The end of the year often feels like a whirlwind for business owners. Between wrapping up projects, closing deals, and planning for the year ahead, taxes may not always take center stage.
Yet, some of the most effective strategies to reduce your tax burden and improve cash flow must be implemented before the clock strikes midnight on December 31. Waiting until tax season can mean leaving money on the table.
In this guide, I’ll explore five actionable strategies that can help you take control of your taxes before the year ends.
These steps aren’t just about saving money… they’re about empowering you to reinvest in your business and secure a stronger financial future.
Working with Your Tax Strategist: A Vital Step to Minimize Your Tax Burden
Before diving into year-end strategies, one essential step every prepared business owner should take is conducting a preliminary tax burden calculation.
Collaborating with your tax strategist on this evaluation allows you to gauge your total taxable income and identify potential liabilities before they become a surprise in April. This step involves reviewing your revenue, expenses, deductions, and any outstanding liabilities to provide a clear picture of your tax position.
Armed with this information, you can make informed decisions about deferring income, prepaying expenses, or utilizing deductions to reduce your burden. A tax strategist not only brings expertise to ensure all potential savings are uncovered but also ensures compliance with current laws, allowing you to pay as little as humanly possible without stepping outside the bounds of the law.
Taking the time for this proactive step can be the difference between scrambling during tax season and approaching it confidently.
Deferring Income and Prepaying Expenses: Timing Is Everything
In the world of taxes, timing can be everything. If your business is cash-based, deferring income until the following year can lower your current year’s taxable income.
For example, if you’ve invoiced a client but won’t receive payment until January, you can defer recognizing that income until the next tax year, effectively reducing your taxable income for the current year. Some savvy business owners even offer long-term clients special packages… providing a slight discount in exchange for agreeing to pay early next year while delivering the services incrementally over the coming months.
Conversely, prepaying expenses is another strategic move. Let’s say you’re planning a marketing campaign for the first quarter of next year. By paying for it now, you can deduct the expense in the current tax year, lowering your taxable income. Other eligible expenses, such as rent, utilities, or payments to key suppliers, can also be prepaid, giving you a dual benefit: reducing your tax burden while setting up your business for success in the coming year.
Example: Imagine your business is set to earn $200,000 in December but expects even higher profits next year. By deferring $50,000 of that income until January, you can delay paying taxes on it until the following year, potentially keeping yourself in a lower tax bracket this year. Additionally, if you prepay $10,000 in expenses, such as rent or upcoming marketing campaigns, you can further reduce your taxable income by a total of $60,000. This proactive approach not only minimizes your tax liability but also helps you strategically manage cash flow across tax years.
Open and Fund a Health Savings Account (HSA): A Triple Tax Advantage
If you haven’t opened an HSA yet, now is the time. HSAs are one of the most tax-efficient tools available to business owners. They offer three key tax benefits: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free.
For 2024, individuals can contribute up to $4,150, and families can contribute up to $8,300. If you’re 55 or older, you can add an extra $1,000 as a catch-up contribution.
Example: Let’s say you’re a self-employed individual with a high-deductible health plan. By contributing the maximum to an HSA, you could lower your taxable income by $8,300. That’s money saved while simultaneously building a nest egg for future healthcare expenses.
Make Charitable Contributions: Do Good While Saving
Charitable giving is another powerful strategy, combining the joy of giving back with meaningful tax savings. Donations to qualified 501(c)(3) organizations can be deducted if you itemize your deductions. Whether it’s cash, appreciated stocks, or even tangible goods, your generosity can translate into real savings.
Example: Donating $10,000 in appreciated stock to a charity means you can avoid paying capital gains tax on the stock’s appreciation while also deducting the full market value of the donation. If the stock’s value grew by $5,000 since purchase, you’ve not only helped a good cause but also sidestepped a tax bill on the capital gains.
Sell Crypto or Stocks to Offset Capital Gains: Tax-Loss Harvesting Made Simple
Tax-loss harvesting isn’t just for stock market investors; it’s equally valuable for cryptocurrency enthusiasts. By selling assets at a loss, you can offset gains from other investments, reducing your overall taxable income. Even if you don’t have gains to offset, up to $3,000 of net capital gain losses can be deducted against other income types.
You can even repurchase the same asset after selling it to maintain your investment position, as cryptocurrency isn’t subject to the same “wash sale” rules as stocks (at least under current tax law).
Example: Imagine you sold a stock earlier this year for a $10,000 gain. Selling underperforming crypto assets at a $5,000 loss offsets half of that gain, saving you significant tax dollars. Plus, if you have no other gains, a $3,000 loss can directly reduce your taxable income.
Buy Equipment and Put It Into Service: Leverage Depreciation
Section 179 of the tax code allows businesses to deduct the full cost of certain equipment in the year it’s purchased and put into service. This means you don’t have to spread the deduction over several years. Acting now can provide a substantial write-off if your business needs new computers, machinery, or vehicles.
This strategy should only be applied if the business truly needs the equipment in the near future and if the purchase will provide lasting benefits to the organization. Too often, entrepreneurs make the mistake of spending money on items that don’t align with their business objectives. A prime example is purchasing a new car – one of the most overhyped and rapidly depreciating assets in the world. Unfortunately, I’ve seen too many clients regret these year-end purchases, realizing too late that the expense didn’t contribute meaningfully to their business’s growth or success.
However, if your business truly needs the item and it aligns with your operational goals, that’s a smart move. But please be cautious about being swayed by promotions or “miraculous deals,” as these are often designed to solve the dealership’s year-end revenue goals, not yours. You have already seen how we try to use the same tactic on our own clients. Be intentional and ensure every dollar spent serves your business purposefully.
Example: Suppose you purchase $50,000 worth of equipment in December. By placing it into service before year-end, you can deduct the entire amount under Section 179, reducing your taxable income significantly.
Pulling It All Together: Act Now to Maximize Savings
The key to effective tax planning is proactivity. Each of these strategies – whether it’s deferring income, funding an HSA, making a charitable contribution, harvesting tax losses, or buying equipment – requires action before the end of the year. While some of these strategies may seem complex, their benefits are straightforward: more money in your pocket and less in Uncle Sam’s.
Navigating these decisions doesn’t have to be overwhelming. By partnering with an experienced tax strategist, you can create a tailored plan that fits your business’s unique needs. Feel free to schedule a free consultation now.
Welcome to the New Age of Accounting. Let’s being.
