Small Business Tax Planning: What to Do Before Year-End to Reduce Your Tax Bill

Tax planning is not a conversation to have in April when the return is already due. By that point, the year is over and most of the decisions that would have reduced your tax liability are no longer available to you. Effective tax planning happens before December 31, when you can still act on the numbers.

This guide covers the key areas of year-end tax planning relevant to US small businesses: what to review, what decisions to make before the year closes, and the most commonly missed opportunities that cost business owners money they did not need to spend.

Start With Accurate, Current Books

Every tax planning decision depends on knowing where you actually stand financially. If your books are two months behind, or if you are not confident in the accuracy of your numbers, meaningful tax planning is not possible. The first step is always to get the accounts current and verified before any planning work begins.

This is not a minor point. Business owners who approach their accountant in November for tax planning advice and discover their books are six months out of date lose most of the window for action. The time to address bookkeeping accuracy is throughout the year, not in the final weeks of it.

Review Your Estimated Quarterly Tax Payments

If you are a sole proprietor, partner, or S-Corp shareholder, you are generally required to make quarterly estimated tax payments to cover your federal income tax liability and self-employment taxes. The four payment deadlines in a standard tax year are April 15, June 15, September 15, and January 15.

By the fourth quarter, you should have a reasonably clear picture of your full-year taxable income. If your quarterly payments to date have been based on prior-year income and your current-year income is significantly higher, you may be facing a larger-than-expected payment in January. Conversely, if income has come in lower than anticipated, reviewing whether your Q4 payment can be reduced is worth the conversation with your tax advisor.

Underpaying estimated taxes results in an underpayment penalty. It is a modest penalty, but it is entirely avoidable with proper planning.

Consider the Timing of Income and Expenses

One of the most straightforward year-end tax planning strategies for cash-basis taxpayers is managing the timing of income recognition and expense deduction. The general principle is to accelerate deductions into the current year where beneficial, and defer income into the next year where possible and appropriate.

• Accelerating deductions. If you have planned expenditure on equipment, software, supplies, or professional services that you were going to make in January, consider making that purchase before December 31. Under Section 179, many business assets can be fully expensed in the year of purchase rather than depreciated over time.
• Deferring income. If you are a cash-basis taxpayer and you have the ability to delay invoicing or receiving a final payment until January, you defer that income into the next tax year. This strategy is most relevant when you expect to be in a lower tax bracket next year, or when current-year income is unusually high.

These timing strategies must be applied with commercial common sense, not simply to generate a tax benefit at the cost of your business’s cash position or client relationships. Speak with a qualified tax professional before making material decisions on this basis.

Maximise Retirement Contributions

Contributions to qualifying retirement accounts can significantly reduce taxable income, and for many small business owners they represent the largest single deduction available. The key plans to be aware of include:

• SEP-IRA. Self-Employed Pension IRAs allow contributions of up to 25% of net self-employment income, with a 2024 contribution limit of $69,000. Contributions can be made up to the tax filing deadline, including extensions, giving you flexibility even after year-end.
• Solo 401(k). For self-employed individuals with no employees other than a spouse, the Solo 401(k) allows both employee and employer contributions, with total contributions potentially reaching $69,000 for 2024 (plus a $7,500 catch-up contribution for those aged 50 and over). The employee contribution portion must be elected before December 31.
• SIMPLE IRA. Suitable for small businesses with employees, SIMPLE IRA contributions are relatively straightforward and provide a tax deduction for both employer contributions and the employee’s own contributions.

The contribution limits and eligibility rules for each plan differ, and the right choice depends on your business structure, income level, and whether you have employees. This is an area where professional advice pays for itself.

Review Your Business Entity Structure

The structure through which you operate your business, whether sole proprietorship, LLC, S-Corp, C-Corp, or partnership, has a direct impact on your overall tax liability. Year-end is a sensible time to review whether your current structure remains optimal.

The most common structural tax planning question for growing small businesses is whether to elect S-Corp status. An S-Corp election allows the business owner to split income between a salary (subject to payroll taxes) and a distribution (not subject to payroll taxes), which can produce meaningful savings once income reaches a level where payroll taxes represent a material cost. The general rule of thumb is that S-Corp election begins to make sense when net business income exceeds approximately $40,000 to $50,000 annually, though the exact threshold depends on state taxes and individual circumstances.

S-Corp elections for the following tax year must typically be filed by March 15. Year-end is the right time to evaluate and prepare, not to rush a decision.

Check Your Depreciation Position

If your business has acquired significant equipment, vehicles, or other depreciable assets during the year, reviewing your depreciation position before year-end is worthwhile. Two provisions in particular are worth understanding:

• Section 179 expensing. Allows businesses to deduct the full cost of qualifying equipment and software in the year of purchase, up to an annual limit, rather than depreciating it over multiple years. For 2024, the Section 179 deduction limit is $1,220,000.
• Bonus depreciation. Allows businesses to immediately deduct a percentage of the cost of qualifying assets placed in service during the year. Bonus depreciation has been phasing down from 100% and is at 60% for assets placed in service in 2024.

Both provisions are subject to rules and limitations, and the interaction between them matters. If you have made or are considering significant capital expenditure before year-end, this is a specific area to discuss with your tax advisor.

Review Accounts Receivable for Bad Debts

If you use accrual-basis accounting and you have invoices outstanding that are genuinely uncollectable, writing them off before year-end allows you to deduct the bad debt expense in the current tax year. Do not carry forward uncollectable receivables out of optimism. If the debt is not going to be collected, recognising the write-off in the current year is the appropriate accounting treatment and generates a legitimate tax deduction.

Under cash-basis accounting, bad debt deductions work differently because revenue is only recognised when cash is received. If you are unsure which method applies to your business, your accountant can clarify.

Year-End Payroll Considerations

Before December 31, confirm that all payroll for the year is accurately recorded, all payroll tax deposits are current, and any year-end bonuses have been processed and reflected correctly in the books. Bonuses paid before December 31 are generally deductible in the current tax year. Bonuses accrued but not paid until January are not deductible until the following year for cash-basis taxpayers.

Also confirm that your W-2 and 1099-NEC obligations for the year are understood and that all necessary information is being collected. W-2s and 1099-NECs must be issued to recipients by January 31.

The Bottom Line

Year-end tax planning is not a single conversation in December. It is the culmination of maintaining accurate books throughout the year, reviewing your financial position in Q3 when there is still time to act, and making deliberate decisions about timing, structure, and deductions before the year closes. The businesses that manage their tax position well are almost always the ones that manage their books well. The two are inseparable.

Collar Assist