Six Tax Planning Strategies & To-Dos For Business Owners
Not only is the end of the year reserved for holidays and quality time with family and friends, but it’s also the time for year-end tax planning. Although there have been few changes in tax law for the 2024 tax year, there are still numerous strategies that can be implemented to help reduce tax liabilities as we approach the end of the year.
Accelerated Depreciation
The Tax Cuts and Jobs Act passed in 2017 allowed for favorable depreciation provisions, including 100% expensing of most personal property for 2018 – 2022 via bonus depreciation. Starting in tax year 2023, the bonus depreciation rate was phased down to 80% and will continue a 20% phase down each year until reaching 0% in 2026. This yields a bonus depreciation rate of 60% in 2024 and 40% in 2025. Taxpayers should also consider alternative depreciation options, such as Section 179 to achieve immediate deductions of fixed asset purchases.
Cost Segregation Studies
By default, non-residential real property is depreciated over a 39-year period, significantly slowing depreciation deductions. However, cost segregation studies can be performed to obtain accelerated depreciation (i.e. bonus or Section 179) for certain building components. A cost segregation study can also be performed on leasehold improvement projects to have better utilization accelerated depreciation options.
Evaluate Sunsetting Tax Provisions
Many favorable tax provisions, such as the Qualified Business Income (“QBI”) deduction and decreased individual income tax rates, are scheduled to expire on Dec. 31, 2025. With the results of the 2024 election, it remains unclear if current provisions will extend past Dec. 31, 2025, and if so, what provisions will remain unchanged. Although there is uncertainty, owners should begin considering these law changes when evaluating capital expenditures, exit transactions, or any other tax strategy that has an opportunity to defer the recognition of expense or accelerate the recognition of income. Being proactive in managing known changes in tax law can manage significant benefits in the long term.
Beneficial Ownership Reporting
The Corporate Transparency Act (signed into law on Jan. 1, 2021) expanded anti-money laundering laws and created new reporting requirements for certain companies doing business in the U.S. Beginning in 2025, many small businesses will be required to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) to create a national database for use by national security and law enforcement agencies to prevent the use of shell companies for criminal activity. The reporting has been challenged in numerous court cases, most recently in the U.S. District Court for the Eastern District of Texas, which placed a temporary injunction on the reporting. You can learn more about the injunction and reporting requirements here.
Employment Credits
The Work Opportunity Tax Credit (“WOTC”) and Empowerment Zone Credits (“EZ”) are wages-based credits for employees who meet certain criteria (i.e., residence, food stamp recipients, veterans, and ex-felons, to name a few). The amount is driven by the amount of wages paid to eligible employees and is set to expire on Dec. 31, 2025. You must have a process in place to screen eligible employees before claiming the credit. If you are not claiming the credits, consider evaluating the credit, as it can yield significant credit amounts in high-turnover businesses such as restaurants.
Pass-Through Entity Taxes
About 36 states have enacted elective entity-level taxes for pass-through entities. Although an elective tax may sound like a not-so-wise choice, the taxes provide a benefit as they allow state taxes to be deducted at the entity level rather than at the owner level, where the deduction may be limited in amount. The result is an increased federal income tax deduction and a state tax impact that is typically tax-neutral. If you operate in a state that has an elective pass-through entity tax in place, you should evaluate if you should take advantage of this to drive lower taxable income for the owners.
Next Steps
Tax planning is essential for businesses looking to optimize cash flow while minimizing their tax liability over the long term. Contact your GBQ engagement team or Ryan Kilpatrick to discuss these year-end tax-saving strategies.
If you would like to listen to our recent Restaurant MasterClass webinar on this topic, click the link for the recording.
By Ryan Kilpatrick and Kaz Unalan
