It's hard to believe, but the end of the year is quickly approaching. While some are thinking about the holidays and cooler weather, businesses should focus on year-end tax opportunities that are too good to pass up.
As experienced tax advisors, Gordon Law helps businesses maximize their savings all year long. We've compiled a list of year-end tax tips to help you lower your next IRS bill.
1. Strategically Plan Out Your Expenses and Revenue
Businesses pay tax on their net income, calculated by taking gross income minus expenses. As the end of the year rolls around, businesses can strategically consider when to make payments for certain costs to either take the expenses on this year's tax return or delay until next year.
If your business is projecting to make a profit this year, consider prepaying certain expenses to lower this year's net income. On the other hand, delaying some costs until January may be the better option if you are already in a loss position.
Similarly, you may also consider making strategic decisions regarding when you recognize revenue. If your business recognizes revenue when you receive payment, you could delay sending out invoices until the start of next year so the income isn't reported this year.
2. Consider Opportunity Zone Investments
Don't throw money out the window and pay more in tax for your business than you need to. Check with your tax professional to see if there are any tax planning opportunities your business can take advantage of before the year comes to an end.
One tax planning option for businesses with capital gains is to invest in low-income and undercapitalized areas called "opportunity zones." This program incentivizes businesses to invest existing assets with accumulated capital gains into opportunity funds by delaying the capital gains tax on these assets. And yes, you can defer crypto taxes this way, too!
Assets can also receive a step up in cost basis and an exclusion of taxable income on future capital gains. There are many nuances to this incentive, so we suggest consulting with a tax advisor for more details.
3. Prepare for Estimated Tax Payments
Don't get stuck paying tax penalties. Many businesses must make estimated tax payments to avoid penalties, and the end of the year usually signals the time to prepare for fourth-quarter payments.
The type of business you have will determine when the quarterly installment is due. For example, the fourth quarter estimated payment due date for calendar corporations is December 15. Review your business income to calculate your estimated tax payment and prepare funds to pay on time.
Consider state-estimated tax payments, too. Businesses like partnerships and S corporations that elected to pay a pass-through entity tax (PTET) with offering states need to check each state's rules for when estimated PTE tax payments are due.
4. Evaluate Your QSBS Status
This tip is for startups looking to attract new investors with a lucrative tax advantage. Calendar-year corporations need to prepare annual financial statements for tax return purposes. You can kill two birds with one stone, though, by also using these statements to evaluate your qualified small business (QSB) status.
For newly formed C-corporations, the qualified small business stock (QSBS) exclusion is a way to encourage shareholders to invest in startup businesses. This powerful tax hack allows an exclusion of capital gains tax on the sale of the qualified small business stock (QSBS).
Of course, businesses must meet specific requirements to qualify, including:
- Having gross assets of less than $50 million at all times before and immediately after the issuance of their stock
- Actively using at least 80% of the company's assets in a qualified trade or business
While there are more nuances to QSBS requirements, your year-end balance sheet can help you determine if you are on the right track to qualifying and allow you to make any decisions or adjustments before issuing your stock.
5. Make Charitable Donations
The end of the year is always a time for giving. Donating to charity is not only a good thing to do, but it also comes with a tax deduction.
Depending on your business type, the potential tax deduction may apply on your business tax return or flow through to your individual return. You also don't only have to donate cash. Donating property (including crypto or NFTs), stocks and securities, and even art is tax deductible.
Be sure you donate to a qualified charity and properly document the donation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
