Every December, our phones get busy with the same question: “Is there anything I can still do to lower my taxes this year?”
Sometimes there is. But the most effective year-end strategies take weeks to put in place, and some need decisions made well before the end of the year. September is the sweet spot. You have enough of the year behind you to project accurately, and enough time ahead to act. Here is the checklist we work through with clients each fall.
1. Get your books current
Every other step depends on this one. If your accounts are not reconciled through August, any projection you make is a guess.
Close out the months you are behind on, clean up uncategorized transactions, and make sure loans, credit cards and owner transactions are recorded correctly. Errors found in September are easy to fix. Errors found in March are not.
2. Project your full-year income
Take your year-to-date profit and project it through December, adjusting for any seasonality, large contracts or planned purchases. Then estimate your tax at that level of income.
This number drives everything else. A business heading for a much bigger year than last year needs a different plan than one heading for a smaller year.
You cannot plan your way around a number you have not calculated.
3. Check your estimated payments
Compare the estimated tax payments you have made this year to what your projection says you will owe. If you are short, the fourth-quarter payment is your chance to catch up and reduce or avoid underpayment penalties. If you have overpaid, you may be able to reduce your final payment and keep that cash in the business.
4. Review your retirement plan options
Retirement contributions are one of the most powerful ways for business owners to reduce taxable income while building their own wealth. But the rules about when a plan must be set up, and when contributions must be made, vary by plan type.
Some plans need to be established before year-end to count for this year. Others can be opened later. If you do not have a plan, or your current plan no longer fits your income, now is the time to decide.
5. Plan equipment and major purchases
If you were already planning to buy equipment, vehicles or technology, the timing can affect this year’s taxes. Under current law, many business assets can be deducted much faster than their useful life, but the details depend on the asset, when it is placed in service and your overall tax picture.
The key word is “already.” Buying something you do not need to save on taxes rarely makes financial sense. Timing a purchase you were going to make anyway often does.
6. Consider the timing of income and expenses
For many cash-basis businesses, the timing of when you invoice, collect and pay can shift income or deductions between years. Whether you want to accelerate or defer depends on whether you expect next year’s income, and tax rates, to be higher or lower than this year’s.
7. Revisit owner compensation and structure
If your business is an S corp, confirm your salary is still reasonable for this year’s profit level. If it is not an S corp, fall is the time to evaluate whether a different tax classification makes sense for next year. We covered how to think about that in our article on business structure.
8. Gather documents for next spring
Start a folder now for the documents you will need at tax time: contractor information for year-end forms, asset purchase records, loan statements and charitable contribution receipts. Your future self will thank you.
Want a professional to run this checklist with you? Our Tax Strategy review covers your business and personal taxes together and delivers a written plan within 21 days of receiving your documents. If we do not identify at least $20,000 in potential savings, we refund your $4,000 fee.
This article is general information, not tax advice. Tax rules change and every situation is different, so review your plan with a qualified professional.
