5 Year-End Tax Planning Tips for Small Business Owners

Bill Harwood |

Tax planning preparations include small-business owners taking necessary measures to optimize their taxes by taking advantage of deductions and benefits.

Here is a brief tax planning overview for small-business owners preparing for tax filings. Incorporating these five tips into monthly, quarterly, and annual tax planning routines may help prevent errors, avoid delays, and help small-business owners manage their stress levels.


1. Get Organized

Early tax planning may help integrate monitoring and reporting practices that authenticate small business year-end tax liability. There are various federal, state, and local tax incentives and credits targeted to small businesses—and if your business qualifies for any of these incentives, documentation is the key. Staying organized and keeping on top of available benefits may help you save money.


2. Review Your Business Structure

Work with your financial professional to evaluate whether your current business structure, whether a sole proprietorship, LLC, S-Corp, or C-Corp, is a tax-efficient option for your situation. Tax laws and regulations change, so what worked when you started your business may not be ideal now. By staying current on these changes, you may take steps to evaluate if your business structure is appropriate.


3. Reconcile All Business, Credit, and Bank Accounts

At the end of each month, your business, credit, and bank account reports should support the final tax reports and your entity’s financial statements. Start by cross-referencing and reviewing expense classifications. It may be easy to forget or incorrectly classify deductible expenses if you wait until tax time and don't maintain the necessary documentation.

The reconciliation process also gives you an overview of your entity’s taxes and financial condition — valuable information that may help you make good business decisions.


4. Check Payroll Tax, Credits, and Deductions

Payroll data reports sent to federal, state, and local agencies must be verified and accurate. Submissions include withholding information for each employee used for computing a company’s tax obligations. Depending on what state your employees reside in, you need to abide by that state's specific payroll forms, filing frequency, and due dates. Be sure to check the submission dates to remain compliant since late or inaccurate reporting may come with penalties.

IRS submission schedules are quarterly. Small businesses must report income, Social Security, wages and workers’ compensation, unemployment, and Medicare taxes.


5. Capture the Qualified Business Income Deduction

Pass-through entities, such as partnerships, S-corporations, and sole proprietorships, should work to capture the Qualified Business Income Deduction (QBID), also known as the Section 199A deduction. This deduction allows certain pass-through businesses to deduct up to 20% of their qualified business income from their taxable income.

For 2023, the QBID threshold limit is $182,100 for single taxpayers and $364,200 for married taxpayers who file a joint return.1 If a qualified business owner’s total annual taxable income is under the threshold limit, the business is generally able to take the QBID.

Not all pass-through entities are eligible for the full QBID. Certain types of businesses, such as specified service trades or businesses (SSTBs) like law firms, medical practices, and financial services, may have limitations or phase-outs. Review IRS guidelines to see if your business qualifies.

Suppose your business is an SSTB or passes the phase-out threshold. Then, consider increasing W-2 wages paid to employees or acquiring qualified property to help capture your deduction. This may help you qualify for a higher deduction.

If your business has SSTB and non-SSTB activities, consider segregating them into separate entities so the SSTB limitations do not negatively impact your non-SSTB activities.

Finally, evaluate your compensation structure. Determine an appropriate salary for yourself as an owner or partner to optimize the QBID. Be cautious not to overcompensate yourself, as this could lower your QBID.

Remember that the QBID rules and limitations may change, so it's essential to stay updated on the latest tax regulations and consult with a financial professional who tailors the strategy to your specific situation.



How the Qualified Business Income Deduction Works


Important Disclosures

Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.


All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

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