As we approach the end of the year, it’s time to start thinking about business planning for the upcoming fiscal year. This guide will provide you with some crucial strategies to consider in order to maximize your business’s financial standing.
Towards the end of the fiscal year, deferring income and accelerating deductions is a standard approach that continues to produce the best results for most small businesses. Proper planning and execution can significantly minimize your tax obligations.
Section 179 Depreciation
The section 179 depreciation is a tax code that allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. For 2023, the expensing limit is $1,160,000 of qualifying property, provided purchases are less than $2,890,000. There is no proration for assets in service; purchases placed in service by the last day of your fiscal year qualify for full expensing. This applies to most depreciable property, off-the-shelf software, interior improvements, roofs, HVAC, and more.
Bonus First Year Depreciation
Businesses can also claim a bonus depreciation of 80% of the total purchase price for used or new machinery and equipment purchased and placed in service in the current year. This is a significant write-off opportunity, and there is no proration based on time in service. Even if the machinery or equipment is only in use for a few days in 2023, it still qualifies for the write-off.
Pass-Through Entity Tax Election
Companies should consider implementing a particular tax strategy for the 2024 tax year that allows the deduction of state income tax on business income without limit. This bypasses the federal cap of $10,000 for state and local taxes and is available in 36 states and one locality as of 2023.
Establishing a Tax-Favored Retirement Plan
If your business does not already have a retirement plan, it’s a good idea to consider setting one up. A Simplified Employee Pension (SEP) plan allows contributions of up to 20% of net self-employment income, with a maximum of $66,000 for 2023. If you are employed by a corporation, up to 25% of your salary can be contributed to a SEP plan, up to the same limit. Other options include a 401(k), defined benefit pension, and SIMPLE-IRA. Establishing a tax-favored retirement plan is a win-win, as it not only provides for your future but also offers valuable tax deductions.
Year-end planning is a critical process for every business. By taking advantage of the strategies outlined above, you can position your business for financial success in the upcoming year. Remember, each business’s situation is unique, so it’s advisable to contact a tax advisor for specific advice tailored to your circumstances. Here’s to a prosperous new year!