A couple months ago, we talked about the 4 taxpayer archetypes. One of those archetypes was the "White Flag" taxpayer. We defined this taxpayer as someone who has essentially resigned themselves to just getting it over with when it comes to their taxes, there's nothing else that can be done. They've surrendered, “it is what it is”. They feel like there is nothing they can do.
As we approach the end of 2024, we see that White Flag attitude in many of the people we are talking to. They feel like it is too late and their 2024 tax fate is set.
We're here to tell you that couldn't be further from the truth. There is still a lot you CAN do, and likely SHOULD do to reduce your taxes in 2024, both before 12/31, and after.
Here are just a few things you can explore, but, while it's not too late now, it will be before you know it if you don't take action.
Defer Income: If possible, consider deferring some income to the next year, especially if you expect to be in a lower tax bracket or anticipate higher deductions in 2024. If you're accounting on a cash basis, perhaps make some deposits in January. If you're on an accrual basis, be strategic about how you recognize revenue in 2025.
Accelerate Expenses: Pre-pay expenses or invest in equipment that allows for accelerated depreciation, thus maximizing deductions in the current year. If you're a cash basis taxpayer, consider prepaying recurring, predictable expenses, like rent, utilities, and insurance, you can pay up to 12 months. If you're on an accrual basis, look for opportunities to recognize expenses for which you may not yet have received a bill.
Retirement Plan Strategy: Make the maximum allowable contributions to retirement plans for you and your employees. This can lower your taxable income. Another option to explore is contributing to a solo 401k. Many business owners just participate in their company plans vs. exploring their ability to increase their contribution limits by setting up a solo 401k.
Real Estate Strategies: If you own or purchased real estate you have until you file your returns to do a Cost Segregation study that could allow you to accelerate depreciation on your properties and identify other opportunities around things like energy efficiency. Cost Segregation is an example of something that can be executed and included in your 2024 taxes, all the way up to when you file, so it doesn't have to be completed in 2024.
Review Inventory for Write-Downs: Conduct a thorough inventory review to write down obsolete or damaged inventory, which can enhance your deductions.
Evaluate Available Tax Credits: Investigate tax credits available for your business, such as the Research and Development Credit, which can reduce your tax liability dollar-for-dollar.
Consider Charitable Contributions: The Tax Cuts and Jobs Act (TCJA) significantly increased the standard deduction, leading to fewer taxpayers itemizing their deductions. As a result, many individuals now opt for the standard deduction since it surpasses their possible itemized deductions, including charitable donations. However, by exploring strategies like charitable trusts or "bundling" multiple years of planned giving into a single year, you can still take advantage of contributions to charity.
Compensation Strategy: As we have discussed in several posts, one of the most common factors in business owners overpaying their taxes is focusing on how much they are paying themselves vs. having a strategy for how they take that money out. Evaluating taking distributions in the form of bonuses vs. taking W2 wages can have a dramatic effect on your tax exposure. Executing an Executive Compensation Study is an excellent way to avoid this common pitfall.
The Pass-Through Entity Tax Election: This election lets certain business entities, like S-corporations, partnerships, and some LLCs, pay state income taxes at the entity level, bypassing the $10,000 SALT deduction cap from the 2017 Tax Cuts and Jobs Act. By doing so, these taxes become a deductible business expense on the federal return, potentially lowering the federal taxable income and overall tax liability for the entity's owners.
Automatic Accounting Changes: Automatic accounting changes, like adopting simplified methods or cash accounting, offer significant tax benefits. These changes allow flexible income and expense recognition, deferring taxable income and accelerating deductions. Small businesses, for example, can benefit from cash basis accounting, recording income when received and deducting expenses when paid, enhancing cash flow management.
And last but certainly not least...
ALWAYS FILE AN EXTENSION
These are just a few strategies to help you regain control over your tax situation for 2024, but one thing we always recommend is file an extension. An extension provides you with additional flexibility to make adjustments or implement changes through a superseding return if you discover new information after filing.
Naturally, each situation is unique, and there are specific eligibility details that vary by state, so it's essential to consult with a tax professional.
If you have any questions, we're here to help.
