Read this overview of your year-end tax opportunities before you meet with your tax planner to strategize.
First, organize your financial records
Effective tax planning begins with well-organized financial records and good tax planning strategies. As the year comes to an end, take the time to ensure your financial documents are in order and completely up-to-date. This simplifies the tax preparation process and helps you identify potential added deductions and credits.
Start by categorizing and reconciling your receipts, invoices, and other financial documents. Accounting software like
Big E-Z streamlines this process considerably. Ensure all your transactions are accurately recorded, and reconcile your accounts to catch any discrepancies. Big E-Z includes built-in bank account reconciliation, and our system will show you if your records are out of balance or you have missing transactions.
Once you have all your records together, you’re ready to talk to your accountant about your year-end tax planning strategy. The following are some topics and actions you might discuss with them:
Make retirement contributions
Review your current contributions to retirement accounts, such as 401(k)s or IRAs. Maximize your contributions to take advantage of available tax deductions. If you have employees, ensure that any employer contributions are in line with your business strategy. Understand the contribution limits and deadlines for each type of retirement account.
Review employee benefits and payroll
The end of the year is a good time to review and address payroll and employee benefits. Verify that your employee payroll records are accurate and up to date. Ensure compliance with tax withholding requirements and make any necessary adjustments. Review employee benefits, such as health insurance and retirement plans, and communicate any planned changes for the upcoming year.
Contributions to employee retirement plans, health insurance premiums, and year-end bonuses are often deductible. Ensure that these expenses are accurately recorded and comply with applicable tax regulations.
Evaluate your expenses to maximize tax deductions
Tallying up all your expenses for the year not only ensures accurate financial records but also positions your business to take advantage of all the available deductions.
Categorize your expenses into the relevant tax categories. Common categories include: office supplies, utilities, rent, insurance, marketing, and professional fees.
Big E-Z makes it easy to categorize your transactions when you import them each month (or at your own pace). Now, summarize the total expenditures in each category to get a clear view of what deduction categories would be most impactful to you.
Check out our extensive
List of Tax-Deductible Expense Categories for Small Business Industries and click through to see the deduction list for your own industry.
Decide on major purchases
Toward the end of the year, small businesses often face the decision of whether to make major purchases now or defer them to the next calendar year. This decision is not just about business needs but can significantly impact your tax position.
Assess current and future financials
Before you decide on major purchases, evaluate your current financial standing and projected income for the next year. If your business had a profitable year and you anticipate a similar or increased income in the upcoming year, making major purchases before year-end could provide immediate tax benefits by offsetting your taxable income.
On the other hand if the current year has been financially challenging, and you anticipate a more profitable upcoming year, it might make more sense to defer major purchases. That way you can maximize deductions at a time when your business is in a higher tax bracket.
Understand Section 179 and depreciation deductions
Consider the tax implications of the Section 179 deduction and the depreciation deduction.
Section 179 of the tax code allows businesses to deduct the full purchase price of qualifying assets purchased or financed during the tax year. However, the Section 179 deduction has annual limits. If your Section 179 deduction is already maxed out for year, further deductions are taken over the lifetime depreciation of the asset purchased. You can choose not to take the full Section 179 deduction and get a larger depreciation deduction instead.
Consider the Section 179 limit and the depreciation methods that will be used for your asset, so you and your accountant can determine what manner of deduction is available to you.
Analyze market conditions and vendor incentives
Research the current market conditions and vendor incentives. Some industries offer end-of-year discounts or promotions to stimulate sales. Consider these, and ensure that the purchase aligns with your long-term business strategy and needs.
The decision of when to make major purchases involves a careful consideration of your business’ current financial status, future projections, and the potential tax implications. By weighing these factors, you can make informed choices that align with your business goals and optimize your tax position. Remember to consult with your financial advisor / tax professional.
Capitalize on your year-end tax opportunities
By understanding the state of your business and the tax deductions available you, you and your advisor(s) can optimize your tax strategy. It all starts with having organized financial records that tell a complete story. Big E-Z is here to make that part easy, so when December comes around you have everything you need to make those year-end decisions.