Year-End Business Tax Planning
Kimberly I. McCarthy, Esq.
Senior Vice President and Chief Wealth Client Services Officer
Washington Trust Wealth Management
The first week of November is an ideal date to add to your yearly calendar to begin year-end tax planning.
Here are several year-end strategies that you still have time to act on before December 31 to minimize your tax liabilities, make the most of available deductions and credits, and take advantage of tax planning opportunities.
(Note: These tips are general guidelines and may not apply to all businesses equally.)
Regardless of your business type or size, the first and most important step in effective year-end tax planning is reviewing last year’s return with your qualified tax professional and financial advisor. Sharing last year’s tax return, reviewing it together, and brainstorming can help determine how changes in your business during the past year should be addressed in your 2024 return.
Identify areas within your control to impact tax liability if you act by 12/31. You might also review your current tax strategy for dealing with state and federal tax credits, bad debts, excess inventory, or paying bonuses.
This is particularly true with regard to changes in tax law. For example, can you take advantage of the (now gradually disappearing) bonus depreciation rules? From mid-2017 until the end of 2022, businesses could claim 100% of the asset's bonus depreciation — which is usually spread out over the life of the equipment — in the same year they bought the asset. Starting in 2023, bonus depreciation falls to 80%, then drops an additional 20% each year through 2027.
One of the most important year-end business tax planning items is to assess your employee benefit plans to take advantage of opportunities and avoid pitfalls.
For example, if you are looking to start a retirement plan, amend your existing plan, or make other changes to take advantage of a tax-qualified retirement plan contributions, you must at least have the plan in place by December 31st. This generally means adopting a plan document and taking the necessary corporate steps; funding may not be required until after year end, depending on the plan and contribution type.
If your plan has participation issues, or if your highest-paid employees make more contributions/receive more benefits than lower-paid employees, your plan may have “top heavy” issues if you haven’t used a safe harbor plan. Failing top heavy testing can create qualification or tax issues for your plan or your highly-paid participants, but it can be avoided with appropriate planning. Run a top-heavy report to assess top-heavy status and see whether proactive steps could or should be taken before 12/31.
This time of year is also a great time review your employee benefit plans for other common plan mistakes which could impact plan qualification. This includes whether you have used the right definition of compensation and eligibility, deposited plan assets or enrolled plan participants timely, or correctly calculated employer contributions.i Catching and correcting these errors during the plan year – which generally ends 12/31 – can avoid costly issues with the IRS or Department of Labor.
Washington Trust Can Help
Your wealth advisors at Washington Trust understand that the best approach to year-end tax planning depends on your specific circumstances and the latest tax laws, so we work with you and qualified tax professionals to develop a tailored strategy for your business to ensure you minimize your tax liabilities and make the most of available deductions and credits.
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