Small Business Taxes & Management

Special Report

Year-End Tax Planning--Part I


Small Business Taxes & ManagementTM--Copyright 2023, A/N Group, Inc.



General Comments

Note--This is Part 1 of three parts. This section is designed to lay down some preliminaries and help you estimate your income and taxes for the year. Part 2 is Business Planning and Part 3 is Individual Planning.

This year should have been more normal but the steep rise in interest rates has changed that. While on balance businesses are doing better, that's far from universally true. Much the same is true of the stock market. Many funds have done well, as have many averages, but more than a few tech stocks are less then half of what they were a year ago. There's a good chance you've got substantial losses--both realized and unrealized. But you could be in a different financial situation than usual, whether you're simply an employee, an independent contractor, or own a regular business. Consumers have generally tightened their belt as a result of inflation. For businesses 80 percent bonus depreciation is in effect for 2023 but drops to 60 percent in 2024. Capital spending plans can be long term for many businesses.

Tax rates saw a big drop in 2023, but the drop in 2024 will be smaller. The same is true for thresholds for the long-term capital gain rates, alternative minimum tax exemptions, phaseouts of credits, etc. Before doing any serious planning you should review your income and expenses for the year. If you have a business operating as an S corporation, partnership, LLC, or sole proprietorship, the income and losses will be passed through to you. So you've got to have a good idea of how the business is doing. Much the same applies if you have a rental property (or properties) and can deduct the losses or if the property throws off income. In the past we've said that rental properties tend to be more stable than an operating business. That may not be true this year as residential rental rates have climbed (but may be peaking). Depending on the market, you may have tenants who are behind in the rent, moved out, or had new tenants moving in--some at a higher rent, some lower.

The theory behind business tax planning is similar to planning for your personal return. You want to defer the income to a low tax rate year. If you do business as a sole proprietorship (i.e., file a Schedule C), S corporation, partnership, or LLC (limited liability company), income and losses of the business are passed through and reported on your personal tax return. Thus, your approach to year-end planning is similar to that for individual planning. (There are some factors that can complicate the issue; they're discussed below.) And, yes, while it's true you can save taxes by making equipment and other purchases, you're out-of-pocket cost is still more than 50%. For example, you purchase a $1,000 laptop. If you're in the 37% bracket for federal purposes and 10% for state, you're effective tax rate is probably about 45% (you may get a deduction for your state taxes on your federal return). That means the government is picking up $450 of the cost; you're paying for the other $550. If you're self-employed or doing business as a partnership or LLC, your rate will be slightly higher when you add in the self-employment tax. Best suggestion? As always, economic considerations come first. Don't buy what you don't need; don't buy more than you need.

For a list of tax rates, facts on alternative minimum tax, standard deduction, credits, etc. go to our Tax Tables page for the details.


Projecting Your Income--Business

Before going any further you've got to have a good handle on the income from your business. Your accounting records are a good starting point, but more than likely you'll have to adjust them to conform to the tax accounting rules. Here are some possible adjustments:

Check with your accountant on these issues. Hopefully, the differences will be slight, and, if so, can be ignored.

In the past we've suggested annualizing your income (e.g., take the first 10 (or 11 if you have them) months, divide the income by 10 (or 11) and multiply by 12) to figure your full-year profit or loss and then account for any variations during the year. You might try and forecast revenue and expenses through the end of the year. Alternatively, use the latest couple of months, say August, September, and October, divide by three and multiply by two to estimate November and December. Whatever you do, don't just wing it. Use a rational approach. You might even use more than one scenario. Consider how business has gone for the year. Again, this will be an important year for tax planning. Fortunately some businesses are lucky and seasonal or year-to-year variations aren't significant.

Businesses that operate as a sole proprietorship, LLC, partnership, S corporation, etc. have their income (or losses) passed through to the owners and reported on the owners' individual tax returns. That means you'll have to project both the businesses income and your personal income to evaluate your tax bracket. See below.


Projecting Your Income--Personal

If you do business as an S corporation, sole proprietorship, etc. your share of profits or losses are passed through and taxed on your personal return. (If you, or you and your spouse are the only shareholders in an S corporation, taking a smaller or larger salary won't change the outcome materially. A larger salary will just mean the pass-through income from the S corporation will be reduced and vice versa. But the total income will be virtually unchanged. That means you'll have to do a projection of your personal as well as business income before you can do any serious business planning. Fortunately, projecting your personal income is likely to be easier. Assemble your records for the first 10 months of the year. If you record income and expenses on a regular basis, this should be a snap. The purpose of this article is to determine if it makes sense to make any last minute business capital expenditures to take advantage of bonus depreciation, etc. While we've included a list of items to take into account at the personal level, you can cheat and estimate some of them. For example, your charitable contributions usually run $500 to $1,000. For now your best guess is good enough. Concentrate on the bigger numbers.

Caution!--If you turned 73 this year you'll have to start taking distributions (required minimum distributions or RMD). There's no option to defer this year. You can delay your first RMD until April 1 of next year, but then you'll have to take two RMDs next year. The IRS is checking to make sure the distribution is made. Failure to do so can result in a substantial penalty. There's no exception for IRAs, but an RMD may not be required from a pension plan if you're still working. Check with your accountant.

Two more points to keep in mind. First, the general rule for most taxpayers is if you're married filing joint and you don't have a home mortgage, chances are you won't have enough in deductions to come out ahead by itemizing. The exception here is if you have large charitable contributions and/or high medical expenses. Second, if you bought an electric vehicle or are planning to before the end of the year, check the rules carefully if you're anticipating a tax credit.

Finding your tax bracket. If you've got a good handle on your income and expenses you can net the two to arrive at your taxable income.

If you're pretty confident of your computations, you can find your tax bracket by using the Tax Tables in our Reference File. Keep in mind that long-term capital gains and qualifying dividends are taxed at a lower rate. Go to our Tax Tables for the details. However, we strongly suggest you use tax software to do the calculations. Many 2022 versions have a 2023 planning module. Alternatively, you can use the 2022 version. For planning purposes you won't be far off.

Caution. Your chance of getting hit with the alternative minimum tax (AMT) is substantially less than before the 2017 tax law change. But it's still possible. If you were subject to it in 2020 there's a chance you may face it again.

We'll discuss specifics of tax planning for businesses in the next article and planning for individuals in the final article.


Copyright 2023 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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--Last Update 11/22/23