It’s hard to believe another year is almost over! For small business owners, year-end means it’s time to take a look at your current finances and tax strategy. The moves you make before December 31 can make a big difference when tax season rolls around to saving money, improve cash flow, and keep your business in compliance. To help you finish the year strong, we’ve put together a practical year-end tax planning checklist packed with tips to uncover savings and set your business up for success in 2025.
Legislation in has accelerated the timeline for several deductions causing them with earlier end dates than initially planned. Whether you’ve been claiming these credits for years or are just hearing about them, you still have time to make the most of them. Keep reading to find out who qualifies, what the benefits are, and how to claim your savings before the deadlines hit.
Buy Equipment and Other Fixed Assets
One of the most impactful ways to create tax deductions before year-end is by purchasing equipment, machinery, or other fixed assets essential to your business and placing them in service by December 31. Typically, these assets are capitalized and depreciated over multiple years, but certain options revitalized the One Big Beautiful Bill (OBBB) by allow you to deduct some, or all, of the costs immediately.
Bonus Depreciation: Under the OBBBA, businesses can immediately deduct 100% of the cost of qualifying property purchased after January 19, 2025. Previously set at 40% for 2025, this permanent change makes it possible to fully expense eligible assets in the year they are placed in service, which can significantly reduce your tax bill. Qualifying property includes tangible personal property with a MACRS recovery period of 20 years or less, most computer software, certain leasehold improvements, and specific transportation utility assets. This benefit applies to both new and used property acquired after the effective date, giving businesses greater flexibility in managing capital investments.
Section 179 Expensing: Under the OBBBA, the limit for Section 179 Expensing was increased to $2.5 million for property placed in service in taxable years beginning after December 31, 2024. Previously, this limit was $1.25 million for 2025. Section 179 lets businesses write off the cost of eligible property in the year it is placed in service, rather than depreciating it over time. Eligible property includes tangible personal property used in an active trade or business, such as machinery, equipment, and off-the-shelf software. Certain improvements to nonresidential real property, such as roofs, HVAC systems, and fire protection systems also qualify. Most buildings and structural components do not qualify, except for “qualified real property,” which covers specific leasehold, restaurant, and retail improvements. To qualify, the property must be used more than 50% for business purposes and placed in service during the tax year the deduction is claimed.
Review our blog, OBBBA 100% Bonus Depreciation and Section 179 Expensing to get a more in-depth view of these two provisions.
De Minimis Safe Harbor: This rule allows businesses to immediately expense certain low-cost items instead of capitalizing and depreciating them as fixed assets. If your business maintains applicable financial statements, you can deduct up to $5,000 per item or invoice, provided the items are also expensed for accounting purposes. For businesses without such financial statements, the limit is $2,500 per item or invoice. Despite the “de minimis” name, this provision can result in significant upfront deductions, for example, purchasing ten computers at $2,500 each could allow a $25,000 immediate deduction.
Maximize the Qualified Business Income (QBI) Deduction
As the year-end approaches, business owners should take steps to maximize the Qualified Business Income (QBI) deduction, also known as the Sec. 199A deduction, which allows up to a 20% deduction on qualified business income. To optimize this deduction:
Review income levels: Ensure your income stays below the phase-out thresholds of $197,300 for single filers and $394,600 for joint filers (2025 amounts) to avoid reduction of the deduction.
Adjust W-2 wages: For businesses structured as S corporations, ensure “working shareholders”’ W-2 wages align with industry standards while avoiding IRS scrutiny.
Make capital investments: Increase deductions through Section 179 expensing or bonus depreciation, which can lower taxable business income.
Contribute to a Retirement Plan
Contributing to a retirement plan provides both significant tax advantages and long-term savings for business owners and employees.
SEP IRA
Solo 401(k) plan
Year-End Bonus
Manage Year-End Inventory
Year-end inventory is a key factor in determining a business’s profit or loss, as it directly impacts the Cost of Goods Sold (COGS), which is central to calculating gross profit. COGS is calculated as: Beginning Inventory + Purchases During the Year – Ending Inventory. A higher ending inventory reduces COGS, increasing gross profit and taxable income, while a lower ending inventory raises COGS, lowering gross profit and taxable income.
Write down obsolete or slow-moving inventory: Recognizing reduced inventory value as a loss can lower taxable income.
Delay inventory purchases: Postponing purchases until after year-end can help manage COGS and reduce taxable income for the current year, optimizing financial results.
Review Accounts Receivable for Bad Debts
As year-end approaches, business owners should assess their accounts receivable to determine if any bad debts can be written off for tax purposes. Bad debts, which are amounts owed to the business that are uncollectible, typically stem from unpaid customer invoices or unreturned loans. These debts can be classified as either business or nonbusiness debts.
To qualify for a business bad debt deduction, the debt must have been previously included in the business’s income and be related to regular business operations.
For businesses using the accrual method, bad debts are deductible in the year they are deemed worthless. It’s important to document diligent collection efforts and prove the debt’s worthlessness to comply with IRS requirements.
Managing bad debts effectively not only cleans up financial records but can also optimize taxable income, improving your business’s overall financial health. Consult a tax advisor to ensure you’re fully leveraging this deduction in your year-end tax strategy.
Pre-Pay Expenses
As year-end approaches, business owners can reduce taxable income by prepaying certain business expenses. Accelerating deductions for items like insurance premiums, office supplies, and marketing costs before December 31st can lower this year’s taxable income. This strategy is particularly useful for businesses using the cash accounting method, where expenses are deducted in the year they’re paid. Under the IRS safe harbor rule, businesses can prepay up to 12 months of expenses, pulling those deductions into the current tax year. However, ensure that deferring income won’t disrupt cash flow needs.
Defer Income
Deferring income to the next tax year is another strategy to optimize tax outcomes. For businesses on the cash basis, delaying client billing until after the new year means income is only counted when received. This can help keep your business under key tax thresholds, lowering your overall tax liability. However, it’s important to weigh this strategy carefully to avoid any negative impact on operations or client relationships.
By balancing both prepaying expenses and deferring income, business owners can better manage taxable income, improve cash flow, and potentially reduce tax liabilities.
Avoid Underpayment Penalties
If you expect to owe taxes for 2025, taking proactive steps before year-end can help minimize or avoid underpayment penalties. The penalty is applied quarterly, so making a fourth-quarter estimated payment will only reduce the penalty for that quarter. However, withholding is treated as paid evenly throughout the year, meaning that increasing withholding at the end of the year can reduce penalties for earlier quarters. Here are some strategies to consider:
Use a Qualified Retirement Plan: If you have a qualified retirement plan, you can take an unqualified distribution as a temporary solution to address under-withholding. When you take the distribution, 20% is automatically withheld for federal income taxes, which can help catch up on required payments and avoid penalties. To mitigate tax consequences, you can roll the entire amount (including the withheld portion) back into the plan within 60 days. This ensures the tax-deferred status of the retirement savings and avoids additional tax liabilities, though you’ll need to use other funds to cover the withheld amount during the rollover.
Increase Spouse’s Withholding: If you’re married and your spouse is employed, they can increase withholding for the end of the year—potentially even withholding the entire paycheck amount with the help of a cooperative employer.
Increase Withholding from Other Income Sources: If you have other sources of income subject to withholding, consider increasing the withholding on those amounts as well.
It may be beneficial to consult with your tax advisor to estimate potential underpayment penalties and determine whether any exceptions to the penalty apply.
By implementing these year-end tax strategies, business owners can lower taxable income, reduce tax liabilities, and strengthen their financial positions heading into the new year. Call us to set up a year-end planning meeting to ensure you’re using these strategies correctly and complying with IRS guidelines.
Chris VanArsdale
Chris is a Manager in our tax department with over 10 years of experience. His specialties include international, trust and estate, and business tax filings.
