With 2024 on the horizon, many businesses are in the midst of year-end tax planning to strategize and assess where deductions can be optimized to increase cash flow. In this article, Creative Planning Business Services shares tips businesses should consider before ringing in the new year that can reduce your tax burden for 2023.
Businesses that carry inventory often have goods that are outdated, damaged or no longer needed. If you’re aiming to reduce your tax burden in the current tax year, it’s best practice to dispose of or scrap this inventory by year-end to accelerate the losses related to it.
A significant exception to this practice is the handling of “subnormal goods,” which are goods that are unsaleable at typical prices or unusable due to damage, imperfections, changes of style, etc. This is common with electronic devices, such as smart phones that release new models each year, diminishing the value of unsold older models. For these goods, businesses can write down the cost of inventory to its current price within 30 days after year-end, subtracting the costs of sale even if the inventory is still in stock at the end of the year.
Businesses may have an opportunity to take a federal income tax deduction for some of the expenses they prepay instead of taking a deduction at the time services are provided. Determining which prepaid expenses are eligible for accelerated deductions can help your business optimize your tax savings. These deduction opportunities will vary depending on whether your business is on the cash basis or accrual basis method of accounting.
For businesses on the cash basis method, prepaid expenses can be deducted in the year of actual payment as long as the prepaid expense follows the “12-month rule.” Under the 12-month rule, cash basis businesses can deduct prepaid expenses in the year in which they are paid as long as the right/benefit associated with the prepayment doesn’t extend past the earlier of these two timeframes:
- 12 months from the first date on which the taxpayer realizes the right/benefit
- The end of the taxable year following the year of payment
For businesses on the accrual basis method, the rules are more complex before they can apply the 12-month rule. Taxpayers must carefully examine their prepayments to confirm whether there’s a fixed and determinable liability and whether economic performance has occurred by year-end in order to meet tax compliance regulations.
It’s crucial to review bonus plans before the end of the year to confirm they’re as tax-efficient as possible. To achieve this, most businesses that distribute bonus payments will want to deduct those payments in the year in which they’re earned (the service year) instead of the year in which they’re paid out to team members. This can be done by implementing strategies that allow for accelerated deductions, such as using a fixed bonus pool or a minimum bonus strategy that provides some flexibility for retaining bonuses forfeited by team members.
If you’re interested in implementing any of the above tax strategies to accelerate deductions, you must make all revisions and take necessary action before the end of the 2023 tax year. It’s recommended to partner with a tax advisor who can guide your business in the right direction. If you don’t have a tax advisor and aren’t sure where to start, Creative Planning Business Services can help.
Our team of tax professionals works with clients every day to maximize their opportunities and limit their tax exposure. Schedule a meeting today to learn more about our range of tax services and what we can do to empower your tax planning.