Five Key Considerations for Year-End Tax Planning for Small Business Owners

By: Kyle Meissner, CPA, Manager
Cordell, Neher & Company, PLLC

 Kyle Meissner, CPA, Manager

No matter if you are a sole proprietor or have several employees on your payroll, it's easy for any small business owner to overpaywhen it comes to taxes. As we enter the last quarter of the year, you should consider end-of-year tax-planning strategies and take advantage of possible tax breaks to lower your next tax bill. Consider these five strategies to potentially reduce your business's taxable income so you can keep more of your hard-earned profits for yourself and your employees. 


Review & Project Your Income

Start this quarter by reviewing your current income and projecting future income for 2023. To set yourself up for optimal success and to pay the least amount of taxes required by law, you need to know where you currently stand and where you are headed. An income projection lets you know what tax bracket you will be in for the coming year. The ideal place to begin is by looking at your income and deduction information from your last tax return, and then you can adjust anything with new or current data. Based on what new information you have, you can calculate, or "project," how much you will pay in taxes.

The benefit to projecting your business's income is to either reduce the number of surprises for the future and/or to feel secure that you have adequately planned for them. An income projection gives you a solid road map to predict your estimated quarterly tax payments and plan for future expenses when your sales might be lower, or you experience reduced cash flow. It reduces financial risk by forecasting a big-picture view of your entire business so you can maximize profitable resources and minimize wasted ones.

 Time Your Expenses

The strategy of timing income and expenses can potentially reduce your tax liability. Deferring income to the following year and speeding up deductible expenses into the current year can be a way to defer certain taxes to your benefit. This same strategy can be applied if you expect to be in a higher tax bracket the following year when tax rates can increase. In this scenario, you would take the opposite approach—increasing income could allow more of your income to be taxed at the current year's lower rate.

For example, consider the timing of equipment purchases. Section 179 of the IRS Tax Code allows business owners to deduct the cost of certain property as an expense when the property is placed in service. This deduction can aid business owners by alleviating big financial purchases you need to make. It's key to implement this strategy in Q4 when you are reviewing and projecting the following year's resources and need to time an expense for deduction.

Time Your Retirement Contributions

If you have yet to develop a retirement plan for your business, or if you are not sure your chosen plan is the right one, you are most likely missing tax-saving opportunities. This could be anything from a SEP IRA to a Solo 401(k), if you're a sole proprietor. Contributions made by employers are tax-deductible and are not subject to employment taxes. Choosing to offer benefits to your employees has been shown to increase recruiting and retention, while simultaneously providing tax advantages and other incentives as a bonus to you.

If you already offer benefits to your employees, consider timing your contributions by fully funding at year end. The funds you defer into a qualified retirement plan are not taxable until you begin withdrawing your tax-deferred savings. You can put extra funds into it at year end to lessen your tax burden for the current year by reducing your taxable income. This is important if you are currently in a high tax bracket and/or foresee yourself being in a lower tax bracket in the future.

Withhold Estimated Tax Payments

The federal government requires all businesses to pay as they go through estimated tax payments. By splitting up your tax payments each quarter, you're softening your tax burden at the end of the year by avoiding paying one large bill. The estimated tax payment method enables business owners to keep record of your expenses in the build-up to Tax Day and offset any costs that occur between this period and your final submission to the IRS. It's important to note where you currently stand in income so that you can use this information to determine whether you need to be paying more (or less) each quarter than you previously were.

Instead of making your estimates based on the entire year, consider calculating what you should owe each quarter to make your payments as accurate as possible and avoid overpaying the government. This is especially important for business owners who have fluctuating income and cash flow throughout the year.

Review Employee Retention Credits

The Employee Retention Credit (ERC) was introduced in 2020 to help businesses affected by the COVID-19 pandemic. Since its release, there have been several modifications, and recently, the Infrastructure Investment and Jobs Act (IIJA), signed by President Biden in November 2021, retroactively eliminated some employers' ability to claim an ERC for wages paid after Sept. 30, 2021. Despite all of this, many businesses are still eligible for the credit and have not filed for it. Don't assume your business is not eligible. If you have employees or your business was affected by the pandemic, you could likely qualify for credit.

Whether you are a sole proprietor or have employees on staff, consider talking with a CPA or accountant to see if you are eligible for available tax credits like this one and can take the complex paperwork off your to-do list.

Tax planning this time of year is critical to your business's success to ensure your keeping the maximum amount of profits possible before having to pay taxes. Our team at Cordell, Neher & Company, PLLC, stays updated on ever-changing tax laws and has worked with business owners since 1988 to help reduce tax liabilities.

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