Year-End Tax Planning: Strategies for Small Businesses

The weeks between now and December 31 are your last chance to reduce this year’s tax bill. Strategic moves made before year-end can save thousands in taxes.

Here’s your guide to year-end tax planning for small businesses.

Why Year-End Matters

The December 31 Deadline

For cash-basis taxpayers (most small businesses), the timing of income and expenses matters:

Income counted when received
Expenses counted when paid
December 31 is the cutoff

Actions taken in late December can shift thousands of dollars between tax years.

It’s Too Late After January 1

Once January arrives, most tax-saving opportunities for the prior year are gone. The few exceptions (like retirement contributions) have limits. Now is the time to act.

Income Timing Strategies

Deferring Income

If you expect to be in a lower tax bracket next year (or want to delay taxation):

Strategies:

Delay invoicing until after December 31
Extend payment terms on late-year invoices
Delay closing large deals until January
For service businesses: don’t bill until work is completed next year

Caution: Don’t defer income if:

You need the cash flow
Tax rates are expected to increase
You’ll be in a higher bracket next year

Accelerating Income

If you expect to be in a higher tax bracket next year:

Strategies:

Invoice early and encourage payment before year-end
Offer early payment discounts
Collect on outstanding receivables
Close pending deals before December 31

This pays taxes now at lower rates rather than later at higher rates.

Evaluate Your Situation

Questions to ask:

What’s my expected income this year vs. next year?
Will tax rates change?
Am I near a bracket boundary?
What’s my cash flow situation?

Expense Timing Strategies

Accelerating Deductions

Pay deductible expenses before December 31:

Common year-end payments:

January rent (pay in December)
Annual insurance premiums
Membership dues
Professional subscriptions
Software renewals
Office supplies and inventory
Equipment and technology
Business travel booked/paid this year

Important: The expense must be paid (not just incurred) for cash-basis taxpayers.

Equipment Purchases: Section 179

Section 179 allows immediate deduction of equipment purchases instead of depreciating over years.

2026 limits: Check current limits (typically $1+ million)

What qualifies:

Business equipment
Computers and technology
Office furniture
Vehicles (with limitations)
Software

Strategic timing:

Buy needed equipment before year-end
Don’t buy equipment just for the deduction
Must be placed in service by December 31

Bonus Depreciation

Additional depreciation for new and used equipment:

100% bonus depreciation (check current law)
Applies to assets with recovery period of 20 years or less
Can create losses that carry forward

Combined with Section 179, you can deduct substantial equipment purchases immediately.

Retirement Contributions

Max Out Retirement Accounts

Retirement contributions are powerful deductions:

Solo 401(k):

Employee deferrals: Due by December 31
Employer contributions: Due by tax filing deadline

SEP IRA:

Contributions can be made until tax filing (including extensions)
But planning now ensures you have the cash

SIMPLE IRA:

Employee deferrals: Due by December 31
Employer match: Due by tax filing deadline

Calculate Your Maximum

Work with your accountant to calculate:

Maximum allowable contribution
Cash available for contribution
Tax savings from contribution

A $50,000 retirement contribution at 32% saves $16,000 in federal taxes.

Business Structure Decisions

S-Corp Election

If you’re currently a sole proprietor or LLC and have significant profit, S-Corp election might save taxes next year.

Deadline: March 15 for current-year election (but plan now)

Benefits:

Save self-employment tax on distributions
Typically beneficial above $50,000 net profit

Entity Structure Review

Year-end is a good time to review:

Is your current structure still optimal?
Would a different structure save taxes?
Are there state-specific considerations?

Consult with a tax professional before making changes.

Deduction Maximization

Review All Deductible Categories

Ensure you’re capturing all legitimate deductions:

Commonly missed deductions:

Home office (simple or actual method)
Vehicle expenses/mileage
Professional development and education
Industry conferences
Business meals (50% deductible)
Insurance premiums
Professional services (legal, accounting)
Bank and credit card fees
Interest on business debt
Marketing and advertising
Software subscriptions
Professional memberships
Business travel

Document Everything

For deductions to survive an audit:

Keep receipts
Document business purpose
For meals: note who, what, where, why
For travel: business purpose and itinerary

Do a documentation review before year-end.

Home Office Deduction

If you work from home:

Calculate your deductible square footage
Choose simplified method ($5/sq ft, max $1,500) or actual method
Actual method requires tracking utilities, mortgage interest, etc.

Must be regular and exclusive business use.

Health Insurance Deduction

Self-employed individuals can deduct health insurance premiums:

Medical, dental, vision
For yourself, spouse, and dependents
Limited to net self-employment income

This is an above-the-line deduction—it reduces adjusted gross income.

Charitable Contributions

Business Charitable Giving

If your business makes charitable contributions:

Donations to qualified charities are deductible
Must be made by December 31
Keep documentation of donations

Inventory Donations

Donating excess inventory:

Deduction typically limited to cost basis
Special rules for food inventory donations
Get written acknowledgment from charity

Bad Debt and Losses

Write Off Uncollectible Accounts

If customers won’t pay:

Attempt collection efforts
Document your attempts
Write off as bad debt expense
For cash-basis taxpayers: only if previously recorded as income

Year-end is a good time to clean up old receivables.

Recognize Business Losses

If certain business activities have losses:

Recognize losses before year-end
May offset other income
Check passive activity loss rules

Dispose of Worthless Assets

Equipment or inventory worth nothing:

Can be written off as loss
Document worthlessness
Remove from books

State Tax Considerations

State-Specific Deductions

Some states have different rules:

Different depreciation schedules
Additional or limited deductions
Different income recognition

Plan for federal and state taxes together.

SALT Limitations

State and local tax (SALT) deduction is limited to $10,000 for individuals. This affects:

Pass-through business owners
State income tax deductibility

Some states have pass-through entity tax elections that may help.

Year-End Tax Checklist

November Tasks

Review year-to-date profit and tax projection
Calculate expected tax liability
Identify income timing opportunities
List potential year-end expenses
Review equipment needs
Calculate retirement contribution capacity

December Tasks

Make retirement contributions (or plan for later)
Purchase needed equipment (placed in service by 12/31)
Prepay deductible expenses
Send final invoices (or defer to January)
Collect outstanding receivables (if accelerating income)
Make charitable contributions
Review and write off bad debts
Schedule year-end tax planning meeting with CPA

Documentation Tasks

Working With Your Tax Professional

Schedule a Year-End Meeting

Meet with your CPA or tax advisor in November or early December to:

Review projected income and taxes
Discuss strategy options
Make decisions on timing
Plan retirement contributions
Identify any missed opportunities

Information to Bring

Year-to-date P&L
Expected remaining income and expenses
Major planned purchases
Questions about specific deductions
Changes in business or personal situation

Questions to Ask

What’s my projected tax liability?
Should I defer or accelerate income?
What expenses should I prepay?
Am I maximizing retirement contributions?
Is my business structure still optimal?
What am I potentially missing?

Common Year-End Mistakes

Mistake 1: Waiting Until January

Many tax-saving moves must happen before December 31. Don’t miss the window.

Mistake 2: Buying Things You Don’t Need

A $10,000 purchase saves maybe $3,000 in taxes. You still spent $10,000. Don’t buy things just for the deduction—but do accelerate purchases you were going to make anyway.

Mistake 3: Forgetting State Taxes

Federal planning is important, but state taxes add up too. Consider both.

Mistake 4: Ignoring Next Year

Shifting income or expenses affects two years. Make sure the strategy makes sense for both.

Mistake 5: Poor Documentation

Deductions without documentation are worthless in an audit. Keep records.

Mistake 6: DIY on Complex Decisions

Year-end tax planning involves strategy and trade-offs. Work with a professional if amounts are significant.

Multi-Year Tax Planning

Think Beyond This Year

Smart tax planning considers:

Expected income changes
Potential tax law changes
Life events (retirement, sale, etc.)
Investment and asset locations

Build Tax Planning Into Your Routine

Don’t just think about taxes in December:

Quarterly estimated tax reviews
Mid-year planning checkups
Ongoing documentation
Regular accountant communication

Proactive planning beats reactive scrambling.

The Bottom Line

Year-end tax planning is an opportunity—not a panic. The time to act is now, while options are still available.

Work with your tax professional, review your options, and make strategic moves before December 31. The effort invested now can save significant money come April.

Need help getting your books ready for tax planning? At Profit Path Books, we ensure your books are accurate and up-to-date so you and your CPA can make informed tax decisions. Book a consultation to discuss year-end planning.