, one of our tax professionals—to determine what is and isn't deductible for any given year before you claim it on your return.

Consider a change of business entity type

According to census data, 73.1% of all small businesses are sole proprietorships. This is largely because sole proprietorships are so easy to start. You don't need to file paperwork or make a declaration to the IRS to start a sole proprietorship. In fact, if you started a side gig in 2021, you might be a sole proprietor and not even know it.

But sole proprietorships aren't taxed as a separate entity. Instead, they're considered "pass-through" entities, meaning their business income and expenses are passed onto the business owner and recorded on Schedule C as part of Form 1040, the individual income tax return. As a result, your business pays the same tax rate you do, depending on your income bracket.

Each business structure has its own tax benefits and drawbacks. Incorporating can potentially reduce your tax liability—especially since the Tax Cuts and Jobs Act (or TCJA) lowered the corporate tax rate to 21% in 2017. It can also save you money on self-employment tax. But that doesn't mean it's best practice for everyone. The cost of incorporation can get expensive and comes with stricter reporting requirements, which can add a lot of paperwork to your to-do list.

Whether it's a C corporation, S corporation, or limited liability company, making a switch to a new entity type can greatly impact how your business is taxed. Talking through your options with a tax professional—or your Accracy tax advisor—can help you identify which entity type will best suit your needs.

How Accracy can help

Looking for ways to cut down your tax bill? You don't have to wait until December to start making moves. With Accracy, you stay on top of your tax-deductible expenses all year, thanks to completely automated bookkeeping. Connect your bank, credit card, and merchant accounts to Accracy's platform, and your personal bookkeeping team takes care of the rest.

Every month, your bookkeeping team categorizes your transactions and reviews your books to ensure not a single deduction is left on the table. With a premium subscription, you also get unlimited, on-demand access to consultations with our tax professionals. They'll talk you through potential tax moves, both big and small, so you can make changes to your business in confidence. Learn more.

Buy bookkeeping in bulk

You can cut down on tax preparation costs by having a clean, completed year of bookkeeping. Bookkeeping is a tax-deductible business expense that will lower your tax bill and make the tax filing experience stress-free.

If you plan to pay a bookkeeper or use an online bookkeeping service to help you catch up on a large backlog of bookkeeping, arrange and pay for the service before December 31 and claim the expense as a tax deduction. If you're feeling overwhelmed by your bookkeeping backlog, Accracy's Catch Up and Retro services can help.

Or, if your bookkeeping software is something you want to use long-term, consider purchasing an annual subscription before the end of the year. Buying in bulk is a great way to reduce your taxable income and save money in the long run. With Accracy, you save $600 a year by switching to an annual Essentials subscription or $1,200 by switching to an annual Premium subscription.

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