I recently saw a video on social media that gave me a good laugh—and a bit of a metaphor for tax season. The video showed someone carefully hollowing out a Ferrero Rocher chocolate and replacing it with a brussels sprout! Imagine the reaction when someone unwraps what should be a delicious treat, only to find a veggie surprise. It reminded me of what tax season can feel like for many small business owners. After a successful year, you start peeling back the layers of expenses and income, and suddenly—brussels sprouts! However, with some careful planning before December 31st, you can help make sure your tax season is more like unwrapping chocolate than vegetables.
Here’s a quick guide to optimizing your tax situation before year-end:
- Review Expenses and Income for Potential Deductions and Credits
Start by taking a close look at your expenses and income to see if there are tax deductions or credits that apply. This is an excellent time to speak with your tax professional to identify overlooked deductions, such as office supplies, vehicle mileage, or advertising costs that could reduce your taxable income.
- Consider Deferring Income or Accelerating Expenses
If you had a particularly strong year, you may want to consider deferring income or accelerating expenses. For example, if you’re a cash-basis taxpayer, you could prepay January’s rent or certain utility expenses before year-end to lower your current taxable income. Consulting your tax professional will ensure you’re following the correct guidelines, as not all expenses can be accelerated.
- Contribute to Retirement Accounts
Maximizing retirement contributions is a smart way to lower your tax bill. Contributing to accounts like a 401(k) or SEP IRA can reduce your taxable income. Remember, 401(k) and Solo 401(k) contributions generally need to be made by December 31st, while SEP IRA contributions can be funded until the April tax deadline. Unsure about the timing? Double-check with your tax advisor to maximize every opportunity.
- Review Payroll and Employee Information
Make sure your payroll data is accurate and up to date. Ensuring all employee information is correct helps prevent complications, especially for business owners who may need to send W-2s or 1099-NECs by January 31, 2025.
- Consider Charitable Contributions
Giving to charity can help reduce your taxable income. For maximum tax benefits, you could use a Donor-Advised Fund (DAF) to “bunch” contributions. This allows you to make a large charitable donation in a single year (to qualify for itemizing), then distribute those funds to charities over several years. If your annual giving doesn’t typically exceed the standard deduction, this strategy could provide greater tax efficiency.
- Roth Conversions
This is a great time to review Roth conversion options. Converting part of a traditional IRA to a Roth IRA allows you to pay taxes at the current rate on the converted amount, locking in the tax rate. If your tax bracket is temporarily lower this year, such as from a life event like marriage or job change, a Roth conversion could be especially beneficial. Keep in mind that the Tax Cuts and Jobs Act, which lowered tax rates, is set to expire at the end of 2025, so this may be an ideal time to convert.
- Consider Your Business Entity Type
As your business grows, reevaluating your entity type could save on taxes. For smaller businesses, a Schedule C filing may work, but larger or family-run businesses might benefit from becoming an S Corporation. With an S Corp, you can pay yourself a reasonable salary and distribute additional income as dividends, reducing payroll taxes. For instance, moving $20,000 from salary to income distribution could save you $3,060 in payroll taxes, but consult your CPA to ensure this is the right choice for you.
Key Tax Timelines for 2025
- January 31: Receive W-2s or 1099-NEC forms
- Mid-February: Receive 1099-B forms for brokerage accounts
- April 15: File your 2024 tax return
Acting on these strategies before December 31st can make tax season a little sweeter. Consulting with your tax professional will help ensure you’re taking advantage of every available deduction and credit to reduce your tax bill—and keep those “Brussels sprout surprises” to a minimum.