Year-End Tax Planning for Your Business: 8 Strategies to Consider

Business leaders could lower taxes for this year by deferring income and accelerating spending. Or they could lower taxes for next year by doing the opposite: collecting more income and delaying spending. Here's what to know about other year-end tax moves worth considering, including contributing to workplace retirement plans, investing in equipment and using energy tax credits. Launch this on-demand webcast for more insights: Strategies for Surviving Year-End Reporting.

The end of the year is arguably the most important time for tax planning. It's your last chance to make decisions that will affect your company's tax return.

As leaders gear up for 2024, organizations are facing additional year-end tax planning considerations. Not only do businesses need to plan around new workplace trends following the COVID-19 pandemic, but major tax changes will be going into place soon due to the 2022 Inflation Reduction Act and the end of pandemic-relief measures.

If you're not sure what move to make first, you're not alone. This checklist of eight year-end tax planning strategies from ADP's tax credits team can help.

1. Deferring income and expenses

Whether revenue will count toward this year's tax return or next year's depends on when it was earned. If you'd like to pay less in taxes for your upcoming return, you could defer some income from December so it's counted in January.

Your method for deferring income will depend on your organization's accounting system for recognizing revenue, which was selected when the business was established. If you use the cash system, which considers income earned when you receive payment, you could delay sending out some invoices until after the new year. If you use an accrual system, which recognizes revenue after you complete a job for a client, you could delay some shipments or wait to finish off projects until January.

On the other hand, if you have a lot of unused deductions for the year, it may make sense to accelerate your efforts so you can put those deductions to good use. In this case, you would do the opposite — either send out invoices early or move to complete shipments and projects before the end of the year.

You could do the same with expenses as well. If you'd like to potentially reduce your taxes this year, you could prepay expenses like rent or suppliers under the cash system. Under the accrual system, you would agree to new expenses, like signing a contract to buy new equipment for your business, even if payment isn't due until next year.

Steps to reduce taxes this year

Using the cash system
- Delay sending out invoices to clients
- Prepay rent, suppliers and other expenses before year-end
Using the accrual system
- Postpone projects or shipments until next year
- Agree to more business purchases, even if you can delay payment

Steps to reduce taxes next year

Using the cash system
- Send out invoices and ask to get paid before year-end
- Delay paying rent, suppliers and other expenses until next year
Using the accrual system
- Complete projects or shipments before year-end
- Delay business investments until next year, even those that don't require payment

2. Investing in equipment

You may want to consider deducting the entire purchase price of certain tools and appliances from your taxes using the Section 179 deduction as detailed by the IRS. You can use this deduction when you purchase equipment, tools, vehicles and technology for your business.

Thanks to the Tax Cuts and Jobs Act of 2017, the IRS allows you to deduct up to 100% of a purchase, up to $1.16 million per year, to account for qualified purchases of property for your business. If you spend more than $1.16 million, you can also claim a temporary deduction called bonus depreciation. This would allow you to potentially deduct 80% of your 2023 investment in equipment.

With bonus depreciation, you need to deduct all assets in the same category at once; you can't pick and choose as you can with the Section 179 deduction. For example, if you deduct the entire cost of one vehicle upfront, you'd need to deduct the cost of all vehicles purchased in the year.

Starting in 2023, the upfront bonus depreciation deduction begins to decrease, going from 80% in 2023 and reducing by 20% a year until it's scheduled to be gone in 2027. That would mean spreading the equipment purchase deduction over years for the expected use of the asset rather than claiming the whole thing at once.

If you haven't reached this limit yet and have more investments in mind, consider pursuing them before the end of the year if you'd like to use the full upfront deduction.

3. Contributing to retirement plans

If you offer a workplace retirement plan like a 401(k), December 31 is the final date for you and your employees to make contributions for the year. Make sure everyone is aware of this deadline so that they can make any final retirement investments before the new year.

If you want to reduce your own personal tax bill, adding money to your 401(k) account is a simple way to earn another deduction while developing your nest egg. In tax year 2023, you and your employees could have contributed if you were younger than 50 and $30,000 if you were 50 or older.

4. Maximizing energy tax credits

There are also several energy tax credits available each year. These include tax credits for:

Buying energy-efficient vehicles
The Section 179D deduction for building energy-efficient upgrades
The solar panel investment credit
Rebates for energy-efficient appliances

The Inflation Reduction Act of 2022 extended the use of (and in some cases enhanced) these tax credits so they are still available in 2023 and beyond. Making these changes before the end of the year could drastically improve your tax situation, and the upgrades would also be positive contributions to the state of the environment.

5. Coordinating with remote employees

The rise of remote employees has become a major interest for tax authorities since the global health crisis began in 2020. If you have employees working from home, they could potentially be working anywhere, including in a different state. This could create new tax responsibilities for your business.

When an employee works from home in another state, you may need to register and withhold payroll taxes for that state government. It depends on what agreements they have in place with the state where your business is located. Your remote employee might also trigger other responsibilities for your business in another state. For instance, you might need to register for licenses and permits in that other state. You might also end up owing them corporate income and/or sales taxes because of the work performed there.

What further complicates the situation is that when employees are remote, they could be moving to different locations throughout the year. For example, they may work for a month from a ski resort in Utah, which could trigger the need to collect payroll taxes for that location as well. If you have remote employees, you should:

Let your staff know why it's so important for you to know their location. Consider requiring approval before they relocate to another state.
Ask every employee to share their location during the year, including temporary visits.
Add up their days in each location.
Share this information with your tax advisor to see if there are any new tax responsibilities. You may also qualify for new tax incentives for creating jobs in another area.
Register with any new state governments to collect payroll taxes or handle other requirements.

6. Looking ahead to new 2024 tax benefits

The Inflation Reduction Act created a couple of significant new tax benefits for 2023 that your business may be able to use. First, it doubled the size of the small business research and development (R&D) tax credit. If your business invests money on qualified research activities to drive innovation and growth, you can use that expense to offset the employer portion of Social Security and Medicare taxes. To use this credit, your business must have less than $5 million in revenue and must have only been earning revenue for less than five years. Before, the maximum credit was worth $250,000 per year. In 2023, it will be $500,000. If you invest in R&D, you might consider how to increase your budget to use the larger credit next year.

Additionally, the Inflation Reduction Act extended the Affordable Care Act's premium subsidies for employees earning over 400% of the poverty limit through 2025. You do not need to change anything to manage your workplace health insurance plan. You still need to report health insurance amounts for employees on Form 1095-C each year. However, you may want to let your workforce know that they will continue receiving this government help with their premiums.

The Inflation Reduction Act has also made many of its newly enacted energy credits, as well as some pre-existing energy credits, tradeable by the parties who generate the credits. Though guidance on how a transfer will work is not yet available, a taxpayer can now purchase energy credits from an unrelated party to reduce its Federal income tax liability.

Alert: Possible state payroll tax increases

Most states are falling below their reserve requirements for unemployment insurance. In the near future, they likely will need to increase their tax revenue to meet federal requirements. Approximately 10 states are also in the position of possibly losing a federal credit for unemployment taxes, which would increase what in-state employers would need to collect.

If these changes go through, the amount your business owes for payroll taxes could increase. Consider speaking with your tax planner or payroll provider to see whether these government changes are something you need to budget for.

7. Preparing for more tax audits

The IRS audit rate has fallen steadily over the past few years. However, this looks set to change in 2023 and beyond. The Inflation Reduction Act is set to increase funding for the IRS by $80 billion over the next 10 years, with more than half of that money going toward extra enforcement, such as audits. Both businesses and business owners are more likely than average to face an audit.

State revenue agencies could also be looking for more enforcement, especially regarding new challenges like remote workers. This is all the more reason to get your year-end tax planning right.

There is an upside, though. All this extra funding should give the IRS more resources to answer questions and handle taxpayer services. If you've struggled with reaching the IRS in the past, it could become easier in the future.

8. Meeting with your tax planner

As you prepare for the end of the year, you may want to consider meeting with your tax advisor. Together, you should:

Go over your bookkeeping to ensure that all of your profit and loss figures have been recorded and updated.
Estimate how much you'll owe in taxes and whether you'll receive a refund or owe money.
Discuss other year-end tax planning strategies and deduction opportunities you might not have considered.
Review new laws that launched in 2023 and their implications for your business.
Start preparing your tax strategy for 2024.

As you move toward the end of December, consider pursuing these moves so you can celebrate the holidays with the knowledge that your business will be in excellent shape for the upcoming tax season.

For a further review of recent year-end tax planning changes, launch ADP's on-demand webcast anytime: Strategies for Surviving Year-End Reporting.