A Year End Tax Planning Perspective for Business Owners

The final quarter of the year is one of the most important times for business owners to review their tax strategy. Many deductions and planning opportunities must be completed by December 31 to count for the current tax year, and some can be considered now but executed after year-end. A little work now makes a big difference when it’s time to file the tax return.

This guide walks through the key areas to review, the deadlines that matter, and the long-term planning steps that help business owners stay ahead.

Deductions That Must Be Completed Before December 31

Some expenses must be paid or incurred by year end to qualify as deductions for the current tax year. Reviewing these early helps you plan cash flow and avoid missing opportunities. For those cash-basis taxpayers, there is a balance to strike between maximizing deductions now and keeping enough working capital in the business to handle seasonality and cash needs in the early months of the upcoming year.

Read more about the importance of managing working capital here: https://southcoastfp.com/a-business-owners-guide-to-working-capital/

Equipment and Capital Purchases

Section 179 and bonus depreciation are popular tax strategies that provide significant tax savings in the year of purchase, but the asset must be placed in service before December 31. This means the equipment needs to be delivered, installed, and ready for use, not just on order. If you are considering equipment upgrades for the coming year, it may be worth evaluating whether accelerating the purchase would benefit your tax position, even if it means paying an expedite fee. Keep in mind that writing off the full value of the equipment this year means that there won’t be any depreciation in the following years.

Learn more about how depreciation timing affects your tax liability here: https://southcoastfp.com/when-profit-isnt-cash-understanding-the-hidden-gaps-in-your-financials/

Employee Bonuses and Compensation

Bonuses must be paid by year end for cash basis taxpayers to deduct them this year. For accrual basis taxpayers, bonuses can be accrued as an expense if the amount is fixed and paid shortly after year end (generally by March 15), but the rules are strict. If you plan to reward employees, deciding now helps ensure that you have the cash flow to take advantage of this deduction in the current year. With this information, the 4th quarterly tax payment will also be more accurate since you can consider this deduction even though it won’t be paid until later.

Charitable Contributions

Business charitable contributions must be completed by December 31. This includes cash donations, sponsorships, or giving inventory or property. Be sure to keep documentation and verify the organization’s tax-exempt status.

Prepaid Expenses

Some expenses can be prepaid and deducted this year depending on your accounting method and the type of expense. Items such as insurance, software, or certain supply purchases may accelerate deductions and support your broader tax strategy.

Review Retirement Plan Opportunities

Retirement plans are among the most powerful tax planning tools available to business owners, and year end is the perfect time to evaluate your options.

Choosing the Right Plan for Your Business

Several retirement plans offer both tax savings and flexibility:

• SEP IRA for simple, high-contribution options (no other employees)
• SIMPLE IRA for smaller teams looking for low administrative burden
• Solo 401(k) for owner-only businesses
• Standard 401(k) for growing teams

Choosing the right plan depends on headcount, profitability, growth goals, and desired contribution levels. Each plan has its own complexities, so it’s important to work with a plan advisor to understand your options carefully.

Deadlines That Matter

Some plans must be established before December 31. Others, like SEP IRAs or certain types of 401(k)s, allow setup into the following year, but earlier planning ensures you maximize contributions and avoid administrative bottlenecks. If you expect a strong year financially, exploring a retirement plan before December 31 can help reduce taxable income while building long-term wealth. Many administrators become too busy at the end of the year to rapidly create a new retirement plan.

Evaluate Your Business Structure and Flexibility

Year end is an ideal time to evaluate whether your current tax structure still fits your business. Many owners outgrow their original entity type and may benefit from reviewing how their income flows through to their personal tax return.

Partnership and Multi-Member LLC Planning

Partnerships have unique tax rules related to guaranteed payments, basis tracking, and distributions. If you operate with partners, reviewing your agreement and tax projections now can help avoid surprises later, particularly by looking at special allocations and how income will end up flowing through the K-1’s to the partners.

C-Corporation Considerations

Even though they are less common for small businesses, C corporations may offer benefits in certain industries, especially where owners plan to reinvest profits into growth. Reviewing your long-term goals helps determine the best structure.

Read more about how C-Corporations are regaining popularity due to their tax-free opportunity: https://southcoastfp.com/the-hidden-tax-gold-mine-why-strategic-startups-are-choosing-c-corps-over-llcs/

Forecast Your Tax Liability Before the Year Ends

A year-end tax projection provides clarity on your expected liability and helps you make informed decisions before the clock strikes 12. This includes:

• Reviewing year-to-date financial performance
• Creating a pro-forma of the financials through Dec 31
• Identifying opportunities for current year and long term planning
• Calculating tax exposure at federal and state levels
• Preparing federal and state estimated tax payments

A projection allows you to execute on a strategic plan now, versus reacting to a surprise tax bill in April when it is too late to change the outcome.

Strengthen Your Recordkeeping and Financial Reporting

Tax Planning is only as good as the underlying numbers. During the year-end projections is the right time to:

• Reconcile all banking, credit card, and loan accounts
• Review accounts receivable and accounts payable for accuracy
• Confirm major purchases were categorized correctly
• Organize documentation for deductible expenses
• Ask for help from your accounting team for complex transactions!

Better records lead to better tax outcomes and help you start next year with a stronger financial foundation. Find out how our team works with businesses and owners to produce clean and timely financials here: https://southcoastfp.com/caas-solutions/

Final Thoughts

The end of the year provides a valuable opportunity to review your operations, strengthen your tax position, and prepare for the year ahead. With the right planning, business owners can capture the right deductions, improve flexibility, and reduce tax exposure while building a stronger financial foundation.

If you want support reviewing your year-end tax strategy and you want to feel confident in your number reach out to our team to see how we can help.