Year-End Tax Planning: The SMB Owner's Checklist
The most valuable tax planning happens in September and October, not December. Here's your comprehensive checklist for year-end tax moves that actually work.
September-October
Project Income & Plan
November
Execute Strategies
December
Final Decisions
January
Year-End Actions
Year-end tax planning is one of the highest-value activities a business owner can undertake. The decisions you make in the final months of the year can save tens of thousands of dollars in taxes. But here's what most owners get wrong: they wait until December, when many of the best options have already closed.
This guide walks through the key year-end tax planning actions for established business owners, organized by when you need to act. For a broader view of tax planning strategies throughout the year, see our complete Tax Planning for Business Owners guide.
The September-October Window
The best time for year-end tax planning is September through mid-October. By then, you have enough data to project your annual income accurately, and you still have time to implement strategies that require advance planning. Waiting until December leaves money on the table.
September-October: The Strategic Window
This is when the real planning happens. With three quarters of data in hand, you can project your full-year income with reasonable accuracy and make informed decisions about the strategies below.
Project Your Annual Income
Before making any year-end moves, you need to know where you're heading. Work with your accountant or CFO to project your taxable income for the year. This projection should include:
- Business net income through September plus projected Q4
- Owner salary and distributions already taken
- Expected capital gains or losses
- Other income sources (investments, real estate, spouse income)
- Retirement contributions already made
This projection tells you which tax bracket you're in and how much room you have for additional deductions or income deferral.
Retirement Plan Decisions
Retirement plans are the largest tax shelter available to most business owners, but some strategies require early action. For detailed guidance on retirement plan options, see our article on Retirement Plans as Tax Strategy.
Retirement Planning Checklist
Equipment Purchases and Section 179
Section 179 allows businesses to deduct the full purchase price of qualifying equipment and software in the year of purchase, rather than depreciating it over several years. For 2024, the deduction limit is $1,220,000 with a phase-out threshold of $3,050,000 in total equipment purchases.
Section 179 Qualifying Property
Typically Qualifies:
- Machinery and equipment
- Vehicles (subject to limits)
- Office furniture
- Computers and software
- Certain building improvements
Does Not Qualify:
- Real property (buildings)
- Land
- Property held for investment
- Property used outside the US
- Property from related parties
Do Not Buy Equipment Just for the Deduction
Section 179 should accelerate planned purchases, not create unnecessary ones. A $100,000 equipment purchase to save $37,000 in taxes still costs you $63,000. Only buy equipment you actually need for your business operations.
Timing Considerations
To claim Section 179 for the current tax year, the equipment must be placed in service (not just ordered or paid for) before December 31. This means:
- Order early enough to ensure delivery and installation by year-end
- For complex equipment, factor in setup and testing time
- Vehicles must be titled and available for use before year-end
- Software must be installed and operational
Bonus and Compensation Timing
The timing of bonuses and other compensation can shift significant tax liability between years. For business owners, this involves both your own compensation and employee bonuses.
Employee Bonuses
For accrual-basis businesses, bonuses declared before year-end but paid within 2.5 months of year-end can be deducted in the current year (the 2.5-month rule). This allows you to take the deduction this year while employees receive the cash next year.
2.5-Month Rule Requirements
- Fixed and determinable: Bonus amounts must be set by year-end
- Unconditional: No additional conditions for employees to meet
- Payment deadline: Must be paid within 2.5 months (by March 15 for calendar-year businesses)
- Related parties: The 2.5-month rule does not apply to bonuses paid to owner-employees who own more than 50% of the business
Owner Compensation Strategy
For S-corp owner-employees, the timing of salary and distributions can affect both income tax and self-employment tax. Consider:
- If you expect higher income next year: Consider taking more salary and distributions this year to stay in a lower bracket
- If you expect lower income next year: Defer distributions to next year when you may be in a lower bracket
- Reasonable compensation: Ensure your salary meets reasonable compensation standards regardless of timing strategies
Estimated Tax Adjustments
The fourth quarter estimated tax payment (due January 15) is your last opportunity to adjust for the current tax year. Getting this right avoids both underpayment penalties and over-withholding.
Safe Harbor Rules
You can avoid underpayment penalties by meeting either safe harbor:
- 100% of prior year tax: Pay at least 100% of your prior year tax liability (110% if AGI exceeded $150,000)
- 90% of current year tax: Pay at least 90% of your current year tax liability
For business owners with variable income, the 100% safe harbor is often the safer approach. However, if you had unusually high income last year, you may want to calculate the 90% current-year estimate to avoid over-withholding.
State Estimated Taxes
Do not forget state estimated taxes, which have their own rules and safe harbors. Many states follow federal rules, but some have different thresholds. This is particularly important if you do business in multiple states or have recently expanded geographically.
January Actions That Affect Prior Year
The tax year does not end on December 31 for all purposes. Several important actions can be taken in January that still affect your prior-year tax return.
Q4 Estimated Tax (January 15)
Your final estimated tax payment for the prior year is due January 15. This is your last chance to adjust withholding before filing.
IRA Contributions (April 15)
Traditional and Roth IRA contributions can be made until the tax filing deadline (April 15, or October 15 with extension) and designated for the prior year.
SEP-IRA Contributions (Filing Deadline)
SEP-IRA contributions can be made until the business tax return filing deadline, including extensions. This gives you until September 15 or October 15 to fund.
HSA Contributions (April 15)
Health Savings Account contributions can be made until the tax filing deadline for the prior year, assuming you had qualifying HDHP coverage during that period.
Solo 401(k) Exception
While Solo 401(k) employer contributions can be made until the tax filing deadline, employee deferrals must be made by December 31 of the tax year. This is why establishing the plan early is critical for maximizing contributions.
Your Year-End Tax Planning Checklist
Here is a consolidated checklist organized by when each action needs to happen:
September-October
November-December
January-April (Prior Year)
Get Professional Help with Year-End Tax Planning
Year-end tax planning is complex, and the stakes are high. Eagle Rock CFO works with established business owners to optimize their tax position, coordinate with CPAs and tax advisors, and implement strategies that save real money.
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