What does the IRS consider tax deductions for small businesses?
Before you can focus on maximizing tax deductions for your small business, you need a clear understanding of what the IRS deems as deductible business expenses. The IRS looks at expenses in the categories of ordinary and necessary. These costs keep your business running and growing while offering you potential savings on your tax bill.
What are ordinary and necessary expenses?
An ordinary expense is an expense that is common and accepted in your trade or business. Office supplies for a business would be considered an ordinary expense because it is a regular part of business operations.
On the other hand, a necessary expense is an expense that is helpful and appropriate for your business. While the expense does not have to be indispensable, it must contribute to the operation and growth of the business. Advertising expenses to promote your business would be considered a necessary expense.
Year-End Strategies To Help You Maximize Your Small Business’s Deductions
Maximizing deductions for your small business is essential because it directly reduces your taxable income, ultimately lowering the total amount of taxes owed. Every dollar you save in taxes can be reinvested into the business for growth, employee benefits, or future projects. Additionally, when you take advantage of available deductions, you help ensure that you aren’t paying more than what’s necessary to the IRS – allowing for better cash flow management. Maximizing deductions for your business provides financial flexibility and supports long-term sustainability.
Here are some strategies to help you get ahead and make the most of your tax-saving opportunities before the year ends.
1. Defer Income and Accelerate Expenses
One of the most common and effective ways to minimize taxes is by adjusting the timing of income and expenses. If you can, consider deferring income to the next tax year while accelerating expenses into the current year. Making this simple shift can lower your taxable income for the current year and provide immediate tax savings.
2. Take Advantage of Section 179 Expensing
The IRS allows small business owners to deduct the cost of certain equipment and software in the year it’s purchased, rather than depreciating the asset over time. Currently, the Section 179 deduction lets you immediately expense up to $1,160,000 of qualifying assets in 2024. If you’re planning to purchase new equipment for your business, now is a great time to take advantage of this significant tax-saving opportunity.
3. Make Retirement Contributions
Maximizing contributions to retirement plans is a powerful way to reduce your taxable income while securing your financial future. Not only do retirement contributions provide a valuable tax deduction, but they also allow your savings to grow tax-deferred until retirement.
4. Review and Write Off Bad Debts
If your business is owed money that you don’t expect to collect, review your accounts receivable and write off any of those bad debts. Writing off these uncollectible debts can lower your taxable income for the year, providing a deduction for money you expected but unfortunately, will never receive.
Document your efforts to collect the debt since this can be important for claiming the deduction.
5. Maximize the Qualified Business Income Deduction (QBI)
The Qualified Business Income (QBI) deduction lets eligible small business owners deduct up to 20% of their business income. To get the most out of this deduction, check your taxable income and consider ways to lower it – like contributing to retirement plans or making certain purchases before the year ends. If your income is too high, you might lose part or all of the deduction, so careful planning is important.
6. Take Advantage of Last-Minute Charitable Contributions
Charitable donations have a dual purpose – they’re a great way to give back while you also benefit from a tax deduction. Contributions made to qualified charities can lower your taxable income, but it should be noted that donations should be made before the end of the year to qualify for this year’s deduction.
Both cash donations and donations of goods are eligible for deductions, so consider cleaning out your inventory or office equipment that’s no longer in use.
7. Evaluate Your Inventory
If you’re a business that holds inventory, now is a good time to review and assess its value. If you have outdated, unsellable, or obsolete inventory, you may be able to take a deduction for the loss in value – reducing your taxable income and ensuring your books accurately reflect your business’s current assets.
8. Hire Before Year-End to Take Advantage of the Work Opportunity Tax Credit
If you’ve been considering expanding your team, hiring before the end of the year could provide you with additional tax savings. The Work Opportunity Tax Credit (WOTC) offers businesses a federal tax credit for hiring individuals from targeted groups, such as veterans or long-term unemployed individuals. By bringing on new employees now, you may be able to lower your tax liability and start the new year with a stronger workforce.
9. Consider Bonus Depreciation
Bonus depreciation allows businesses to immediately deduct a large percentage of the cost of qualifying assets. For 2024, bonus depreciation allows you to deduct 60% of the cost of certain property placed in service this year. This applies to new or used assets, making it a valuable tool for lowering your tax burden if you’re planning to make large purchases.
10. Consult a Tax Professional
The best, most reliable way to ensure you’re maximizing your deductions is by working with a tax professional, like us, who can help you navigate the complexities of the tax code. Plus, a tax advisor can identify strategies specific to your business, ensuring you take full advantage of available deductions and credits.
Why is it important for me to take steps now to maximize my small business’s deductions before the year ends?
It requires extensive planning and a proactive approach to maximize your business’s deductions before year-end. Taking these steps now, you can significantly reduce your tax burden and put your business in a strong financial position for the coming year. Remember, every dollar saved on taxes is a dollar that you can reinvest into growing your business. Why wait until tax season when you can begin implementing these smart tax moves today?
Looking for guidance on how to maximize your deductions or interested in a tax strategy tailored to your business? Contact us today!
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