These four questions could help you lower your business tax liability for 2024 and beyond.
As we approach the end of the year, if you are a business owner, you may be looking for ways to optimize your finances and lower your business tax liability. In considering your business strategy and tax situation, you also may want to work with your advisors to determine whether the potential sunsetting of the 2017 Tax Cuts and Jobs Act at the end of 2025 might impact you.
Steve McConley, Business Owner Advisory strategist with Wells Fargo Advice and Planning, answers some key questions that entrepreneurs should be considering this tax season. He says a focus on the future is essential if businesses want to stay one step ahead of the ever-changing business tax landscape.
What should business owners focus on before year-end to reduce their business tax exposure?
McConley suggests looking at capital expenditures you intend to make soon and consider accelerating these instead of waiting for next year. The sunsetting of the Tax Cuts and Jobs Act scheduled to occur at the end of 2025 may impact the way deductions work for those expenses.
Currently, owners may be able to deduct 100% of their capital expenditures. For example, an LLC or an S corporation can sometimes deduct the entire cost of a piece of equipment purchased in 2024. That same purchase made later may have to be depreciated over three to five years.
We don’t suggest making purchases just for the deduction, but where is makes business sense, we do suggest making necessary purchases sooner rather than later to enjoy the tax benefits that are still in effect.
What other tax-smart moves can business owners consider?
“There are the usual things, like donating to charity, giving bonuses to employees, and increasing executive benefits,” says McConley. If these are actions the business has been planning to take, it could be a good idea to implement them in the fourth quarter so you can realize the tax benefits for 2024.
McConley stresses that it’s important to keep in mind that how a business handles these and other tax considerations depends on the tax-paying structure of the business. Is it a sole proprietorship, partnership, LLC, or S corporation that passes income through to the owners? Or is it a C corporation that pays its own taxes? These are important distinctions that impact business tax strategy.
Is business structure something that owners could consider changing?
Many companies start off as one type of business structure and change to another type as the business grows and evolves. For example, if you’re planning to sell your business to a third party in a few years, you may want to change to a flow-through entity because there may be potential tax advantages for the sale compared with selling as a C corporation. But C corporation status offers certain advantages to small-business owners that other options don’t, so that’s an important factor to consider as well.
That said, McConley says he’s seen businesses wait too long to make adjustments. They don’t have to do anything, so they do nothing, and that has the potential to create tax disadvantages in the future.
He recommends revisiting the business structure on a regular basis to ensure that you’re choosing the best structure for the business today and in the future.
Who could business owners turn to for guidance?
Start by hiring a good CPA who does more than just prepare taxes and audit the books — someone who can provide strategic business tax guidance. Your team should also include a strong financial and business advisor with specific knowledge of running a small business. Lastly, include a commercial banker — someone who can help you learn how to improve your business cash flow, how to judiciously manage (or utilize) debt, and how to take other actions that could improve your business finances in advance of tax season.
A good team can provide guidance based on your specific situation because that’s what they do for other businesses day in and day out. Wells Fargo has a team of specialists to help business owners navigate these types of business structure issues.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
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