Here’s a novel thought: let Uncle Sam pay for your holiday gifts and entertaining.
No, I’m not talking about anything illegal. You can’t buy personal gifts and bill them to your business. That’s called fraud. And that’s not how you want to end the 2024 tax year.
But if your business uses the cash method of accounting (as many sole proprietors do), you may be able to legally cut your tax bill by hundreds or thousands of dollars by making a few strategic decisions for your business between now and the end of the year. If you’re a sole proprietor, those tax savings may more than cover your holiday spending, practically speaking.
In this guide, we’ll talk about some ways you can make the most of your year-end tax planning for federal taxes (we don’t really cover state or local income taxes here). But before you pursue any of these tax planning strategies, keep in mind that you should chat with a tax professional to get personalized guidance.
Are you having an unusually good year this year? That windfall profit may look good in your accounting software right now. But come tax time, Uncle Sam (and his state and local cousins) could take away a big chunk of it — especially if the windfall profit bumps you up into a higher income tax bracket.
One way to minimize that tax bite this year is to defer income into 2025. You can do that for at least some of your income by waiting to send out invoices until the first week in January. That helps ensure you won’t get checks or ACH payments until next year. You can also delay calling or sending reminders to late payers until the beginning of the new year.
You’ll still have to pay taxes on the profits next year, but you reduce your taxes for this year. For both low and high-income earners, that could make a difference.
One caveat: Holding onto checks you receive this year and waiting until 2025 to deposit them doesn’t work. For cash-basis businesses, the IRS considers the year you constructively received a check to be the year the income is earned, not the year you deposit it in the bank. “Constructively receiving income” means you have control over what happens to it.
How does the IRS know when you received checks? Those 1099 statements your clients send you are also sent to the IRS.
If a client dates a check December 31 and includes it in your 2024 1099, but you don’t receive the check until January of 2025, the income should be reportable for 2025. But you might have to include a note when you file your tax return to explain the discrepancy in your 2025 income. Ask your tax advisor for guidance.
Some purchases you make for your business are considered capital expenditures. These expenditures are things like tangible items that you use and don’t get used up, such as a computer, desk, or another type of machine you need for work. The traditional way to deduct the cost of such items is to depreciate them over a number of years. In other words, you deduct part of the cost each year over the useful life of the item.
However, under Section 179 of the tax law, you can choose to deduct the entire cost of such business purchases in one year instead of depreciating them over time. This is called “expensing” the cost. Thus, Section 179 is often referred to as the expense deduction.
So, if you’ve had a profitable year and you’ve been thinking about buying some equipment, this could be the time to do it. Making the purchase and putting it to use before the end of the year could save you a lot on your taxes. Here’s how:
Say you’re operating as a sole proprietor for tax purposes and you’re showing a profit for this year of $107,000, which will pass through to your personal income tax return. Assuming your federal income taxes plus self-employment taxes come to 23% of your income, you’ll pay around $24,610 in taxes.
There’s some equipment you want to buy for the business that costs $24,000.
If you buy and expense (deduct) that $24,000 equipment on this year’s tax return, the profit that passes through to your personal tax return will drop to $83,000 ($107,000-$24,000). Assuming you are still taxed at the 23% rate, you’ll pay $19,920 in taxes instead of $24,610 — a savings of $4,690.
The expense deduction can be used for any type of tangible property.
Depending on the nature of your business, you could take a 179 deduction for things such as computers, phones, a 3-D printer, lab equipment, machinery, mechanics tools, office furniture, or even a new SUV if its primary use is for the business.
If you’re planning to make a substantial purchase to take advantage of the 179 deduction, talk to your financial advisor first. They’ll help you decide whether you’d be better off deducting the expense in one year or depreciating it over time.
If you’re operating as a sole proprietor for tax purposes and you have a business loss for the year, you might still benefit from Section 179. If you have other personal income (W-2 earnings, for instance), the loss from the business would pass through to your personal return and give you personal income tax benefits by reducing the taxes due on your personal earnings.
If you don’t have other personal income to offset a loss, the loss would carry over to a future year when you do have a profit.
If you’re operating as a corporation or S corporation for tax purposes, you can’t deduct a business loss against personal income. If you take the 179 expense deduction, the loss would carry forward to future years when you do have a profit.
For the year 2024, the maximum Section 179 expense deduction is $1,220,000. That amount gets reduced if your business puts more than $3,050,000 in Section 179 property into use in the year. Additionally, the maximum Section 179 expense deduction for sport utility vehicles placed in service in your business in the 2024 tax year is $30,500.
Generally speaking, all the ordinary and necessary expenses of running your business are tax deductible. So, if you’re having a banner year, consider speeding up the purchase of some items that qualify as ordinary expenses. The increased deductions may affect your adjusted gross income for the year, reducing your tax liability and helping you get some equipment that you’ll need anyway.
However, it’s important to consider the implications of paying taxes on these ordinary expenses, as it can affect your overall tax liability. There are plenty of options. For instance:
Make your kids earn the money they spend on gifts instead of just giving it to them. You benefit by converting a personal expense (the gifts they buy) into a deductible business expense (your child’s salary). As an added plus, you’ll help teach your kids the value of a dollar. Your kids will benefit by making money and learning real work skills that can help them get jobs elsewhere later on.
If your child is under the age of 18, the salary you pay them isn’t subject to Social Security and Medicare taxes if your business is a sole proprietorship or a partnership jointly owned by the two parents. The salary isn’t subject to FUTA (Federal Unemployment Tax Act) if the children are under 21. But in either case, the income is still subject to income tax withholding. Learn more about hiring family on the IRS website.
This presumes your retired relatives want to work, and the amount that you pay them won’t negatively affect their Social Security payments. They benefit from the extra income they earn, which, depending on their income, may be taxed at a lower rate than yours. They can also benefit from the satisfaction they feel by contributing their skills and knowledge to your success. You get a tax deduction for the money you pay your parents — money you might otherwise just give to them if they are in financial need.
A person can earn an unlimited amount of money from a job and still collect the full Social Security benefit once they have reached full retirement age. But if they earn money from a job and haven’t reached full retirement age, there’s a cap on how much they can earn from the paid job without losing some of their Social Security income.
There are two different earnings limits. One is for the years preceding the year you reach your full retirement age. There’s a different limit for the year you reach full retirement age.
For 2024, the limit is $22,320 for those who won’t reach full retirement age in 2024. Once you reach that earnings limit, the IRS deducts $1 in Social Security benefits for every $2 earned.
The earning limit changes in the year you reach full retirement age. Thus, for individuals who reached full retirement age during 2024 (July 1, 2024, for instance), the earnings limit is $59,520. The IRS deducts $1 in benefits for every $3 earned above $59,520. But it only counts the earnings before the month you reach full retirement age. From that point on, there’s no reduction in earnings, no matter how much you make.
Confusing? A bit. That’s why it’s recommended to chat with your tax advisor for full guidance.
Unlike other entertainment expenses, holiday parties or company picnics are fully deductible expenses. That’s because they work as an incentive to boost morale and company team spirit. About the only hitch is that you have to invite all employees, and these parties do have to be special events, not a routine occurrence.
If you haven’t already done so, be sure to set up a qualified retirement plan if you’re self-employed and fund it. Depending on the type of plan you set up, you may be able to put anywhere from $6,000 to over $300,000 dollars in a tax-deferred account. Rules and requirements are complicated for anything other than a traditional IRA. So, if you have the earnings to put away a lot, consult with your accountant to determine the right retirement savings plan for you.
It’s important to understand required minimum distributions (RMDs), which are mandatory withdrawals from retirement accounts that individuals must start making once they reach a specified age, currently set at 72. These distributions have significant tax implications, and failing to adhere to deadlines can result in penalties.
One strategy to meet RMDs while gaining tax benefits is through a qualified charitable distribution (QCD). QCDs allow individuals over the age of 70 1⁄2 to make distributions directly to charitable organizations without including the amount in their taxable income.
Compare your retirement plan options
Charitable contributions and gifts can provide tax benefits and help you support your favorite causes. To optimize your charitable donations, consider the following:
By understanding your tax situation and optimizing your charitable contributions, you can minimize your tax liability and maximize your tax benefits. These tricks can be pretty complicated, so it’s best to consult with a tax advisor to help ensure you’re taking advantage of all the tax benefits available to you.
At any time of the year, understanding your tax situation is crucial to making informed decisions about your finances. Whether you’re just filing your annual taxes or you’re weighing potential deductions to get yourself out of a higher tax bracket, knowing the basics can help.
Your taxable income is the amount of money you earn from various sources, such as your job, investments, and self-employment, minus any deductions and exemptions you’re eligible for. To determine your taxable income, you’ll need to gather information about your ordinary income and other profits from all sources, including:
By accurately calculating your taxable income, you can better understand your income tax liability and plan accordingly.
Your tax filing status determines which tax rates and deductions you’re eligible for. The most common tax filing statuses are:
Choosing the correct filing status can significantly impact your taxable income and the amount of income tax you owe. Make sure to select the status that best fits your situation to maximize your tax benefits.
To prepare your tax return, you’ll need to gather various documents, including:
Having all your documents organized and ready will make the tax filing process smoother and help ensure you don’t miss out on any deductions or credits.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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