With year end rapidly approaching, many business owners are focusing on budgeting and strategic planning for 2025. But you shouldn't overlook last-minute opportunities to cut taxes for 2024. Here are some tax-smart moves for businesses to consider executing by December 31.
If you've been planning to buy new or used machinery, equipment or computer systems, you can deduct a significant chunk of the purchase price this year if it's placed in service before December 31, 2024. The first-year bonus depreciation percentage is only 60% for 2024 (down from 80% for 2023 and 100% for 2022). It's scheduled to drop to 40% for 2025, absent congressional action. The bonus depreciation deduction also is available for software, certain vehicles, office furniture and qualified improvement property (generally, interior improvements to nonresidential property, including roofs; HVAC, fire protection and alarm systems; and security systems).
However, Section 179 expensing may give you more bang for your buck for 2024. With Sec. 179, you can deduct 100% of the purchase price of new and used eligible assets. The maximum deduction is $1.22 million for 2024. In addition, the deduction begins phasing out on a dollar-per-dollar basis when qualifying purchases exceed $3.05 million for 2024. The maximum deduction also is limited to the amount of your income from business activity.
You can carry forward excess amounts or claim the unused amounts as bonus depreciation, which isn't subject to any income limits or phaseouts. Bonus depreciation can even create net operating losses (NOLs). Under the Tax Cuts and Jobs Act (TCJA), NOLs can be carried forward only and are subject to an 80% limitation.
Beware: Depreciation-related deductions can reduce qualified business income (QBI) deductions (see below) and certain other tax breaks that depend on taxable income. Your tax advisor can help determine what's right for your situation.
Important: President-Elect Trump has expressed support for returning to 100% bonus depreciation, as well as doubling the phaseout threshold for Sec. 179 expensing. In 2025, the Republican-controlled Congress could pass legislation that includes these changes as part of its efforts to extend and expand the TCJA.
If you conduct your business using a so-called pass-through entity — meaning a sole proprietorship, S corporation, limited liability company or partnership — your shares of the business's income and deductions are passed through to the owners and taxed at your personal rates. Under current law, the 2025 individual federal income tax rate brackets will be the same as this year's, with modest bracket adjustments for inflation.
So, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. At a minimum, this strategy will postpone part of your tax bill from 2024 until 2025.
Most small businesses (including C corporations and personal service corporations) can use cash-method accounting for tax purposes. Assuming your business is eligible, cash-method accounting allows you to manage your 2024 and 2025 business taxable income to minimize taxes over the two-year period.
If you expect your business income will be taxed at the same or lower rate next year, there are specific cash-method moves that can defer some taxable income until 2025. On the income side, the general rule for cash-basis businesses is that you don't have to report income until the year you receive cash or checks in hand or through the mail.
To take advantage of this rule, consider waiting until near year end to send out some invoices to customers. That will defer some income until 2025, because you won't collect the money until early next year. Of course, this should be done only for customers with solid payment histories.
Other ways for cash-basis businesses to reduce taxable income for the current year include:
On the other hand, if you expect to be in a higher tax bracket in 2025, take the opposite timing approach: Accelerate income into this year (if possible) and postpone deductible expenditures until 2025. That way, more income will be taxed at this year's lower rate instead of next year's expected higher rate.
A noncorporate owner of a pass-through entity may be eligible for a deduction of up to 20% of the owner's share of the entity's QBI. This deduction is subject to complex rules and restrictions.
For example, it's subject to limitations based on an owner's taxable income. So, if you're close to the income limit, you might consider deferring taxable income into next year and accelerating deductible expenditures into this year. However, you don't want to lower taxable income too much — the QBI deduction itself is based on income from the business.
Additionally, the QBI deduction is subject to limitations based on the W-2 wages paid and the unadjusted basis of qualified property for the tax year. To increase your QBI deduction this year, consider increasing W-2 wages (possibly through year-end bonuses) or buying qualified property in 2024. (However, be aware that increasing wages or taking first-year depreciation deductions can have the unintended consequence of decreasing your QBI deduction.)
Note: The QBI deduction is currently scheduled to expire after 2025, unless Congress extends it or makes it permanent. There's currently notable bipartisan support for extending this TCJA provision because it benefits small businesses.
Eligible small employers that don't already offer a retirement plan can reap multiple tax benefits by establishing a qualified retirement plan. For example, you can claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan, such as a 401(k) plan. Eligible costs are those incurred to set up and administer the plan and to educate employees about it.
A perk of this credit is that you can elect to claim it for the tax year before the plan starts, for the start-up costs paid or incurred that year. For instance, a qualified small employer (meaning one with no more than 100 employees) whose new plan doesn't become effective until January 1, 2025, can elect to treat 2024 as the first credit year.
In addition, eligible small employers can claim a tax credit for contributions made to a defined contribution plan, SEP or SIMPLE IRA plan. An eligible employer that adds an auto-enrollment feature can claim a credit of $500 annually for three years, beginning with the first tax year the employer includes automatic enrollment.
With significant parts of the TCJA scheduled to expire after 2025 and a new GOP majority in Congress, 2025 will likely bring some major shifts in the tax landscape. Contact your tax advisor to take advantage of current tax breaks to minimize your federal tax liability for 2024 and stay atop any new developments.
Most states have pass-through entity tax (PTET) laws. This tax functions as a workaround for the current $10,000 cap on the federal income tax deduction for state and local taxes (SALT). PTET may benefit owners of pass-through entities — including partnerships, S corporations and limited liability companies — who pay individual income tax on their share of the business's income.
The details vary by state. But the general goal is to shift the state tax burden for pass-through entity income from the individual partners or shareholders to the entity. Typically, the laws allow eligible pass-through entities to pay an elective entity-level state tax on business income with an offsetting tax benefit at the owner level. The benefit usually is a full or partial tax credit, deduction or exclusion. The business can claim a Section 164 business deduction for the full tax payment because the SALT cap doesn't apply to businesses.
Important: The $10,000 SALT limit is scheduled to expire after 2025, without congressional action. President-Elect Trump supports increasing or eliminating it, but some members of Congress may push back on changing the current rules because increasing the SALT limit would only benefit taxpayers living in high-tax states.
The PTET election isn't necessarily right for every pass-through entity. Contact your tax advisor to discuss whether this option is available in your state and makes sense for your situation.
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