As the year’s final quarter approaches, business owners have a golden opportunity to fine-tune their financial strategies and implement tax-planning measures that can significantly impact their year-end results. The months leading up to December 31 are critical for making decisions that will not only help reduce tax liabilities but also set the stage for financial success in the upcoming year. Here’s how you can leverage the fourth quarter to optimize your financial health and tax standing.
- Conduct a Year-to-Date Financial Review
Start by reviewing your year-to-date financial performance. Look at your income, expenses and profitability to ensure you are on track to meet your business goals. Analyze your cash flow and if necessary, adjust your budget and financial projections for the final quarter. This is the time to identify where you can cut unnecessary costs, where to invest, and how to prioritize expenditures for the remainder of the year.
Action Steps:
- Compare actual results to your original budget.
- Reforecast expected revenue and expenses for the last quarter.
- Ensure your financial statements are up-to-date and accurate.
- Take Advantage of Tax Deductions and Credits
Business expenses and certain credits can lower your tax liability. Taking action now can maximize these benefits.
- Section 179 Deduction: If you’re planning to purchase equipment, consider doing it before year-end to take advantage of the Section 179 deduction. This provision allows businesses to deduct the cost of certain assets (like machinery, vehicles, or computers) as an expense, rather than depreciating it over time.
- Retirement Plan Contributions: Contributions to retirement plans, such as a 401(k) or SEP-IRA, can significantly reduce taxable income for business owners and employees. Ensure you’re contributing the maximum allowable amount to gain the greatest tax benefit.
- Tax Credits: There are several tax credits available to businesses, including the Research and Development (R&D) Credit, which rewards innovation, and the Work Opportunity Tax Credit (WOTC), for hiring individuals from targeted groups. If you’ve made energy-efficient upgrades, you may also qualify for green energy credits.
- Defer Income and Accelerate Expenses
Strategically shifting income and expenses can be an effective tax-saving strategy.
- Deferring Income: If your business had a profitable year and you anticipate being in a lower tax bracket next year, consider deferring income. Delay sending invoices or finalizing deals until January, if possible, to push income into the next tax year.
- Accelerating Expenses: Pay for expenses now that you expect to incur in the following year, such as rent, utilities, or office supplies. By accelerating deductible expenses, you can reduce your taxable income for this year.
- Tax-Loss Harvesting
If you’ve invested in stocks or other assets that have lost value, consider selling them before year-end to harvest the losses. This can offset capital gains and lower your tax bill. However, be cautious with the “wash-sale rule,” which prevents you from repurchasing the same or similar assets within 30 days of the sale.
- Evaluate Your Payroll and Employee Benefits
The fourth quarter is a great time to evaluate your payroll processes and employee benefits. If you plan to issue year-end bonuses, these can be tax-deductible. Similarly, providing additional employee benefits, such as health insurance or retirement matching contributions, can reduce your taxable income and serve as a retention tool for your workforce.
Make sure that your payroll taxes, including state and federal withholdings, are up to date. Errors or underpayments can result in penalties and interest, adding unnecessary costs to your business.
- Inventory Management
If your business holds inventory, conducting a year-end review is crucial. By identifying obsolete or slow-moving stock, you can write off unsellable items, which can lower your taxable income. A physical inventory count ensures that your books are accurate and your financial statements reflect your actual inventory levels.
- Plan for Estimated Taxes
Many small business owners are required to pay quarterly estimated taxes. The fourth quarter is your last chance to avoid penalties by ensuring your estimated tax payments are accurate. If your income fluctuated significantly this year, you may need to adjust your final payment.
- Consider Your Business Structure
As your business grows, your current legal structure may no longer be the most tax efficient. For example, switching from a sole proprietorship or LLC to an S-Corp may reduce self-employment taxes. A review of your business structure with a tax professional could reveal opportunities for significant tax savings.
- Charitable Contributions
If charitable giving is part of your company’s values, consider making donations before the year ends. Contributions to qualified nonprofit organizations are tax-deductible and can help lower your taxable income. Beyond the tax benefits, it’s also a great way to give back to your community and enhance your business’s reputation.
- Work with a Tax Professional
The final quarter of the year is often too complex to navigate without professional advice. New tax laws, business changes and financial goals all impact your strategy. Consulting a tax advisor can help ensure you’re taking advantage of every opportunity available to you while avoiding costly mistakes.
Position Your Business for Success
Financial and tax planning in the fourth quarter is not just about reducing your tax bill—it’s about setting up your business for success in the coming year. With careful planning and smart decisions, you can maximize deductions, minimize liabilities and start the new year on strong financial footing.
By reviewing your financials, maximizing tax deductions and seeking professional guidance, you can close the year with confidence and position your business for growth and profitability in the future.
Kevin O. Stinnett. CLU, CLTC, LUTCF is the owner and president of Lexington Insurance Agency in Lexington, Ky.
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