Five Time-Tested Year End Tax Planning Strategies

The leaves have changed, we’ve had our first major snow, and that always means that its time for year-end tax planning. My clients are clamoring for ideas for generating last-minute tax savings. Here are six powerful business tax deduction strategies you can easily understand and implement before the end of 2023.

1. Prepay Expenses Using the IRS Safe Harbor

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses (ordinary and necessary business expenses) up to 12 months in advance without challenge, adjustment, or change by the IRS.

2. Stop Billing Customers, Clients, and Patients

If you are a cash-basis taxpayer, here is one rock-solid, straightforward strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2023.

Customers, clients, and insurance companies generally don’t pay until billed. Not billing customers and clients until after year’s end is a time-tested tax-planning strategy that business owners have used successfully for years to reduce the current tax year’s income, while still earning the revenue.

3. Buy Office Equipment

Increased limits on Section 179 expensing now enable 100% write-offs on most equipment and machinery, whereas bonus depreciation enables 80% write-offs. Either way, when you buy your equipment or machinery and place it in service before December 31, you can get a big write-off this year.

Qualifying Section 179 and bonus depreciation purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

4. Don’t Assume You Are Taking Too Many Deductions

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.

If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years, but the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.

What does this all mean? Never stop documenting your deductions, and always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

5. Consider Buying a Vehicle

Want a new or new-to-you (used) SUV, Crossover, or Van? Let’s say that on or before December 31, 2023, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the

manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four benefits:

1. Bonus depreciation of 80 percent

2. Section 179 expensing of up to $28,900

3. MACRS depreciation using the five-year table

4. No luxury limits on vehicle depreciation deductions

Looking for a pickup? If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2023, then this newly purchased vehicle gives you four big benefits:

1. Bonus depreciation of up to 80 percent

2. Section 179 expensing of up to $1,160,000

3. MACRS depreciation using the five-year table

4. No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have

· a GVWR of more than 6,000 pounds, and

· a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. The vehicle is still eligible for expensing of up to the $28,900 SUV expensing limit and 80 percent bonus depreciation.

What about an electric vehicle? If you purchase an all-electric vehicle or a plug-in hybrid electric vehicle, you might qualify for a tax credit of up to $7,500. You take the credit first, and then follow the rules that apply to the vehicle you purchased.

I hope you find these tips to be helpful in generating some last-minute tax savings. If you want an annual, proactive tax strategy session each fall, please reach out to learn more about Fusion’s Empowerment Tax Packages. We are proud to offer bundled tax preparation + legal services that keep you compliant, supported, and paying as little tax as possible – LEGALLY.