3 Smart Year-End Tax Planning Moves for Business Owners
As the saying goes, “Make hay while the sun shines,” and 2024 promises to be about as sunny as it gets from a tax perspective.
As the sun begins to set on 2024, let’s look at just a few of the many opportunities for business owners to do some year-end tax planning that could potentially yield significant tax savings. Many taxpayer-friendly provisions of the Tax Cuts and Jobs Act (TCJA) are still in effect through the end of next year, but it’s uncertain whether a new Congress will choose to extend those provisions. Please note that the following figures are based on the 2024 tax code and are subject to change. Thresholds and eligibility criteria may vary based on individual circumstances and future legislative actions.
1. Maximize the Qualified Business Income (QBI) Deduction
What is it? Qualified business income (QBI) is the net income or loss from a trade or business. Internal Revenue Code Section 199A allows many business owners to deduct a portion of taxable business income, subject to some limitations.
Who is eligible? Owners of sole proprietorships, partnerships, S corporations, and some trusts and estates. (Income from C corporations and W-2s is excluded). Owners of interests in rental real estate are eligible for the deduction, thanks to a safe harbor. The icing on the cake is that taxpayers can take the deduction regardless of whether they itemize or take the standard deduction.
How much can you deduct? The QBI deduction phases out at certain income levels. For single taxpayers, that phaseout range is between $191,951 and $241,950. For married taxpayers, the range is between $383,901 and $483,900. The rules for how much you can deduct vary depending on where you fall in that income range. However, for most small and mid-sized business owners, the deduction is 20% of QBI.
When can it be used? Section 199A (among many other TCJA provisions) expires on December 31, 2025. So, unless this provision is extended, it will be off the table for the 2026 tax year and beyond.
Action items: Talk to your tax advisor about any changes to your business model (e.g., a medical office that started selling a tangible product) that might affect your eligibility for this deduction. Taxpayers with income higher than the lower income threshold should discuss whether increasing owner compensation will create a net positive tax effect.
2. Accelerating Depreciation Deductions: Should You Buy That New Truck Now or Later?
What is it? Section 179 allows business taxpayers to write off all or part of the cost of eligible assets in the year they are placed in service, up to certain dollar limits. Bonus depreciation, more technically known as “additional first-year depreciation deduction,” was introduced to encourage even greater investment in capital assets.
Who is eligible? In 2024, businesses that have taxable income and spend less than $4.27 million per year for equipment can claim Section 179 deductions. Bonus depreciation is available to all businesses that purchase eligible property.
How much can you deduct? TCJA made both depreciation benefits more valuable. TCJA doubled the Section 179 deduction limit and increased the phaseout threshold. The 2024 inflation-adjusted deduction limit is $1.22 million, with a phaseout at $3.05 million in qualifying purchases. The 2017 Tax Act also increased bonus depreciation to 100% of the price of qualifying property through 2022. Unfortunately, this was a temporary boost, as the percentage started ramping down by 20 percentage points each year, beginning with 80% in 2023. For 2024, the bonus depreciation deduction is 60%. On the bright side, the bonus depreciation has no annual limit. It can be claimed even if the depreciation deduction is greater than the company’s taxable income. However, if you sell the property upon which bonus depreciation is claimed, the deduction amount will be taxed as regular income.
When can it be used? While the increased Section 179 limits are permanent, bonus depreciation becomes less valuable each year until it disappears in 2027— absent Congressional action—so use it while it lasts.
Action items: In high-income years, it can be smart to maximize depreciation deductions by accelerating purchases of eligible property. On the other hand, if the business has already purchased more equipment than it can deduct, consider waiting on that new (or new-to-you) truck. Keep in mind that heavy equipment and vehicles aren’t the only types of property that qualify. For example, off-the-shelf computer software also qualifies for the Section 179 deduction. The key is to engage in year-end tax planning, so you have time to make thoughtful purchases instead of buying equipment solely for the tax benefit.
3. Should You Claim the Passthrough Entity (PTE) Deduction for State and Local Taxes?
What is it? The $10,000 limit on federal income tax deductions for state and local tax (SALT) payments was among the more controversial TCJA provisions. Then, the IRS made a surprisingly taxpayer-friendly decision to allow passthrough entities (PTEs) to deduct certain SALT payments. Since then, many states have taken advantage of this opportunity by enacting laws allowing PTEs to pay SALT at the entity level, essentially converting a personal tax deduction to a business tax deduction.
Who is eligible? See the AICPA’s map showing which states have enacted or proposed a PTE tax.
When can it be used? Most states require PTE tax payments by the end of the tax year.
Action items: Keep in mind that PTE tax is calculated at the entity level, which is typically just one silo affecting an individual’s overall tax position. Engage your tax advisor to prepare a tax projection before the end of the year so you can see whether or not paying the PTE tax will likely reduce your overall tax liability.
Plan Now to Save Taxes Later
These three year-end tax planning considerations are just a few opportunities to optimize your business tax strategy. Before making strategic decisions such as buying equipment, adjusting compensation, or prepaying state taxes, be sure you have the complete picture. Sit down with your tax advisor now to review your unique situation. Working together, you can make a plan to reduce your overall business and personal tax liability and set aside the cash you’ll need to make those tax payments when they are due.