7 Year-End Tax Strategies Every Entrepreneur Should Know

1. Maximize Section 179 Deductions

Section 179 is a powerful tool for entrepreneurs to reduce taxable income. By allowing businesses to deduct the full cost of qualifying purchases, it provides immediate relief instead of spreading deductions over several years through depreciation. This is particularly helpful for cash-flow management and reinvestment in your business.

• How It Works : Say you purchase $50,000 in equipment for your business. Without Section 179, you might only deduct $5,000 per year over 10 years. With Section 179, you deduct the entire $50,000 this year, significantly lowering your taxable income.
• Eligible Items : Examples include:
  • Equipment and machinery (e.g., industrial printers, tools)
  • Technology (e.g., laptops, software subscriptions)
  • Vehicles used 50% or more for business ( limits apply for luxury vehicles ).
• Common Pitfall : Failing to place the item in service by December 31. Simply purchasing it isn't enough; it must be usable by year-end.
• Pro Tip : Pair Section 179 with bonus depreciation for maximum tax savings on major purchases.

2. Accelerate Business Expenses

Accelerating expenses can create an immediate tax benefit by pulling deductions into the current year. This strategy works well for businesses that use cash-basis accounting , where income and expenses are recognized when they are paid.

• How It Works : If your business owes $12,000 in rent for the first quarter of next year, prepaying it in December allows you to claim that deduction now.
• Examples of Expenses to Accelerate :
  • Marketing and advertising campaigns
  • Professional subscriptions and memberships
  • Repairs and maintenance
• Common Pitfall : Overextending your cash flow. Avoid prepaying expenses if it strains your business's liquidity or if next year's income might be lower.
• Pro Tip : Use this strategy to lock in discounts on services or goods, providing both tax and cost savings.

3. Consider Setting Up or Maximizing Retirement Plans

Entrepreneurs often neglect retirement savings while focusing on growing their businesses. However, contributing to a retirement plan is a double win: it secures your future and offers significant tax deductions.

• Plan Options for Entrepreneurs :
  • Solo 401(k) : Ideal for sole proprietors or partnerships without employees. You can contribute up to $22,500 ($30,000 if 50+) as an employee, plus up to 25% of net business income as an employer.
  • SEP-IRA : Best for small businesses with few employees. Contributions can be as high as 25% of compensation, up to $66,000.
  • SIMPLE IRA : A budget-friendly option for businesses with employees. Contributions are capped at $15,500 ($19,000 if 50+).
• Key Insight : Even if you can't contribute the maximum, starting a plan before December 31 opens the door to contributions up until the tax filing deadline.
• Pro Tip : Use retirement plan contributions to help reduce income below key thresholds (e.g., $364,200 for QBI deduction).

4. Utilize the Qualified Business Income (QBI) Deduction

The QBI deduction can save entrepreneurs thousands, but it's surrounded by complex rules. Essentially, qualifying businesses can deduct up to 20% of their net income, but phase-outs and restrictions apply.

• Who Qualifies : Most sole proprietors, LLCs, S-Corps, and partnerships. However, certain " specified service trades or businesses " (e.g., doctors, consultants) face additional limits if income exceeds $364,200 (married filing jointly).
• How to Optimize :
  • Pay yourself a reasonable salary if you're an S-Corp owner to stay within limits.
  • Review year-end income and consider deferring revenue to reduce taxable income.
• Common Pitfall : Miscalculating taxable income or overlooking wage requirements for higher deductions.
• Pro Tip : Work with your tax advisor to ensure your deductions are maximized, especially if you're near the income threshold.

5. Review Depreciation Strategies

Depreciation deductions allow you to recover the cost of business assets, but timing is key. Bonus depreciation and Section 179 can be used together for maximum benefit.

• How to Leverage Bonus Depreciation :
  • Deduct 80% of eligible asset costs in the first year (down from 100% in 2022).
  • Applies to both new and used assets, unlike Section 179.
• Common Pitfall : Forgetting to evaluate long-term implications. Bonus depreciation reduces the basis of the asset, potentially leading to higher gains when selling it.
• Pro Tip : Focus on assets with shorter useful lives (e.g., vehicles, computers) for maximum immediate impact.

6. Strategize Employee Bonuses or Profit-Sharing Plans

Year-end bonuses and profit-sharing plans aren't just a way to thank employees—they're a tax-efficient method to reduce business income.

• How It Works :
  • Bonuses paid by December 31 are fully deductible for the business, even if employees don't cash their checks until January.
  • Profit-sharing plans allow contributions to retirement accounts, deferring taxes for both the business and employees.
• Example : A small business with $100,000 in profit might allocate $10,000 for employee bonuses, reducing taxable income to $90,000 while boosting team morale.
• Pro Tip : Consider structuring bonuses as part of a strategic retention plan to maximize their value beyond tax savings.

7. Perform a Tax Loss Harvesting Review

Tax loss harvesting isn't just for personal investments—it's also relevant for business owners with diversified portfolios.

• How It Works :
  • Sell investments that have declined in value to realize a loss.
  • Use losses to offset gains from other investments or up to $3,000 of ordinary income.
• Example : If you realized $15,000 in gains this year, selling an asset with a $10,000 loss reduces your taxable gains to $5,000.
• Common Pitfall : Violating the wash-sale rule , which prohibits repurchasing a substantially identical security within 30 days of the sale.
• Pro Tip : Review both business and personal investment accounts for opportunities to harvest losses strategically.

Action Steps for Entrepreneurs

1. Schedule a Consultation : Work with a tax advisor who understands your industry and goals.
2. Run Projections : Use financial software or your accountant to estimate your taxable income and deductions.
3. Create a Year-End Checklist : Include deadlines for major strategies like retirement contributions, asset purchases, and bonus payments.