Year-end tax planning: the decisions that expire December 31
Most small businesses think about tax in March, which is the one month when nothing can be done about it. By then you are reporting a year that has already closed. Every meaningful decision expired on December 31.
Planning is the part that happens while the year is still open, and it starts with a number: what does full-year profit actually look like? Get a projection in October and the rest of the conversation becomes concrete.
Timing is most of the game
The core lever available to most small businesses is not avoiding tax but choosing which year income and expenses land in. If you expect a similar or lower bracket next year, deferring income and accelerating expenses pulls the bill later. If next year looks materially better, the reverse can be right.
On the cash basis this is unusually direct: an invoice sent December 28 and paid January 6 is next year's income; a supplier bill paid December 30 is this year's expense. On accrual it is the work and the obligation that matter, not the payment, so the same moves do not work — which is exactly why the first question is which basis you are on.
| This year | Next year | Two-year total | |
|---|---|---|---|
| No action | $340,000 | $290,000 | $630,000 |
| Defer income | $280,000 | $350,000 | $630,000 |
| Accelerate income | $400,000 | $230,000 | $630,000 |
The equipment decision
Provisions like Section 179 and bonus depreciation can let you deduct much or all of a qualifying asset in the year it is placed in service, rather than over its useful life. That makes a December purchase genuinely different from a January one.
The trap is buying something you did not need for the deduction. A $40,000 machine does not save you $40,000 — it saves you your tax rate on $40,000, so perhaps $12,000, while costing you $40,000 of cash. If you needed the machine anyway, timing it into December is smart. If you did not, you just spent $28,000 to avoid $12,000.
Equipment cost
$40k
cash out the door
Tax saved at 30%
$12k
the actual benefit
Net cash cost
$28k
only worth it if you needed it
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The levers worth raising
- Retirement contributions. Often the largest deduction available to a profitable owner, and several plan types have to be established before year end even if funded later.
- Owner compensation split. For an S corp, the balance between salary and distribution has real consequences in both directions, and it is reviewed annually.
- Bad debt write-offs. Receivables you will genuinely never collect should come off the books in the year they went bad.
- Obsolete inventory. Stock that is genuinely worthless should be written down before year end, not carried at cost into another year.
- Accrued bonuses. If you intend to pay them, the rules on when they can be deducted are specific — worth confirming before you commit.
Do not let the tail wag the dog
The most expensive year-end tax mistake is spending a dollar to save thirty cents. Deductions reduce tax; they do not create cash. A business that buys things it does not need every December to keep the tax bill down is converting real cash into depreciating assets at a substantial loss.
The right question is never "how do I lower this year's tax." It is "given what I already intend to do over the next eighteen months, when is the best time to do each of those things?" That framing gets you the timing benefit without the waste.
Book the conversation for late October or early November. December is too late to establish plans, order equipment, or get anyone's attention.
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