As 2024 draws to a close, there are strategic opportunities to manage your business finances in a way that can be tax advantageous. Here are key considerations to make sure you are optimizing your tax position before the year ends:
Consider Deferring or Accelerating Income
For cash-based businesses, almost any money received in 2024 – even if it relates to products you’ll deliver or services you’ll render in 2025 – is part of your 2024 income. This means that if a customer or client pays you early, you can claim that income in 2024. If you want to reduce your income in 2024, consider delaying December invoicing until January.
For accrual-based businesses, you report the income in the year you perform the service or deliver the product. However, if you are looking to accelerate income for 2024, consider which projects you can finalize in 2024 so that you can legitimately invoice the client in 2024. Alternatively, if you are looking to reduce your reportable income for 2024, you can delay closing out projects until next year and send the final invoice in 2025. This same principle applies for shipping of physical products.
Managing Expense Recognition
For cash-based businesses, once you’ve “sent the cash out the door”, you will need to record it. So if you’re looking to reduce your taxable income in 2024, consider pre-paying for next year’s expenses under the IRS’s 12 Month Rule. This works well for annual subscriptions, business insurance, property taxes, etc..
Alternatively, if you’re looking to reduce your expenses for 2024 consider paying only the portion of the annual subscription, rent, etc. that you will use in December. Or delay payment until January 2.
For accrual-based businesses, you will need to recognize the expense in the year you received the product or service. To do this accurately, check your desk drawers, emails, etc. to make sure you’ve recorded every possible expense. Stand back and think about all of the items you’ve purchased or services you received, and then check to make sure you’ve recorded the associated expenses. to make sure that you have processed any outstanding invoices. Another popular way to reduce your income is to give your employees or yourself a discretionary payment (think awards, bonuses, etc.) Just be sure to process any payments before December 31 so they are deducted in 2024.
Alternatively, if you can delay starting a new service or ordering a product until next year, you don’t need to record the expense in 2024. Sometimes the difference of a few days doesn’t make much business impact and this can help defer the expense until the next year.
Be sure to discuss your specific situation with your accountant or tax advisor to ensure you are making the most advantageous choices.
