Tax Tips
Most of what people call year-end tax planning is really December panic. The moves that matter most need weeks, sometimes months, of lead time. Here is what still works in the fourth quarter, and what needs to already be in motion.
Start with an accurate picture
Nothing below is worth doing on guesswork. Close your books through the end of the third quarter, project the rest of the year, and get a realistic taxable income figure. Half the value of a planning session is discovering that the number is not what you assumed.
Timing income and expenses
If you are on the cash method and expect a lower bracket next year, deferring December invoicing into January and pre-paying deductible expenses in December moves income to the cheaper year. If you expect a higher bracket next year, do the opposite. The mistake is assuming deferral is always right — it is only right when next year is cheaper.
Equipment and capital purchases
Assets must be placed in service — not just ordered, not just paid for — by December 31 to be depreciated this year. Section 179 expensing and bonus depreciation can accelerate the deduction, subject to income limits and the current bonus percentage, which has been stepping down. Confirm the year’s figures before you commit to a purchase for tax reasons.
Retirement plans
This is where lead time matters. A solo 401(k) generally must be established before year-end to allow employee deferrals, while a SEP-IRA can be set up and funded as late as the extended due date. If you have been meaning to open a plan, do it now rather than in March.
Reasonable compensation and owner draws
S-corporation owners must pay themselves reasonable wages before taking distributions. December is the last chance to run a catch-up payroll and fix a year where the split drifted. This is one of the most commonly examined issues for small S-corps.
Bad debts, obsolete inventory and dead assets
Write off receivables you will genuinely not collect, inventory you cannot sell and equipment you have disposed of. These are real deductions sitting on the balance sheet doing nothing.
Check your estimates
Run the safe-harbour calculation before the fourth-quarter payment on January 15. Paying in enough to hit a safe harbour is cheap insurance against an underpayment penalty, and the penalty is not deductible.
Two things that need more than a month
- Entity changes. An S-election generally has to be filed within a set window to take effect for a given year. Decide early.
- Accounting method changes. These require a filing with the return and should be planned, not discovered.
If you do one thing this quarter, make it the projection. Everything else is a decision you cannot make well without it.
Want this reviewed against your own return?
Bring last year’s return to a consultation and we will tell you, plainly, whether anything on this page applies to you.
