Year-End Tax Planning Checklist for Business Owners
For many business owners, tax planning starts when it's time to prepare the tax return. By then, some of the best opportunities to reduce taxes may already be gone.
Year-end tax planning gives you a chance to review where your business stands while there is still time to act. That doesn't mean spending money just to create deductions. It means understanding your numbers and making decisions that make sense for both your business and your tax situation.
Here are several areas worth reviewing before the end of the year.
1. Review Your Income and Expenses
Start with the basics. How much has your business earned so far, and what do you expect between now and December 31?
Compare your current results with the prior year and look for any major changes.
If income increased significantly, your tax liability may have increased as well. If profits declined, your estimated payments may need to be adjusted.
Current Bookkeeping & Accounting records make this process much easier. If your books haven't been updated in several months, getting them current should be one of your first year-end priorities.
2. Estimate Your Tax Liability
Once you have a reasonable estimate of your annual income, you can estimate your federal and state tax liability.
This is also a good time to review the estimated tax payments you've already made.
If you've underpaid, you may still have time to make an additional payment. If you've significantly overpaid, you may be able to adjust your remaining payments and keep more cash available for your business.
Our article How Much Should Small Business Owners Set Aside for Taxes? provides additional guidance on preparing for business tax obligations throughout the year.
3. Review Business Purchases
If your business needs equipment, technology, furniture, or other assets, year-end may be a good time to consider those purchases. The key word is "needs."
Buying something solely for a tax deduction usually doesn't make financial sense. Spending $10,000 to save a fraction of that amount in taxes still leaves you with less cash. Instead, consider whether a purchase already makes sense for the business and whether the timing creates a legitimate tax planning opportunity.
4. Review Retirement Contributions
Retirement plans can be an important part of tax planning for business owners.
Depending on your business structure and retirement plan, you may have opportunities to make tax-advantaged contributions for yourself and potentially your employees.
Contribution limits, deadlines, and requirements vary by plan, so this is an area where planning ahead matters.
Waiting until your tax return is being prepared may limit your available options.
5. Look at Accounts Receivable and Upcoming Income
If your business uses the cash method of accounting, the timing of when income is received may affect when it becomes taxable. That doesn't mean you should unnecessarily delay collecting money your business is owed. Cash flow comes first. However, understanding when large payments, bonuses, or other income are expected can help you plan for the resulting tax liability.
6. Review Your Business Structure
As businesses grow, the tax structure that made sense at startup may no longer be the best fit. For example, a profitable LLC taxed as a sole proprietorship may eventually benefit from considering an S corporation election.
Our article LLC vs. S Corporation: When Is It Time to Make the Switch? explains some of the factors business owners should consider.
Entity decisions should be based on more than tax savings alone. Payroll costs, administrative requirements, state taxes, and long-term plans all matter.
7. Check Payroll and Owner Compensation
S corporation owners should review payroll before year-end. Owners who perform services for the business generally need to receive reasonable compensation. Waiting until after the year ends to discover that payroll was handled incorrectly can create unnecessary complications. This is also a good time to confirm that payroll records, tax deposits, and employee information are accurate.
8. Review Deductions and Documentation
You don't want to discover during tax preparation that you forgot about expenses or can't support a deduction. Review expenses such as:
Professional fees
Business insurance
Software and subscriptions
Advertising and marketing
Continuing education
Business travel
Equipment
Office expenses
Good records make Business Tax Preparation easier and provide support for deductions reported on your return.
9. Don't Wait Until December 31
Year-end planning doesn't have to happen in the final week of December.
In fact, starting earlier gives you more options. A tax projection in the fall can identify potential issues while there is still time to address them. Depending on your circumstances, another review closer to year-end may also make sense. This is the difference between tax preparation and proactive Tax Strategy & Planning. Tax preparation reports what already happened. Tax planning gives you an opportunity to make decisions before the year is over.
How Groundwork Tax & Accounting Can Help
At Groundwork Tax & Accounting, we help business owners look beyond the tax return.
By reviewing your financial results, estimated payments, business structure, deductions, and upcoming decisions, we can identify planning opportunities before important deadlines pass.
The goal isn't simply to reduce taxes at any cost. It's to make tax-efficient decisions that also make sense for your business.
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Frequently Asked Questions
When should I start year-end tax planning?
Ideally, before the final weeks of the year. Starting in the fall provides more time to evaluate your situation and implement strategies when appropriate.
Should I buy equipment before year-end for the tax deduction?
Only if the purchase makes sense for your business. A tax deduction reduces the cost of a purchase, but it doesn't make an unnecessary expense free.
Can I reduce my estimated tax payments if my business had a bad year?
Possibly. Estimated payments should reflect your expected tax liability, but several rules can affect the amount you should pay. A tax projection can help determine whether an adjustment makes sense.
Should I review my S corporation salary before year-end?
Yes. S corporation owners who work in the business should periodically review their compensation and payroll to make sure they are being handled appropriately.
What's the difference between year-end tax planning and tax preparation?
Tax planning occurs before the year ends and focuses on decisions that may affect your taxes. Tax preparation generally occurs after the year ends and reports the financial activity that already took place.
