BUSINESS ARTICLES

Tax-Saving Tips: Year-End Strategies for Businesses & Individuals

As we approach the end of 2024, businesses and individuals are entering a critical moment for their finances. By making the right decisions now, you can maximize this year’s tax savings while avoiding future increases.

Here are some simple but effective tax-saving tips for businesses, business owners, and individuals.

Year-End Tax Tips: Businesses and Individuals

First, focus on the big picture.

When planning your year-end tax savings, develop a strategy that will maximize your savings over 2024 and weigh your investment considerations and tax savings to develop a strategy that maximizes the total financial benefit for your business. As we like to say, don’t let the tail (the taxes) wag the dog (your big-picture goals).

It is important to note that many provisions from the 2017 Tax Act are set to sunset at the end of 2025, absent congressional action. For example, the 20% qualified business income deduction for S Corporations and Partnerships is set to expire.

Consider traditional and “reverse” tax planning.

Traditional planning aims to defer taxable income to future years while accelerating deductions by paying bills, purchasing supplies, and paying out bonuses. Reverse planning is the opposite, increasing income recognition in the current year and deferring deductions.

Generally, when business owners and individual filers expect future tax increases, they may use a “reverse” strategy, taking advantage of the current year’s lower taxes while deferring savings to future years, where they can offset higher taxes. That strategy may shift when current tax-savings opportunities are expected to disappear.

Additionally, in a year when income from other sources is expected to be lower, there may be opportunities to accelerate income recognition in order to take advantage of a lower marginal tax rate.

Year-End Tax Tips: Individuals

Make the most of your 2024 401(k) and IRA contributions.

Annually, individuals can invest up to $23,000 in a 401(k), plus an additional $7,500 for those 50 and up. In 2024, IRA contributions are capped at $7,000, plus $1,000 for those 50 and up.

Required Minimum Distributions (RMDs)

If you turned 70 ½ before 2020, don’t forget to take your required minimum distributions from your IRAs before year end. If you turned 72 after 2019 and before 2023, this rule applies to you too. Finally, if you turned 73 in 2024, you must begin taking your required minimum distributions by April 1 of 2025 (if you wait until 2025, you’ll need to take two RMDs in 2025).

If you inherited an IRA from someone who died after 12/31/19, some beneficiaries are now required to withdraw the balance of the IRA by the end of the 10th year following death. There are still exceptions to this rule for eligible designated beneficiaries that allow the beneficiary to utilize their life expectancy in withdrawing these funds (spouses, minor children, disabled individuals, and individuals no more than 10 years younger than the deceased).

For accounts inherited after 12/31/19, a non-eligible designated beneficiary must take annual RMDs from an inherited IRA if the decedent was of RMD age at the time of death. The IRS published final regulations in 2024 that provide relief of this rule for 2020 through 2024. In other words, this rule will go into effect in 2025.

Be strategic with your charitable donations.

In 2024, the standard deduction remains high—$14,600 for single filers and $29,200 for married couples filing jointly. Additionally, the deduction for state and local taxes is capped at $10,000. As a result, many taxpayers who donate to charity do not receive any extra tax benefit because their total itemized deductions don’t exceed the standard deduction.

One effective strategy to maximize your tax benefit is to “bunch” your charitable donations. This means combining two years’ worth of donations into a single tax year so that your itemized deductions exceed the standard deduction. In the following year, you can then claim the standard deduction.

Example:

Let’s assume you are married and file jointly. You normally donate $10,000 to charity each year, and you have $15,000 in additional deductions (such as mortgage interest and state/local taxes).

  • Without the strategy (donating $10,000 each year):
    • 2024:
      • Charitable donation: $10,000
      • Other deductions (e.g., mortgage interest, state/local taxes): $15,000
      • Total itemized deductions: $25,000
      • Since $25,000 is less than the $29,200 standard deduction, you would take the standard deduction and lose the extra tax benefit from your charitable donation.
    • 2025:
      • Same scenario as 2024. You take the standard deduction of $29,200.
    • Total deductions over two years (2024 & 2025): $58,400 (standard deduction both years)
  • With the “bunching” strategy (donating $20,000 in 2024 and nothing in 2025):
    • 2024:
      • Charitable donation: $20,000
      • Other deductions: $15,000
      • Total itemized deductions: $35,000
      • Since $35,000 exceeds the $29,200 standard deduction, you itemize and get the full tax benefit.
    • 2025:
      • No charitable donation, only other deductions: $15,000
      • Since $15,000 is less than the $29,200 standard deduction, you take the standard deduction.
    • Total deductions over two years (2024 & 2025): $64,200 ($35,000 itemized in 2024 + $29,200 standard deduction in 2025)

Outcome:

By using the bunching strategy, you can deduct $64,200 over two years, compared to $58,400 if you spread your donations evenly across both years. That’s a difference of $5,800 in additional deductions, giving you greater tax savings.

A donor-advised fund is a useful tool to facilitate this strategy, allowing you to make the large charitable contribution upfront and distribute the donations to your chosen charities over time.

If you’re 70 ½ or older, consider making your charitable donations directly from a traditional IRA. Your contribution counts towards your Required Minimum Distribution. At the same time, it is not taxable and does not count towards your Adjusted Gross Income, so it won’t trigger a Medicare premium surcharge.

You can also cull your portfolio and reduce your tax burden by donating shares of stock and other appreciated property. You can usually deduct the property’s full value, and neither you nor the charity has to pay taxes on appreciation. (Note: Never donate assets that have dropped in value. If you do, you will not be able to write-off your losses.)

Take advantage of the annual gift tax exclusion.

You can avoid future gift taxes – without having to tap into your lifetime estate and gift tax exemption – by giving smaller amounts of cash to receipts annually.

Each year, you can give up to $18,000 to each recipient without paying a federal gift tax. Your spouse can give the same amount. For example, if you’re married and have children, you and your spouse can give each child up to $36,000 without paying federal tax. This strategy is a good way to reduce the overall tax burden of an inheritance, but you have to stay on top of it year after year.

Move your IRA funds to a Roth IRA.

If you expect tax rates to be higher when you enter retirement than they are now or your income is significantly lower than you expect it to be in the future, you can reduce your overall tax burden by switching to a Roth. The converted amount will be taxed. However, future earnings are tax-free.

Consider transferring the money in increments over time to take advantage of the marginal tax rates and distribute the tax owed.

Harvesting Capital Losses (and Gains)

Individuals can offset their capital losses against any capital gains, plus up to an additional $3,000 each year. If you’ve realized (or plan to realize) capital gains in 2024, consider selling investments that have lost value to reduce some of those gains. Just be mindful of the wash-sale rule, which disallows the loss if you repurchase the same or a similar investment within 30 days of the sale.

Alternatively, if you expect to recognize capital losses in 2024 or have losses carried over from previous years, you could sell assets with gains to use those losses sooner.

Year-End Tax Strategy for Businesses and Business Owners

Take advantage of generous write-offs while they’re here.

As we mentioned above, bonus depreciation is a good savings opportunity, but it’s going to be less valuable in the years to come. It’s currently set to decrease from 60% by 20% each year following 2024 until it expires altogether at the end of 2026.

Take advantage of significant savings now by deducting the cost of qualifying business assets. Just be aware that those assets must be purchased and put into service before the end of the year.

Expense new or used assets.

Organizations can expense up to $1,220,000 of their fixed asset additions under section 179, if the assets are put into service during 2024.

There are several differences between bonus depreciation and section 179:

  • Bonus depreciation can create and increase a tax loss; section 179 cannot.
  • Bonus depreciation can be claimed on qualified improvement property (interior improvements made to commercial real estate that does not impact the structural framework of the building or enlarge the building) and land improvements.
  • Section 179, on the other hand, can be claimed on certain qualified real property (commercial real estate). That includes work related to:
    • Roofs
    • HVAC
    • Fire Protection & Security Systems

Take a 20% deduction on pass-through income.

If you own an LLC taxed as a partnership, S Corporation, or are a Schedule C filer, you may be eligible to deduct 20% of your qualified business income on your tax return. However, this deduction comes with certain limitations, especially when your income reaches specific thresholds—$191,950 for single filers and $383,900 for married couples filing jointly.

It’s important to pay close attention if you have an interest in a business that either has minimal payroll expenses or is classified as a Specified Service Trade or Business (SSTB), particularly if you expect your income to exceed these thresholds. SSTBs include businesses in fields like health care, law, accounting, performing arts, consulting, financial services, and brokerage services.

Once your income surpasses these thresholds, the 20% deduction begins to phase out for SSTBs. For non-SSTB businesses exceeding the income limits, the deduction doesn’t phase out but becomes subject to the “wage and capital” test. This means your deduction is limited to the lesser of:

  • 50% of the total W-2 wages your business pays to employees,
  • Or 25% of the total W-2 wages plus 2.5% of the original cost of your business’s qualified property (like equipment and buildings).

If your income is close to these thresholds, there may be strategic planning opportunities to maximize your deduction. Keep in mind that this 20% deduction is currently set to expire at the end of 2025.

Pay attention to your Research & Development Costs.

Businesses are no longer able to claim a current tax deduction for research and development costs. Instead, these costs are required to be capitalized and amortized over 5 years (domestic R&D) or 15 years (foreign R&D).

The costs for the year are amortized beginning with the mid-point of the year, effectively allowing for only 1/10 or 1/30 of the costs to be deducted in the year incurred. R&D costs are any costs for developing or improving a product, process, formula, technique, or computer software. This provision is very unpopular and has bipartisan support in congress to be repealed.

While a bill to do so passed the house in early 2023, it never gained enough traction to become law. After election season passes, this may come before congress again with the possibility of a repeal retroactive to 2024.

Explore specialty tax incentives.

Congress and state legislatures often provide credits or other incentives to encourage certain activity. Some examples include:

  • R&D Tax Credit: To mitigate the negative impact of the capitalization rule outlined above, many businesses that are investing in R&D may be eligible for this credit. The eligibility and documentation requirements for this credit are more intensive than the capitalization rules, but that should not dissuade businesses from exploring whether they are eligible. Some industries that are often eligible include software development, architecture, engineering, manufacturing, food and beverage, and many more.

The credit is available to certain small businesses as a payroll tax credit, so businesses can take advantage of this credit even if they are not yet profitable.

  • Small business credit for retirement plan expenses: This credit helps small businesses mitigate the costs incurred to establish and maintain a retirement plan, such a 401K.
  • The Section 179D deduction is a tax incentive designed to encourage energy-efficient building improvements. It allows building owners (and, in some cases, designers or contractors working on government buildings) to claim a tax deduction for making energy-efficient upgrades to commercial buildings.

State pass-through entity taxes.

For individuals, there is a $10,000 cap on federal itemized deductions based on state and local taxes. Fortunately, there’s a workaround. Many states, including Illinois, allow pass-through entities (S Corporations and Partnerships) to elect to be taxed at the entity level, effectively converting nondeductible state taxes at the individual level into a federal tax deduction.

Before you use this strategy, check for any state tax traps – especially if you are a nonresident owner – that may exceed potential savings.

Pay attention to the basis and passive activity rules.

If you own an interest in a pass-through entity that is expected to generate a net tax loss in 2024, it is important to understand what your tax basis in your ownership interest is. This determines how much of that loss you can deduct against your other sources of income.

Your basis can never go below zero. Any unused loss is carried forward to future years.

Here’s how it works:

S Corporation

  • Tax Basis for an S Corp shareholder is the amount of money the shareholder has put into the business, plus any profits they’ve earned but not taken out, minus any losses or money they’ve taken out.
  • It starts with what you invested (cash or property) when you became a shareholder.
  • If the business makes money, your basis increases.
  • If the business loses money or you take money out (in the form of distributions), your basis decreases.

Partnership

  • Tax Basis in a partnership works similarly. It starts with your investment in the partnership.
  • If the partnership makes a profit, your basis goes up; if it loses money or you take a distribution, your basis goes down.
  • The big difference here is that partners also get credit for a share of the partnership’s debt, which increases their basis. So, if the partnership borrows money, your basis increases (even if you didn’t personally contribute cash for that debt).
  • At risk: In a partnership, you get credit for your share of certain types of partnership debt (like recourse debt, where you could be held personally responsible). However, non-recourse debt (where you’re not personally responsible) doesn’t increase your at-risk basis, even though it may increase your tax basis. Your at-risk basis is what determines your allowable loss.

Passive activity rules.

Even if you have enough tax basis to deduct the loss, you also need to determine if you materially participate in the business or are simply a passive investor. Additionally, real estate activities are automatically deemed passive unless the real estate professional rules are met (high burden).

There are several tests that the IRS uses to determine if you materially participate. For simplicity, if you are involved in the day-to-day management and operation of the business, you likely materially participate. If you are simply an investor, you will be subject to the passive activity loss limitations. These rules only allow passive investors to deduct losses against other sources of passive income (not including interest, dividends, capital gains). Any unused losses are suspended and carried forward to future years.

You focus on running your business; we’ll take care of the rest.

At Dugan + Lopatka, we partner with businesses and owners to identify tax savings opportunities, analyze data, manage wealth, and help our clients make key decisions with confidence.

By partnering with one firm for both your business and personal finances, you can ensure that you are maximizing your total tax savings while positioning yourself for success—in business and in life.

Connect with our team here.

 

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