(This column originally appeared in The Inquirer)
Though filing your 2023 taxes may be on your mind this time of year, it’s also a good time to consider ways to cut your tax bill for next year. 2024 is still young, and it’s a good time to meet with your accountant or tax advisor and discuss these strategies. That will give you time to make these moves so that you can minimize your tax liabilities by the end of the year.
Buy capital equipment: The “bonus” depreciation deduction available for businesses has been significantly reduced for 2024, but it still remains a significant benefit. This year if you purchase and put into service certain machinery, equipment, office furniture, software, hardware, and other assets you can deduct more than half of it on your 2024 tax return. The remainder would need to be depreciated over the life of the asset.
Buy a “clean” vehicle: Thanks to the Inflation Reduction Act individuals and their businesses can now get up to a $7,500 tax credit on the price of certain qualified plug-in or fuel-cell electric vehicles. Better yet, the credit can now be taken right at the dealership. If you’re looking for a new car for your business, this incentive is significant.
Start a retirement plan for your business: Thanks to 2022′s SECURE 2.0 Act, eligible small business owners can get tax credits from the federal government that will offset the costs of starting up a new retirement plan. Also, some business owners can get receive additional tax credits for matching their employees’ contributions to their retirement plans or by requiring auto-enrollment into their plans.
Maximize your pre-tax retirement savings: In 2024, you can contribute up to $7,000 to an Individual Retirement Account or as much as $23,000 to an eligible company retirement plan. People over the age of 50 can also make additional “catch-up” contributions. If your company matches your contribution — depending on your age — as much as $76,500 can be put away for retirement. These contributions are an excellent way to reduce your taxable income and defer the taxes you owe until at least the age of 72, when minimum distributions will be required and taxed.
Maximize your after-tax retirement savings: SECURE 2.0 also now allows businesses to create Roth retirement accounts where both owners and employees, up to certain income levels, can contribute after-tax earnings to save for retirement. Because this income has already been taxed it will grow tax free forever without any requirements — or penalties — for withdrawals.
Get a credit for research: The Research Tax Credit was expanded under the Inflation Reduction Act so that small businesses can apply the credit against either their income or payroll taxes owed. It’s available for any business in any industry that’s developing new products and considers expenses such as wages, materials, outside contractors, and overheads. The calculation is a little complicated so it’s best to engage a specialist sooner rather than later to better understand the rules and gather the required documentation.
Consider wash sales: If you have any stocks that have lost money you may want consider a tax move called a “wash sale” where you sell the stock and realize the loss, which can then be offset against capital gains or deducted towards up to $3,000 of your ordinary income. You can then wait 30 days and re-purchase the stock.
Maximize the Work Opportunity Tax Credit: This federal tax credit, which can be taken against either income or payroll taxes depending on certain factors, is available for businesses who hire the formerly incarcerated, the long term (six months) unemployed, people coming off of welfare, veterans, or other worker groups. The credit can be as much as $9,600 per hired employee, but you need to file forms in advance so it’s important to talk to a tax professional before making your hiring decision.
Pay for family leave: Under 1993′s Family and Medical Leave Act, businesses with more than 50 employees are required to provide up to 12 weeks of unpaid leave for family medical care and other reasons. Businesses with less than 50 employees do not have that requirement. But all businesses can take advantage of the Paid Family Leave Tax Credit, which can provide up to a 50% credit on the compensation paid to an employee when off on family leave.
Hire your child: The standard individual tax deduction for 2024 is $14,600 so if you hire a teenager to do work for your company, then their wages up to that amount won’t be taxable (although there may still be some payroll, state, and local taxes due). As an employer, you’ll get a tax deduction for these payments as long as the person is performing reasonable tasks. This rule is not limited to your own children so any younger person can be hired and realize the same benefits.
Instead of giving a raise, pay more for healthcare: If you have a healthcare plan in your business and you contribute to your employees’ costs, consider contributing more this year in lieu of giving a raise. Why? When you give someone a straight raise, both you and the employee will pay taxes on that amount. But most healthcare contributions are non-taxable and deductible.
Pay bonuses: As you head towards the end of this year, meet with your accountant and estimate your profits. If you can afford it, consider paying bonuses. This will reduce your taxable income and also put the money in the hands of your employees — your greatest asset — instead of the government.
Clean out your inventory: If you have old inventory lying around, make a plan for disposing it this year. Once you do, you’ll get a tax deduction for the cost, but you can’t realize this benefit until you remove it.
Clean up your accounts: If you have any older (say more than 120 days) accounts receivable, take a hard look, bite the bullet, and write them off. It’s not uncommon to have uncollectible amounts, and, though frustrating and painful, you can at least get a tax deduction for the amount you’ve been carrying once you remove this asset from your books.
