Year-End Tax Planning: Should You Defer or Accelerate Business Expenses?

Before the year comes to an end is the best time for planning ahead for taxes. With advanced year-end tax planning there are several moves you can make to reduce your future tax liability. Some of these include maxing out on deductions, and others involve “adjusting” the books.

No, we’re not talking about “cooking” the books or anything illegal!

Just some fundamental options, like whether to defer or accelerate business expenses, that, if taken advantage of properly, can make a big difference to your bottom line.

If you’re a business owner, what you need to know is that business expenses are one of the most important things to consider when planning your taxes. In this article, we’re taking an in-depth look into the what, why, and how of whether to defer or accelerate business expenses for end-of-the-year tax planning.

Understanding End-of-Year Tax Planning

Year-end tax planning basically refers to all the planning and preparation work you do to make sure you don’t have to pay more taxes than you need to. The process is complex as it involves a ton of different things, like determining taxable income, tax breaks, and expenses. When it comes to expenses, most people often think that piling on the costs can help. But is that really the case, or should you be deferring business expenses instead?

To Defer Or Accelerate?

Well, the answer would seem to be pretty obvious, wouldn’t it? More expenses mean lower income, and lower income means lower taxes. If this is the case, then you should accelerate business expenses when it comes to year-end tax planning. But what if that’s not the case? We’ll get into these details later in the article. For now, let’s look at what deferring and accelerating expenses is all about.

Deferring Expenses

When you defer expenses, you’re basically holding off that cost as a deductible from your taxable income for a future tax year. What this means is that you’ll use that particular expense to reduce your taxable income in the future.

This would decrease the amount of tax you pay in a future year. However, if you do choose to defer expenses, your taxable income for the current year will increase. We’ll cover the feasibility of this approach in a while, but let’s look at accelerating expenses first.

Accelerating Expense

Pushing the pedal to that metal seems to be the go-to approach when it comes to expenses and year-end tax planning. The idea behind accelerating expenses is to make prepayment for things like property taxes and other business costs.

This basically lowers your taxable income for the current year, meaning that you end up paying less taxes. But, if you use this approach, the amount of expenses you can use to lower your future taxable income also decreases. You can see where this is going, can’t you?

Making The Final Decision

So, if you choose to defer expenses, you can save on taxes in the future, and if you accelerate them, you can save on taxes now. The question here is, how do you choose between the two?

Well, the truth is that there is no one-size-fits-all approach here. What works for someone else’s business and tax situation might not be the best solution for yours. What you need to understand is that making the final decisions depends on a couple of things: tax rates and expected profits.

Changes In Tax Rates

Managing tax liabilities are paramount to businesses regardless of size or industry, and business owners should always keep an eye on changes in the tax rate. Reports have stated that the corporate tax rate in the United States for the 2024 fiscal year will be 28%.

That’s a 7% increase. In such cases, it might make more sense for you to defer your business expenses. Doing so will allow you to lower your taxable income while subject to a higher tax rate, which can ultimately result in lower taxes.

However, if that tax rate was expected to decrease, then that would mean that companies are subject to a higher tax rate in the current year. In such cases, accelerating expenses would be wise since it would allow you to benefit from the upcoming lower tax rate while also reducing your taxable income for the current (higher tax rate) year.

Expected Increase In Profits

Current and expected profits are another factor to consider when it comes to end-of-the-year tax planning. In order to help decide whether to defer or accelerate business expenses, you need to compare your current and expected profits and determine which one is higher.

Let’s say that your current profit is $100,000 and your expected profit for the coming year is $150,000. This means that you’ll have to pay more taxes in the coming year. In such cases, it is better for you to defer expenses to the next year.

Doing so will allow you to reduce your taxable income despite having higher profits and can ultimately reduce the amount of tax you pay. However, if your expected profit is lower than the current one, it’s better to accelerate expenses and reduce your current taxable income.

Other Tips For Reducing Taxable Income

When it comes to end-of-the-year tax planning, the key to determining whether to accelerate or defer expenses is to know your expected profit and future tax rate. But that’s not all. Some additional things you can do to reduce your taxable income include:

• Reinvesting money back into the business.
• Fund qualified retirement plans.
• Giving additional compensation to employees.
• Knowing when to make purchases and investments.
• Staying up to date on current regulations and taking all the tax deductions you can take.
• Maximize pass-through business income deductions.

Final Thoughts

Year-end tax planning is always a complex process that involves a consideration of multiple factors, such as determining taxable income, identifying deductions, and calculating expenses. When it comes to expenses, remember that if you want to have a lower taxable income for the current year, then you probably should accelerate expenses. However, if you want to reduce taxable income for future years, then it’s better to defer them instead.

Contact us today to discuss year-end tax planning strategies for your own unique situation, and learn how we can help your business with Integrated Tax Planning and Preparation Services to lower your tax liability.

 

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