Business Owner Year-End Tax Prep

Essential tax strategies and preparation for self-employed and small business owners

Back to Taxes & Deductions

Why Business Owners Need Special Year-End Planning

Business owners face unique tax challenges and opportunities. Unlike W-2 employees, you have significantly more control over both income timing and deductible expenses. This flexibility, combined with the right strategies, can result in substantial tax savings. However, it also means you bear the responsibility for proper planning, documentation, and compliance.

Critical Year-End Deadline: December 31

Most business tax strategies must be executed by December 31 to count for the current tax year. Some retirement plan contributions can be made later, but most expenses and deductions require action before year-end. Don't procrastinate—start planning now.

Income Timing Strategies

Deferring Income to Next Year

If you expect to be in a lower tax bracket next year (or want to reduce this year's tax liability), consider:

  • Delay December invoicing: Send invoices in early January instead
  • Push year-end bonuses: Pay yourself and employees in January
  • Defer client payments: Request January payment for December work
  • Use accrual accounting: If applicable, record income when earned vs. received
  • Installment sales: Structure large sales to receive payments over multiple years

Accelerating Income to Current Year

If you expect higher taxes next year, do the opposite:

  • Invoice early and request immediate payment
  • Collect on outstanding receivables before year-end
  • Complete projects before December 31
  • Consider Roth conversions while in lower bracket

Maximizing Business Deductions

Equipment Purchases (Section 179 & Bonus Depreciation)

Equipment Purchase Tax Savings

Immediate Tax Savings:

$12,000

Plus self-employment tax savings of approximately $7,065

  • Section 179 deduction: Up to $1,220,000 immediate expensing (2024)
  • Phase-out threshold: Begins at $3,050,000 in purchases
  • Bonus depreciation: Additional first-year deduction on qualifying property
  • Must be in service: Equipment must be purchased AND in use by December 31
  • Qualifying property: Machinery, equipment, vehicles, computers, furniture, software
  • Strategy: Make major purchases before year-end for maximum deduction

Vehicle Deductions

Multiple options available—choose the best for your situation:

Standard Mileage Method

  • 2024 rate: 67 cents per mile
  • Includes: Gas, oil, repairs, insurance, depreciation
  • Plus deduct: Parking, tolls, loan interest (business portion)
  • Required: Detailed mileage log
  • Best for: High-mileage, lower-cost vehicles

Actual Expense Method

  • Deduct: Gas, oil, repairs, insurance, registration, depreciation, lease payments
  • Based on: Business-use percentage
  • Best for: Expensive vehicles, lower mileage
  • Section 179: Can expense vehicle immediately (limits apply)

Heavy Vehicle Advantage

  • Over 6,000 lbs: Full Section 179 deduction (no luxury vehicle limits)
  • Examples: Large SUVs, trucks, vans
  • 2024 limit: Up to $30,500 for vehicles 6,000+ lbs
  • Must be: Used more than 50% for business

Home Office Deduction

Qualification Requirements

  • Regular and exclusive use: Area used solely for business
  • Principal place of business: Main location where you conduct business
  • Exception: Can also claim for administrative/management activities

Simplified Method

  • Rate: $5 per square foot
  • Maximum: 300 square feet = $1,500
  • Pros: Easy calculation, minimal record-keeping
  • Cons: May be less than actual expenses

Regular Method

  • Calculate: Business use percentage of home (square footage)
  • Deduct: Percentage of mortgage interest, property taxes, utilities, insurance, repairs, depreciation
  • Direct expenses: 100% deductible (painting office, repairs to office)
  • Indirect expenses: Proportional deduction (utilities, insurance)
  • Pros: Usually results in larger deduction
  • Cons: More complex, requires detailed records

Technology & Software

  • Computers and tablets (100% business use)
  • Business software and subscriptions
  • Cloud storage and services
  • Office equipment (printers, scanners, monitors)
  • Cell phones and service (business portion)
  • Website hosting and domain fees

Professional Services

  • Legal and accounting fees
  • Business consulting
  • Marketing and advertising agencies
  • Website design and development
  • Professional memberships

Travel & Entertainment

Business Travel (100% Deductible)

  • Airfare, train, bus tickets
  • Hotel accommodations
  • 50% of meals during travel
  • Rental cars and taxis
  • Conference and trade show fees

Meals & Entertainment (50% Deductible)

  • Business meals with clients or colleagues
  • Meals during business travel
  • Office meals during overtime work
  • Documentation required: Date, location, attendees, business purpose

Retirement Plan Contributions

Self-Employed Retirement Options

SEP IRA

  • Contribution limit: Up to 25% of net self-employment income
  • Maximum: $69,000 (2024)
  • Deadline: Tax return deadline including extensions
  • Setup: Can be established and funded after year-end
  • Best for: Solo businesses with variable income

Solo 401(k)

  • Employee contribution: Up to $23,000 ($30,500 if 50+)
  • Employer contribution: Up to 25% of compensation
  • Combined maximum: $69,000 ($76,500 if 50+)
  • Setup deadline: Must be established by December 31
  • Contribution deadline: Tax return deadline including extensions
  • Best for: Higher earners, allows larger contributions

SIMPLE IRA

  • Employee contribution: $16,000 ($19,500 if 50+)
  • Employer match: Required (either 3% match or 2% non-elective)
  • Setup deadline: October 1 for existing businesses
  • Best for: Small businesses with employees

Act Now for Solo 401(k)

Unlike SEP IRAs, Solo 401(k) plans must be established by December 31 to count for the current tax year. If you're considering this option, don't delay. You can make contributions until your tax deadline, but the account must exist by year-end.

Employee-Related Deductions

Payroll & Bonuses

  • Year-end bonuses: Deductible if paid by December 31 (accrual basis) or when paid (cash basis)
  • Salary increases: Can be announced in December, effective in January
  • Payroll taxes: Remember employer portion when budgeting
  • Workers' compensation insurance: Deductible business expense

Employee Benefits

  • Health insurance premiums (100% deductible)
  • Group term life insurance (up to $50,000 per employee)
  • Retirement plan contributions (employer match)
  • Education assistance (up to $5,250 per employee tax-free)
  • Dependent care assistance (up to $5,000 per employee tax-free)

Inventory & Receivables Management

Inventory Write-Downs

  • Obsolete inventory: Write down to fair market value
  • Damaged goods: Reduce inventory value
  • Slow-moving items: Discount and sell before year-end
  • Proper valuation: FIFO, LIFO, or specific identification
  • Documentation: Keep records of inventory counts and valuations

Accounts Receivable

  • Write off bad debts: Uncollectible accounts (accrual basis only)
  • Collection efforts: Document attempts to collect
  • Age analysis: Review accounts over 90 days
  • Cash basis: Cannot deduct bad debts (income not yet recognized)

Estimated Tax Payments

Fourth Quarter Payment

  • Due date: January 15, 2025
  • Consider paying early: December 31 for current year deduction (if itemizing)
  • Safe harbor rules: Pay 100% of prior year tax or 90% of current year
  • High income: 110% of prior year if AGI over $150,000

Avoiding Underpayment Penalties

  • Make up shortfalls with December salary (increases withholding)
  • Make estimated payment before year-end
  • Calculate accurate Q4 payment based on YTD income
  • Consider annualized income method if income is uneven

Entity-Specific Strategies

Sole Proprietors

  • Report on Schedule C
  • Pay self-employment tax on net earnings
  • Can establish SEP IRA or Solo 401(k)
  • Home office deduction available
  • Health insurance deduction (if not eligible for spouse's plan)

Partnerships & LLCs

  • Pass-through taxation (income flows to partners)
  • Guaranteed payments to partners (deductible)
  • Section 199A deduction (up to 20% of qualified business income)
  • Partnership basis considerations for deductions
  • Capital accounts must be tracked properly

S Corporations

  • Reasonable salary requirement for shareholder-employees
  • Payroll tax savings on distributions vs. salary
  • Section 199A deduction available
  • Year-end basis adjustments for loans to corporation
  • One class of stock requirement

C Corporations

  • Flat 21% corporate tax rate
  • Separate tax return (Form 1120)
  • No pass-through taxation (double taxation on dividends)
  • More flexible with fiscal year-end
  • Accumulated earnings tax consideration

Documentation & Record-Keeping

Essential Records to Maintain

  • ☐ Income records: Invoices, receipts, bank statements
  • ☐ Expense receipts: All business expenses over $75
  • ☐ Mileage logs: Date, destination, miles, business purpose
  • ☐ Home office records: Square footage, expenses
  • ☐ Asset purchases: Invoices, depreciation schedules
  • ☐ Payroll records: W-2s, 1099s, payroll tax deposits
  • ☐ Bank statements: Business checking and savings
  • ☐ Credit card statements: Business credit cards
  • ☐ Contracts: Client agreements, vendor contracts
  • ☐ Insurance policies: Business liability, property, workers comp

Digital Record-Keeping Best Practices

  • Use cloud-based accounting software (QuickBooks, Xero, FreshBooks)
  • Scan and digitize all paper receipts immediately
  • Link bank accounts for automatic transaction import
  • Categorize expenses consistently
  • Reconcile accounts monthly
  • Back up all financial data regularly
  • Maintain separate business and personal accounts

Year-End Tax Planning Checklist

Before December 31:

  • ☐ Review profit projections and estimated tax liability
  • ☐ Decide on income timing (defer or accelerate)
  • ☐ Make equipment purchases and place in service
  • ☐ Pay or prepay deductible expenses
  • ☐ Establish Solo 401(k) if desired
  • ☐ Pay employee bonuses
  • ☐ Review and write down inventory
  • ☐ Write off bad debts (accrual basis)
  • ☐ Make charitable contributions
  • ☐ Pay estimated taxes (or increase withholding)
  • ☐ Review entity structure for tax efficiency
  • ☐ Update depreciation schedules
  • ☐ Reconcile all accounts
  • ☐ Organize receipts and records

January - April:

  • ☐ Issue 1099s to contractors (by January 31)
  • ☐ Issue W-2s to employees (by January 31)
  • ☐ Make retirement plan contributions
  • ☐ Pay estimated Q1 taxes (April 15)
  • ☐ File business tax return or extension
  • ☐ Review prior year for process improvements

Common Mistakes to Avoid

❌ Don't Make These Errors:

  • Mixing personal and business expenses: Maintain separate accounts
  • Poor documentation: "If it's not documented, it didn't happen"
  • Missing equipment purchase deadline: Must be in service by 12/31
  • Forgetting estimated taxes: Penalties add up quickly
  • Overpaying yourself (S-corp): IRS requires reasonable compensation
  • Missing 1099 deadline: $60+ penalty per form
  • Not tracking mileage: Losing thousands in deductions
  • Claiming personal expenses: Audit red flag
  • Missing retirement plan deadlines: Especially Solo 401(k) setup
  • Not consulting a professional: Complex situations need expert guidance

When to Hire a Tax Professional

Consider working with a CPA or tax professional if you:

  • Have gross business income over $100,000
  • Are considering changing entity structure
  • Have employees
  • Own multiple businesses
  • Have significant equipment purchases
  • Face an audit or IRS notice
  • Want to implement advanced tax strategies
  • Feel overwhelmed by tax complexity

The Investment Pays for Itself

Professional tax preparation and planning typically costs $500-$3,000+ for businesses, but the tax savings often exceed the fee by many multiples. A good tax professional doesn't just prepare returns—they proactively identify strategies and opportunities you might miss. Consider it an investment in your business, not an expense.

Start Your Year-End Tax Planning Now

The best time to plan was three months ago. The second-best time is right now. Use this guide as your roadmap, consult with professionals as needed, and take action before December 31. Your business—and your bank account—will thank you.