As the year comes to a close, many business owners focus on finishing strong, evaluating annual performance, and preparing for future growth. But one crucial area that often gets overlooked amidst the hustle is proactive tax planning. The fourth quarter presents unique opportunities for businesses to review financial performance, make tax-advantageous decisions, and set the stage for tax season, so they can maximize deductions and minimize liabilities.
By taking targeted steps now, business owners can avoid surprises at tax time, improve cash flow, and retain more profits within the business. Whether you're a small startup or a seasoned enterprise, this Q4 tax checklist can make a measurable difference in your financial outlook. Here are the key areas to focus on for effective tax preparation in the fourth quarter:
1. Review Qualified Expenses and Deductions
Accelerate Deductible Expenses: By prepaying for upcoming business expenses—like office supplies, technology upgrades, or subscriptions—before December 31st, cash-basis taxpayers can reduce taxable income. Evaluate which expenses make sense to accelerate without harming cash flow.
Section 179 Deduction: If your business has significant equipment or asset needs, the Section 179 deduction allows for an immediate expense deduction rather than depreciating the asset over several years. Familiarize yourself with the limits for this deduction to take full advantage while ensuring compliance.
Bonus Depreciation: For eligible assets, 60% bonus depreciation is a powerful way to offset income in the year of purchase. However, this rule phases down over time, so if you’re on the fence about new assets, consider acting now.
2. Assess Payroll and Benefits
Owner’s Compensation and Bonuses: S Corporations and partnerships need to evaluate owner compensation to maintain compliance and maximize tax benefits. Year-end bonuses can also be used strategically to reduce income while rewarding employees.
Retirement Contributions: Retirement plans are one of the most effective ways to reduce taxable income and boost savings. SEP IRAs, SIMPLE IRAs, and 401(k) plans allow you to contribute and deduct substantial amounts, depending on your business structure and cash flow.
Employee Benefits: If you offer benefits like healthcare or retirement matching, these are deductible expenses. Review these benefits for tax efficiency and possible expansion, as they often have favorable tax treatment and help retain valuable talent.
3. Maximize Tax Credits and Incentives
R&D Credit: The Research and Development (R&D) credit isn’t just for tech companies. Manufacturing, food, and other industries that innovate or improve processes may qualify for this credit, offsetting substantial tax liability.
Work Opportunity Tax Credit (WOTC): This credit applies to businesses hiring employees from targeted groups (such as veterans or those receiving certain forms of government assistance). Review new hires from the year to see if you can claim this credit.
Energy Efficiency Incentives: For businesses investing in energy-efficient equipment or building upgrades, there may be federal or state tax credits available. These incentives align with broader environmental goals, offering a financial boost and potential marketing benefits.
4. Evaluate Inventory and Write-Downs
Inventory Write-Downs: For businesses holding physical inventory, Q4 is an ideal time to review and write down obsolete or unsold stock. This reduces taxable income and helps clean up the balance sheet, particularly if certain items have become unsellable or devalued.
Review Inventory Valuation Method: Your inventory valuation method (FIFO, LIFO, or weighted average) has a direct impact on tax outcomes, especially if your costs have fluctuated significantly. Reviewing your inventory accounting strategy at year-end can optimize results.
5. Finalize Estimates and Adjust Quarterly Payments
Catch Up on Quarterly Payments: Q4 is the last chance to make any necessary adjustments to estimated tax payments. If income has changed or you’ve claimed new deductions, ensure Q4 payments reflect these adjustments to avoid penalties.
Tax-Loss Harvesting: If your business has invested in securities, consider selling any underperforming assets to offset capital gains. This can significantly reduce your tax burden by balancing out profitable and unprofitable investments.
6. Consult a Tax Professional for a Year-End Review
Proactive Tax Planning: A knowledgeable CPA or tax consultant is invaluable at year-end, as they can help identify often-overlooked deductions, credits, and deferral strategies that may apply specifically to your business and industry. By consulting a professional before December 31st, you can avoid missed opportunities and ensure your approach is legally sound.
Strengthen Your Business by Closing the Year Tax-Efficiently
In an increasingly complex tax landscape, taking these actions in Q4 isn’t just about meeting tax obligations—it’s about strategically managing your business’s financial health. By maximizing deductions, evaluating credits, and making proactive payments, you’re building a more resilient and profitable foundation for the upcoming year.
Ultimately, thoughtful tax planning can lead to significant cost savings and improved cash flow, which can be reinvested to fuel growth. Start implementing these strategies today, and give yourself a head start on tax season, setting your business up for success and stability in the year ahead.
About the Author
Cherie Sayban is a certified public accountant. She has over 25+ years of experience in Finance, Accounting and Bookkeeping.
Cherie Sayban CPA provides various financial and accounting solutions to small and mid-size businesses. Our portfolio includes: tax preparation, payroll preparation, accounts receivable and payables, general ledger, and QuickBooks . Our bookkeeping workshops are offered both in-person and virtually.
To learn more about how Cherie Sayban CPA can help you and your business, click HERE
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