A few ideas you can implement right now to reduce your tax burden for 2025.

Whether you consider yourself a planner or a procrastinator, anyone can benefit from implementing year-end tax deductions. Depending on how your business is run, you may have the opportunity to take advantage of a number of different strategies to lower your overall tax liability. Here is a short list of deductions you can put in place before January.

1.       Strategic timing of income and expenses

As discussed in our cash vs. accrual article, you may be able to manipulate your income and expenses to change your profit for 2024 or 2025. For example, if you expect to have higher profit in 2024 than 2025, then invoicing clients at the end of December could help push that income into the next tax year. Conversely, you could take advantage of additional expenses before year-end to put your financials in a more favorable position. This strategy is effective for businesses that expect to stay in the same tax bracket and file taxes on cash-basis.

2.       Depreciation

This tax deduction is an allowance for the cost of property purchased for your business. Depreciation is basically the reduction in value of an asset over a specified period of time. It includes the Section 179 deduction for purchases up to $500,000. If you made a purchase in 2024, you may be able to accelerate depreciation for the first year. There are some caveats and exceptions to this rule, so it is best to speak to your tax professional to find out if you qualify.

3.       Write-offs

Reduce your profits and tax liability by finding write-offs before year-end. You can write-off bad debts and obsolete or worthless equipment. Make a list, check it twice, and send it to your tax professional for review.

4.       Sell at a loss

Selling investments such as stocks, bonds, and mutual funds is a common year-end tax strategy called “tax loss harvesting”. Taxpayers with net capital gain during the year can sell to generate a loss before year end. If there is an overall loss up to $3,000, it can be deducted against ordinary income. Any loss amount over this threshold can be carried forward. There are some possible downsides and risks to this strategy. For example, if you sell for a loss but turn around and reacquire an identical investment within 30 days before or after the sale, the wash sale rule applies and the deduction is disallowed. The best move to make is to contact your investment advisor and tax professional to see if selling your investments is in the best interest of your business.

5.       Advertising

Ordinary advertising costs incurred throughout the year are fully deductible. If you’re looking to drive business and reduce your tax burden, now is the time to consider making that investment.

6.       Setup and contribute to retirement plans

The dollar amounts set aside for a 401(k) for yourself and your employees are deductible as a business expense (with limitations). Don’t forget that with IRA’s, you have until April 15, 2025, to make contributions. Contribute the maximum and minimize distributions to reduce your taxable income.

7.       Employee bonuses

A profitable business is possible with hard-working employees. Dispersing a holiday bonus or gift is a great way to boost employee morale and retention while simultaneously reducing your tax burden.

8.       New purchases

Have you been considering purchasing new office equipment, vehicles, or even renovations on your business property? All of these expenses could potentially lower your tax burden if made before January. Consider going green to increase the federal and state tax deductions through promotional energy efficiency tax programs.

9.       Charitable contributions

Giving to charity is a good way to get a deduction. If you itemize your income tax, donating to charity is a great way to lower taxable income. Give to a qualified charity by December 31st and keep all necessary documentation. Consider donating appreciated stock or property rather than cash. Assets owned for more than one year may get a double tax benefit for donation.

10.   Review and plan for 2025

Perhaps the most important item on this list, planning your finances for 2025 with a financial advisor is critically important. Set financial goals, reassess your retirement needs, and make adjustments as necessary. Tax planning can be intimidating for small business owners. With careful planning and implementation of tax-efficient investment strategies, next year could be your best year yet.

With uncertainty about what tax changes may be coming, it is important to have a knowledgeable team on your side. Discuss your situation with your financial and tax advisors to make sure you have done everything required to qualify for specific deductions and implement a plan for 2025 and beyond.

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