Year-End Tax Planning Strategies for Small Businesses

Year-end tax planning checklist:

1. Project your full-year income (October).

• Review year-to-date profit and loss
• Estimate October-December revenue and expenses
• Calculate projected taxable income
• Compare to the prior year (is income significantly higher or lower?)
• If higher: focus on accelerating deductions
• If lower: consider deferring deductions to next year when they’ll save more

2. Accelerate deductions (November-December).

• Equipment purchases: buy and place in service before December 31 to claim bonus depreciation or Section 179. The equipment must be operational (delivered and ready to use), not just ordered.
• Prepay expenses: prepay up to 12 months of recurring expenses (insurance, rent, subscriptions). Cash-basis taxpayers can deduct prepayments under the 12-month rule (Treas. Reg. 1.263(a)-4(f)).
• Repairs and maintenance: complete deferred repairs before year-end. Routine maintenance is currently deductible; improvements must be capitalized.
• Bad debt write-offs: write off uncollectible accounts receivable (only if using the accrual method; cash-basis taxpayers never recorded the income, so there’s nothing to write off).
• Bonus to employees: deduct in the current year if paid by year-end (cash basis) or if fixed by year-end and paid within 2.5 months (accrual basis, for non-related employees per IRC 404(a)(5)).

3. Defer income (December).

• Delay invoicing: for cash-basis businesses, income isn’t recognized until received. Sending invoices in early January instead of late December defers that income to next year.
• Delay completion: if a project will be finished in late December, consider completing and billing in January.
• Installment sales: selling a business asset on an installment basis under IRC 453 spreads the gain over the payment period.
• Caution: deferring income is a one-time benefit. Next year, you’ll have both the deferred income and the regular income. This strategy works when next year’s tax rate is expected to be lower.

4. Maximize retirement contributions.

• 401(k) employee deferral: $23,500 (2025), $31,000 if age 50+, $34,750 if ages 60-63 (SECURE 2.0 super catch-up). Must be elected by December 31 for W-2 employees.
• Employer match/profit sharing: can be contributed up to the filing deadline (including extensions). Up to $46,500 employer contribution ($70,000 total combined limit for 2025).
• SEP IRA: employer contributions up to 25% of net SE income or 25% of W-2 salary, max $70,000. Can be set up and funded as late as the filing deadline (including extensions).
• Solo 401(k): must be established by December 31, but contributions can be made until the filing deadline. Allows both employee deferral ($23,500) and employer contribution (25% of compensation).
• SIMPLE IRA: must be established by October 1 for new plans. Employee deferrals must be made by December 31.

5. Charitable giving strategies.

• Bunching: combine two years of charitable donations into one year to exceed the standard deduction, itemize, and benefit from the deduction. Skip donations the following year.
• Donor-advised fund (DAF): contribute a large amount to a DAF, take the deduction this year, and distribute the funds to charities over multiple years.
• Appreciated stock: donating stock held more than one year to a charity (or DAF) avoids capital gains tax AND provides a deduction at FMV.
• S-Corp/partnership donations: flow through on the K-1 as a separately stated item. The shareholder/partner claims the deduction on their personal return.

6. S-Corp salary adjustment.

• Review the owner’s W-2 salary against current year income
• If income is higher than projected, consider a year-end bonus to increase salary (increasing FICA but also increasing the W-2 wage base for the QBI deduction’s W-2 wage limitation)
• If income is lower, ensure salary is still “reasonable” to avoid IRS challenge