Year End Tax Planning

As the year draws to a close, it's crucial for businesses to revisit their tax strategies to optimize savings and prepare for potential changes in tax legislation that might take effect in the coming year. Given the ever-evolving nature of tax regulations, staying informed, up-to-date, and taking a proactive approach to your year-end tax planning can significantly impact your tax liability, especially if you capitalize on various incentives and deductions now that may not be available next year.

What You Need to Know for Your End-of-2024 Tax Planning

The TCJA Expiration

The Tax Cuts and Jobs Act (TCJA) brought about major tax reforms when it was enacted in 2017, marking the most significant tax overhaul since 1986. However, many of its provisions are fleeting; they’re set to expire at the end of 2025. As this deadline approaches, business owners must stay aware of the possible implications of these changes.

Here’s what you need to know about the TCJA and how its expiration will affect businesses.

Corporate Tax Rate

The current corporate tax rate is a flat 21%, a change that is permanent under the TCJA. While this rate is not set to change, there is no guarantee that the rate won’t change due to the expiration of the TCJA. This could lead to significant changes for businesses that have planning and investment decisions to make and the total loss of this deduction would have considerable consequences for many small and medium-sized businesses that rely on it for reinvestment, hiring, and maintaining profitability.

Depreciation and Expensing

The TCJA introduced the ability to take 100% bonus depreciation, allowing immediate deduction of the full cost of eligible property. However, this provision is phasing out, starting with a 20% reduction each year from 2023 to 2026, culminating in complete phase-out by 2027. This gradual decline could influence business decisions regarding capital investments, prompting a reevaluation of strategies for purchasing equipment and other eligible assets.

International Tax Provisions

For businesses with international operations, several important tax provisions are set to change:

• Global Intangible Low-Taxed Income (GILTI): The tax rate is scheduled to rise from 10.5% to 13.125% in 2026.
• Foreign-Derived Intangible Income (FDII): This tax rate will increase from 13.125% to 16.406% in 2026.
• Base Erosion and Anti-Abuse Tax (BEAT): This tax will rise from 10% in 2025 to 12.5% in 2026.

These changes could significantly impact global businesses, reshaping their competitive positioning.

Estate Tax Exclusion

The estate tax exclusion, which was raised significantly under the TCJA to $12.92 million per person per individual, is also set to revert to pre-TCJA levels in 2026, potentially halving the amount.

What You Can Do to Prepare for 2025 Tax Planning

Invest in Renewable Energy for Tax Benefits

Investing in renewable energy, especially solar installations, not only promotes sustainability but also yields some great tax incentives. The Clean Energy Investment Credit allows businesses to claim substantial tax credits for installing renewable energy systems, including solar panels.

Benefits: This credit can cover up to 50% of installation costs, delivering immediate tax savings while lowering the overall expense of going green.

Considerations: Many states also offer additional incentives that complement the federal tax credit, making renewable energy investments even more appealing.

Long-Term Savings: Beyond initial tax credits, businesses will enjoy reduced energy bills, contributing to long-term financial health.

Use Cost Segregation to Enhance Depreciation

Cost segregation is a strategic method that allows businesses to accelerate the depreciation of specific assets within a property. By identifying assets that can be depreciated over shorter timeframes, you can significantly increase deductions and improve cash flow.

Ideal for: This approach is particularly beneficial for owners of commercial real estate, including office buildings, warehouses, retail centers, and even short-term rentals.

Benefits: By reducing taxable income, cost segregation can lead to substantial tax savings, freeing up cash for reinvestment.

Action Steps: Arrange for a cost segregation study before the year ends to maximize your depreciation deductions for the upcoming tax year.

Conduct a Review of Fixed Assets

A thorough review of fixed assets is a vital year-end task for any business. This process can uncover opportunities for additional depreciation deductions and ensure your financial statements accurately reflect your asset holdings.

Why It Matters: Over time, businesses can accumulate assets that are no longer in use or have been fully depreciated. Identifying and writing off these assets can yield significant tax benefits.

Action Steps: Work with your accountant to conduct a detailed review of your fixed asset register. Identify obsolete or fully depreciated assets and make necessary adjustments.

Tax Savings: An effective fixed asset review can reveal additional depreciation deductions, lowering your taxable income for the year.

Leverage R&D Tax Credits

Research and Development (R&D) tax credits are among the most beneficial incentives for businesses focused on innovation and technological advancement. Whether your company is developing new products, processes, or software, these credits can deliver substantial financial advantages.

Eligibility: Many businesses are surprised to learn that their activities qualify for R&D credits. If your work involves improving existing products or creating new ones, you may qualify.

Benefits: The R&D tax credit reduces your tax liability on a dollar-for-dollar basis, significantly lowering federal and state income taxes.

Action Steps: Consult with a tax professional to review your business activities and identify eligible R&D expenses. Ensure you capture all qualifying costs, including wages, materials, and contracted research.

Talk with a Team Who Understands What Accounting Needs You Have

As the tax landscape continues to shift, these considerations are only general guidelines. The suitability of any strategy will depend on a business’ specific circumstances and long-term objectives.

That’s where Wei, Wei & Co., LLP can help.

Our team of CPAs offer a variety of accounting services, including audit, tax, and management advisory services for several industries.

Contact us today to speak with a team member who understands your accounting needs.