Year-end is the best time to take charge of your business’s tax position, and the worst time to leave it until the last week. A little planning now can lower your tax bill and leave more money to put back into the business.
A good starting routine: review your records so you know where you stand, look for deductions you might have missed, think about when income and expenses fall, consider retirement contributions, and talk to a tax professional. For more detailed strategies, you can read more here. The six steps below explain each part.
1. Understand your tax deductions
Deductions reduce the income you are taxed on. They include business expenses such as office supplies, travel and employee wages. According to IRS guidelines, an expense must be both ordinary (common in your line of business) and necessary (helpful and appropriate) to qualify. Keep detailed records of everything, because they are your proof if you are ever audited.
2. Use retirement plan contributions
Retirement plans such as a 401(k) can lower your taxable income, and the contributions are tax-deferred, which means you pay tax only when you withdraw. Offering a plan can also help you keep good employees. For the setup details, see the Department of Labor’s guide on retirement plans.
3. Time your income and expenses
If you expect to earn more next year, you may be able to push some of this year’s income into next year. If you think you will be in a higher tax bracket next year, bringing expenses forward into this year can help. It takes careful planning, but the savings can be meaningful.
4. Look for tax credits
A deduction lowers the income you are taxed on. A credit lowers the tax itself, which is why credits are so valuable. The Research & Development credit and the Work Opportunity credit are two examples. It is worth finding out which ones apply to your business.
5. Bring in a professional
A tax professional knows the rules, spots deductions and credits you may miss, and keeps up with changes in the law. The fee can feel like an extra cost, but it often pays for itself.
Deductions and credits compared
| Aspect | Deductions | Credits |
| Effect on Taxable Income | Lowers taxable income | Directly reduces tax liability |
| Examples | Business expenses, healthcare costs | Energy efficiency, R&D |
| Benefit Calculation | Depends on tax rate | One-to-one reduction |
6. Plan for next year now
Do not wait for the next year-end. Consider estimated tax payments to avoid penalties, and review your strategy each year in case your goals or the law have changed.
In short
Know your deductions, use retirement plans, time income and expenses wisely, check for credits and get professional advice. Do these things before the year closes and tax season will be far less stressful.
