A profitable year is something every business owner hopes for—until they start thinking about the tax bill that comes with it.
If your business is having a stronger year than expected, the good news is that you may still have time to make decisions that can reduce your tax liability. The key is to do that planning before December 31, not when your tax return is being prepared next spring.
Tax preparation looks backward at what already happened. Tax planning looks forward and asks a much more valuable question: What can we still do about it?
Here are a few areas business owners should consider before year-end.
1. Know Where You Stand
Good tax planning starts with good information. Before making year-end decisions, work with your accountant to estimate where your business will finish the year.
That means looking beyond the balance in your bank account. Your taxable income can be very different from your cash flow, particularly if you have significant accounts receivable, inventory, debt payments, equipment purchases, or owner distributions.
A year-end projection can help estimate your federal and state tax liability, identify potential surprises, and determine whether your estimated tax payments are on track.
Finding out in November that you are headed for a large tax bill gives you options. Finding out in March usually gives you a payment voucher!
2. Consider Upcoming Equipment Purchases
If your business is already planning to purchase equipment, vehicles, machinery, computers, or other qualifying property, the timing of those purchases can have a significant tax impact.
Current tax law provides generous depreciation options for many business assets, including 100% bonus depreciation for certain qualifying property. Section 179 may provide another opportunity to immediately expense eligible purchases.
That doesn’t mean you should buy something simply for the tax deduction. Spending $100,000 to save a fraction of that amount in taxes isn’t a good deal if your business doesn’t need the asset in the first place.
But if a purchase is already in your plans, there may be a benefit to discussing the timing with your tax adviser before year-end.
3. Don’t Overlook Retirement Planning
Retirement plans can be a valuable tool for both business owners and employees—and they can also provide meaningful tax benefits.
Depending on the size and structure of your business, options may include a SEP IRA, SIMPLE IRA, 401(k), profit-sharing plan, or other retirement arrangement. Establishing a plan can help business owners save for their own retirement while also providing a valuable benefit for attracting and retaining employees.
For New York employers, retirement planning has also become a compliance consideration. Under the New York State Secure Choice Savings Program, employers with at least 10 employees in New York that have been in business for at least two years and do not offer a qualified retirement plan are generally required to facilitate the state’s retirement savings program. Secure Choice allows employees to save through automatic payroll deductions into their own Roth IRAs. Employers are not required to make contributions to the program.
For business owners who are subject to the requirement, this may also be a good time to consider whether establishing your own employer-sponsored retirement plan makes more sense. A 401(k), SIMPLE IRA, or other qualified plan may offer additional flexibility and benefits for both owners and employees while also satisfying the requirement to provide access to retirement savings.
Some plans provide more flexibility than others, and deadlines vary. Waiting until you’re preparing your tax return may limit the options available to you, so retirement planning is worth discussing before the calendar turns to January.
4. S Corporation Owners: Review Your Compensation
If you operate your business as an S corporation, year-end is a good time to review how you’ve paid yourself.
S corporation shareholders who perform services for their businesses generally need to receive reasonable compensation through payroll. Taking little or no salary while withdrawing significant distributions can create unnecessary IRS scrutiny.
On the other hand, paying yourself substantially more salary than necessary may result in additional payroll taxes.
There isn’t a one-size-fits-all number. Reasonable compensation depends on factors such as your role, responsibilities, industry, experience, hours worked, and what the business would have to pay someone else to perform similar services.
Reviewing compensation before the final payroll of the year gives you an opportunity to make adjustments while there’s still time.
5. New York Business Owners Should Review PTET
For owners of partnerships and S corporations, New York’s Pass-Through Entity Tax, or PTET, should also be part of the year-end conversation.
PTET can provide a federal tax benefit by allowing eligible pass-through entities to pay certain state taxes at the business level. However, changes to the federal state and local tax deduction have made the analysis more nuanced.
The best answer depends on the business and its owners. Rather than automatically handling PTET the same way every year, consider whether the election and payment strategy still makes sense for your particular situation.
6. Look at the Bigger Picture
Tax planning shouldn’t happen in a vacuum.
Maybe you’re expecting to hire several employees next year. Maybe you’re considering purchasing a building, adding a new location, selling part of the business, bringing in another owner, or making a major investment.
Those decisions can affect the advice your accountant gives you today.
Likewise, the strategy that produces the absolute lowest tax bill isn’t always the best business decision. Preserving cash, maintaining borrowing capacity, funding growth, and preparing for future opportunities can be more important than maximizing every available deduction.
Don’t Wait Until Tax Season!
Perhaps the biggest year-end tax planning tip is also the simplest: have the conversation early!
By the time your accountant prepares your tax return, most of the decisions that could have changed the outcome have already been made. A year-end projection gives you an opportunity to understand your expected tax liability, evaluate available strategies, and make informed business decisions while you still have time to act.
A great year in business should be something to celebrate. A little planning before December 31 can help make sure the tax bill that follows doesn’t come as an unwelcome surprise.