Summer is the perfect time for small business owners to assess their current financial standing and consider tax-saving strategies for 2024. The good news is that no significant unfavorable federal tax changes are expected next year. With a straightforward tax planning environment, now is the time to implement strategies that could lower your federal income tax bill. Here’s a look at some actionable steps you can take before the year ends.
1. Timing Business Income and Deductions If your business is a "pass-through" entity, such as a sole proprietorship, S corporation, partnership, or LLC, your share of the income is taxed at your individual rate. A common year-end strategy is to defer taxable income and accelerate deductible expenses if you anticipate being in the same or a lower tax bracket in 2025. This approach can postpone part of your tax obligation. Conversely, if you expect to be in a higher tax bracket next year, consider accelerating income and delaying deductible expenses to take advantage of the lower rates this year.
2. Tapping into Depreciation Tax Breaks Depreciation deductions can significantly reduce your taxable business income. Consider maximizing the first-year Section 179 depreciation deduction, which allows you to write off the entire cost of certain depreciable assets. However, be aware of the limitations, such as the $1.22 million deduction limit for 2024, with a phaseout beginning at $3.05 million in qualifying assets. For assets not eligible for Section 179, first-year bonus depreciation is an alternative, allowing a 60% write-off in 2024.
If tax rates are expected to rise in the future, you might benefit from declining first-year deductions and opting for regular depreciation schedules, which could be more valuable in the long run.
3. Establishing a Tax-Favored Retirement Plan If you haven’t already set up a retirement plan for your business, now is a great time. Options like SEP-IRAs, SIMPLE-IRAs, and solo 401(k) plans offer significant tax deductions. For example, a SEP-IRA allows a self-employed individual to contribute up to 20% of their net income, with a maximum contribution of $69,000 in 2024. The SECURE Act has extended the deadlines for setting up and funding many retirement plans, providing flexibility in your tax planning.
4. Maximizing the QBI Deduction The Qualified Business Income (QBI) deduction allows pass-through entity owners to deduct up to 20% of their QBI. However, this deduction is subject to income restrictions. Strategies like claiming large depreciation deductions or making significant retirement plan contributions could reduce your allowable QBI deduction. It's essential to work with your tax advisor to balance these moves and optimize your overall tax outcome.
Ready to Plan? Assuming current federal tax rules remain in effect through 2025, you can confidently implement these strategies. As always, your tax advisor is a critical partner in tailoring these moves to your specific situation.
Take action now to lower your 2024 tax bill. Contact Verity CPAs at info@verity.cpa or 808.546.5026 to start planning today.
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