As we approach the end of 2024, it’s the perfect time to take action and set your business up for success in the new year.
Part one of this month’s small business updates includes the following:
- Six powerful business tax deduction strategies you can easily understand and implement before the end of 2024
- All small-business owners with one to 49 employees should consider a medical plan for their business
Business Tax Deductions
Here are six powerful business tax deduction strategies you can easily understand and implement before the end of 2024.
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 up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2024 prepayments cannot go into 2026. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Tuesday, December 31, 2024, you mail a rent check for $36,000 to cover all of your 2025 rent. Your landlord does not receive the payment in the mail until Thursday, January 2, 2025. Here are the results:
You deduct $36,000 this year (2024—the year you paid the money).
The landlord reports $36,000 as rental income in 2025 (the year he received the money).
You get what you want—the deduction this year.
The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.
2. Stop Billing Customers, Clients, and Patients
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, 2024.
We assume here that you or your corporation is on a cash basis and operates on the calendar year
Customers, clients, and insurance companies generally don’t pay until billed. Not billing customers and clients is a time-tested tax-planning strategy that business owners have used successfully for years.
Example. Jake, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. Presto! He postponed paying taxes on his December 2024 income by moving that income to 2025.
3. Buy Office Equipment
Increased limits on Section 179 expensing now enable 100 percent write-offs on most equipment and machinery, whereas bonus depreciation enables 60 percent 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. Use Your Credit Cards
If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.
If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.
But suppose you operate your business as a corporation and you are the personal owner of the credit card. In that case, the corporation must reimburse you if you want the corporation to realize the tax deduction, which happens on the reimbursement date. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.
5. 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. And the good news is that NOLs can turn into future cash infusions for your business because you carry 2024 NOLs forward to future years.
What does this mean? Never stop documenting your deductions, and always claim all your rightful deductions.
6. Deal with Your Qualified Improvement Property (QIP)
QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers)—if you place the improvement in service after the date the building was placed in service.
The big deal with QIP is that it’s not considered real property that you depreciate over 39 years. QIP is 15-year property, eligible for immediate deduction using Section 179 expensing, and 60 percent bonus and MACRS depreciation.
To get the QIP deduction in 2024, you need to place the QIP in service on or before December 31, 2024.
Medical Plan For The Business
All small-business owners with one to 49 employees should consider a medical plan for their business. Sure, it’s true that with 49 or fewer employees, the tax law does not require you to have a plan, but you probably should. When you have 49 or fewer employees, most medical plan tax rules are straightforward.
Here are six opportunities for you to consider:
Sick and Family Leave Payments. Make sure to file amended returns for your 2021 sick and family leave payments to claim up to $32,220 in federal tax credits for yourself. You can also claim an equal amount for your employees. It’s likely that you made payments that qualify for at least some of the credits.
Section 105 Reimbursements. If you have a Section 105 plan in place and have not been reimbursing expenses monthly, do a reimbursement now to get your 2024 deductions, and then put yourself on a monthly reimbursement schedule in 2025.
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). If you want to implement a qualified small employer health reimbursement arrangement (QSEHRA), but you have not yet done so, make sure to get that done correctly now. You are late, so you could suffer that $50-per-employee penalty should your lateness be found out.
Individual Coverage Health Reimbursement Arrangement (ICHRA). If you are thinking of the QSEHRA and want to help your employees with more money and flexibility, consider the individual coverage health reimbursement arrangement (ICHRA) instead. It’s got more advantages.
S Corporation Health Insurance. If you operate your business as an S corporation and want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance, and (b) put that insurance cost on your W-2. Make sure the reimbursement happens before December 31 and you have the reimbursement set up to show on the W-2.
Group Health Insurance Tax Credit. Claim the tax credit for the group health insurance you give your employees. If you recently provided your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50% tax credit for some or all of the monies you paid for health insurance in 2024 and possibly in prior years.
Contact your tax and financial advisors to determine the best moves for your situation.