2024 has been a relatively quiet year for tax legislation. To assist you with making decisions on what works best for you and your business, we have compiled a list of tax strategies based on current tax rules that may help you save tax dollars if you act before the end of the year.
Qualified Business Income Deduction
The QBI deduction continues to be an effective deduction for businesses. Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2024, if taxable income exceeds $383,900 for a married couple filing jointly and $191,950 for all others, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased out and apply to joint filers with taxable income between $383,900 and $483,900 and to single, head of household, and married filing separate taxpayers with taxable income between $191,950 and $241,950. Taxpayers may achieve significant savings with respect to the QBI deduction by deferring income or accelerating deductions to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2024. Depending on their business model, taxpayers may also increase the deduction by increasing W-2 wages before year-end.
Defer or Accelerate Income
Deferring income and accelerating deductions are standard year-end tax planning strategies. However, if Congress were to consider raising the top individual, capital gain, and corporate tax rates, you may want to consider doing the opposite. If changes like those are enacted, accelerating income into this year might subject it to a lower tax rate, and deferring deductions into next year could allow them to be taken against higher taxed income. If you expect taxable income to be higher in 2025 than in 2024, pulling income into 2024 to be taxed at the currently lower rates and deferring deductible expenses until 2025 may be advantageous. The points below are made with the current tax law in place and do not regard the proposed legislation.
- Cash Method of Accounting: Choosing the cash method of accounting instead of the accrual method lets you put yourself in a better position for deferring income and accelerating expenses. Any entity other than a tax shelter that meets an inflation-adjusted average annual gross receipts test ($31 million for 2025; $30 million for 2024) can use the cash method of accounting. For cash basis taxpayers, business expenses are deductible when they are paid, and income is recognized when it is received. To lower taxable income for 2024, businesses may choose to pay invoices before the end of the year or by prepaying certain expenses.
- Installment Sales: Generally, if a gain will be realized on the sale of property, income recognition will typically be deferred under the installment method until payments are received, as long as one payment is received in the year after the sale. Consider selling the property and reporting the gain using the installment method to defer income. Suppose you determine it would be beneficial to move income from future years to 2024, and you made a sale of property using an installment note. In that case, you could make the election on the 2024 tax return not to treat the sale as an installment sale, recognizing all the gain in 2024.
- Early Collection: Businesses reporting on the cash basis method should consider issuing bills and pursuing collection before the end of 2024. Also, you could check to see if customers are willing to pay for 2025 goods or services in advance. Any income received using these steps will shift income from 2025 into 2024.
Accelerate Deductions And Losses
Heading into year-end tax planning season, companies may be able to take some relatively easy steps to accelerate certain deductions into 2024 or, if more advantageous, defer certain deductions to one or more later years. The key reminder for all of the following year-end “clean-up” items is that the taxpayer must make the necessary revisions or take the necessary actions before the end of the 2024 taxable year. (Unless otherwise indicated, the following items discuss planning relevant to an accrual basis taxpayer.)
- Deduction of Accrued Bonuses
In most circumstances, taxpayers will want to deduct bonuses in the year they are earned (the service year) rather than the year the amounts are paid to the recipient employees. To accomplish this, taxpayers may wish to:
Review bonus plans before the end of the year and consider changing the terms to eliminate any contingencies that can cause the bonus liability not to meet the Section 461 “all events test” as of the last day of the taxable year. Taxpayers may be able to implement strategies that allow for an accelerated deduction for tax purposes while retaining the employment requirement on the bonus payment date. These may include using (i) a “bonus pool” with a mechanism for reallocating forfeited bonuses back into the pool; or (ii) a “minimum bonus” strategy that allows some flexibility for the employer to retain a specified amount of forfeited bonuses.
The bonus pool amount must be fixed through a binding corporate action (e.g., board resolution) taken before year-end that specifies the pool amount or through a formula that is fixed before the end of the tax year, considering financial data as of the end of the tax year. A change in the bonus plan would be considered a change in underlying facts, which would allow the taxpayer to prospectively adopt a new method of accounting without filing a Form 3115.
Schedule bonus payments to recipients to be made no later than 2.5 months after the tax year end to meet the requirements of Section 404 for deduction in the service year.
- Deductions of Prepaid Expenses
For federal income tax purposes, companies may have an opportunity to take a current deduction for some of the expenses they prepay rather than capitalizing and amortizing the amounts over the term of the underlying agreement or taking a deduction at the time services are rendered. Under the so-called “12-month rule,” taxpayers can deduct prepaid expenses in the year the amounts are paid (rather than having to capitalize and amortize the amounts over a future period) if the right/benefit associated with the prepayment does not extend beyond the earlier of i) 12 months after the first date on which the taxpayer realizes the right/benefit, or ii) the end of the taxable year following the year of payment. Note that in the accrual method, taxpayers must first have an incurred liability under Section 461 in order to accelerate a prepayment under the 12-month rule.
The rule provides some valuable options for accelerated deduction of prepaids for accrual basis companies — for example, insurance, taxes, government licensing fees, software maintenance contracts, and warranty-type service contracts. Identifying prepaids eligible for accelerated deduction under the tax rules can prove a worthwhile exercise by helping companies strategize whether to make prepayments before year-end, which may require a change in accounting method for the eligible prepaids.
- Write off bad debts that have gone unpaid.
Certain aged, unpaid accounts may be eligible to be used as a write-off on your taxes. This is done when an amount owed by a customer has not been paid and is expected to remain unpaid. By writing off this debt, you can reduce your company’s tax burden for the current tax year.
This process involves some potential complications, including the fact that if the customer ends up paying their bill in the future, you have to reverse the write-off you gave yourself on your taxes. To ensure this process is properly handled, it’s best to address bad debts in collaboration with us to maximize your planning strategy.
Section 179, Bonus Depreciation, and Green Energy Tax Credits
For 2024, the Section 179 expensing limit is $1,220,000, with a phase-out for purchases over $3,050,000. The deduction is subject to a business income limit, and eligible property can be new or used. For 2025, the limit increases to $1,250,000, with a phase-out for purchases of more than $3,130,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for qualified improvement property (generally, improvement to a building’s interior), roofs, HVAC systems, fire protection systems, alarm systems, and security systems.
The deduction (bonus depreciation) falls to 60% for the adjusted basis of depreciable property and is still allowed for qualified property acquired and placed in service during 2024. For 2025, the deduction is reduced to 40% for property placed in service in 2025. Qualifying property, including qualified improvement property (QIP), includes tangible property depreciated under MACRS with a recovery period of 20 years or less and most computer software. Bonus depreciation is not subject to a business income limit and can be used for new and used property.
Now may also be a time to think about green improvements for your business. The federal Inflation Reduction Act, signed into law in August 2022, includes nearly $400 billion for clean energy tax credits and other provisions aimed at combating climate change by incentivizing investment in clean energy technologies. These include federal income tax credits for buying new or used electric or hybrid clean vehicles, installing residential clean energy property, and other investment activities. Restrictions apply, so check with us on which credits might be available to you.
Net Operating Loss (NOL)
The NOL deduction allows a taxpayer with a loss in one year and income in another year to pay tax on the net amount as if it were earned evenly over the same period, thus reducing the inequity that would otherwise result from the use of annual accounting periods and the progressive rate structure. For 2024, NOLs are limited to 80% of taxable income and may carried forward indefinitely. A taxpayer that may have difficulty taking advantage of the full amount of an NOL carryforward this year should consider shifting income into and expenses out of this year. By doing so, the taxpayer may avoid intervening tax year modifications that would apply to the NOL carryforward if not used in full in 2024.
A corporation (other than a large corporation) anticipating a small NOL in 2024 and significant income in 2025 may consider accelerating enough of the 2025 income (or deferring just enough expenses) to this year, creating a small amount of income. This will permit the corporation to base its estimated tax installments for next year on the lower amount of income shown on its 2024 return rather than having to pay estimated taxes based on its higher 2025 taxable income.
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