How Can I Reduce My Taxable Income Before Year-End?

Tax Director Charles Jenkins Jr, CPA talks through three main strategies for reducing taxable income before year-end. Don't feel like watching? Read below.

As a small business owner you want to know how to lower your year-end tax bill, and we can’t blame you!  Here we discuss three different strategies to help lower your year-end tax bill and improve the overall health of your business.  

Each of these three strategies have unique vantage points. From maintaining financial data, to real-time considerations, to a future-focused, proactive approach, there are plenty of options for you as a business owners to reduce your tax liability. Let’s dive in. 

Do You Have Accurate and Up-To-Date Financial Information? 

Most small business owners are cognizant of the cash coming into their business. On the flip side, keeping track of expenses can be harder to keep up with, especially if there isn’t a dedicated bookkeeper on the team. Maintaining up-to-date financial information can easily fall by the wayside, since business owners are usually more focused on activities that generate revenue for the business.  

Here at DBA we provide fractional bookkeeping, controller, and CFO services. We are passionate about our clients having accurate and optimized financial information. Not only does this allow business owners to make good business decisions for continued growth, but we can also correctly categorize expenses to lower taxable income.  

Timing Deductions 

The next thing we want to consider is the timing of deductions.  A great way to use timing to your advantage is planning your equipment purchases and taking accelerated depreciation. Depreciation is a complicated issue  right now – tax law changes are being implemented, and they will continue to change over the next few years.  

Most small business owners have heard of Section 179 as well as bonus depreciation, which allows you to accelerate depreciation related to equipment, vehicles, and in many cases improvements to your building or office space. Let’s take a quick look at the changes for each:  

• Bonus depreciation currently allows taxpayers to deduct 80% of the cost of applicable purchases. That amount is going to be reduced to 60% in 2024 and will continue to be reduced 20% per year after that. 

• Section 179 currently allows taxpayers to deduct 100% of applicable purchases. However, there are more nuances to consider with Section 179. 

If your business has equipment purchases that need to be made now, or in the near future, you can time the purchase to utilize these accelerated depreciation deductions in the current year. We don’t recommend buying equipment solely to lower your tax bill – in that instance you’re going to be spending $1.00 to generate up to $0.37 of tax savings; however, the health of your business and your personal wealth are going to be reduced by $0.63 for equipment your business might not even need. We always recommend timing deductions to your advantage, but only when the purchase is necessary and beneficial for the business. 

Retirement Planning 

Thanks to Steven Covey, we know it is wise to begin with the end in mind. A great future-focused strategy is retirement planning. There is some low-hanging fruit you can consider: 

• SEP IRAs – you can set these up anytime before the filing deadlines, and apply the deduction back to the previous year.  
• 401Ks and cash balance plans – there are additional deductions available but be aware that this strategy comes with increased complexity as well as additional cost to the business owner. 

When it comes to retirement planning at the business level, it is very attractive to both you as the owner and your employees; however, you also have to consider the associated costs. We recommend that you speak with a tax professional as well as a wealth planner, so you are fully educated on the impact of the retirement package you offer. You want to bring benefit to your employees and yourself, but you need to make sure you aren’t harming the health of the overall business. 

We’ve covered three different options to reduce your year-end tax bill: accurate books and records, utilizing and timing deductions properly, and retirement planning. Each of these come with different considerations and applications – here at DBA, we can help you with each of these strategies, and we are happy to answer any questions you may have.  

Looking for additional ways to save on taxes? Check out these informative posts from other DBA experts: 

• Lezlie Reeves, CPA addresses another popular question: Are My Travel Expenses Tax-Deductible?  
• Marcus Dillon, President and owner of DBA (Dillon Business Advisors) walks through tax savings you may be missing, which will support your efforts to maximize savings and reduce your tax liability.