[Before we get into the weeds - I've released a new podcast covering Top Tax Court Cases for 2024. If you enjoy my posts on tax court cases, you should take a listen. Would appreciate any feedback and support. You can find it on Spotify and Apple Podcasts - "Today in Tax Court".]

Over the last 16+ years in public accounting, one thing has remained true. There are a surprising number of business owners that despise sending money to the federal government. 🤬 And while spending $1 to save 40¢ is terrible tax advice, it ignores how much major creators of wealth hate letting the government control how their money is used (i.e. pay taxes). 💸

To combat this, tax pros have a handful of ideas near year end to deploy to sneak in last bits of tax savings. I'll share some good ones below. You've heard of most of these, but the alpha is in the details. So let's dive in: 🤿

1. §179
2. Bonuses (QBI)
3. Tax Loss Harvesting
4. Charitable Donations (Cash, DAF, RMDs)
5. Pre-tax Retirement Accounts (SEP, 401(k))

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§179 Deduction

This is another form of accelerated depreciation. 🚙 If you buy an asset for your business before end of year, even if it's financed, it may be eligible for a FULL "write off." Anyone who pays attention to taxes knows bonus depreciation is phasing out, but §179 is still an option - subject to some restrictions.

For example, there is a limit in how much you can write off in any given year - unlike bonus. Also, §179 cannot drive you into a loss position on the entity and instead you roll forward your excess to future years.

I created a useful chart below 👇 and have shared it before on twitter.

While it's not as lucrative as full bonus depreciation, §179 can still be used and save significant tax.

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Bonuses and QBI

A significant amount of business owners would rather pay their employees bonuses than pay the IRS taxes. Nothing wrong with that (except that the bonuses will still be subject to tax for the employees albeit likely at a lower rate). 🧾

But bonuses paid on W2s create an additional benefit - QBI optimization.

The Qualified Business Income (QBI) deduction is a 20% deduction off of flow-through (K1-type) income. And a majority of business owners are eligible for it - except for when they earn "too much" in profit. 💰

Over $400k-ish of income, the 20% "phases-out" and loses it's tax impact. The phase-out is calculated based on two factors - one of which is amount of W2 wages paid. So technically, paying wages on W2 can actually increase the amount of available QBI deduction.

Another way to optimize QBI for W2 is to actually pay yourself (the business owner) a year-end bonus 🫴 - a strategy that can save hundreds of thousands in tax when done right. Dialing QBI can be lucrative and should always be double checked before end of year.

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Tax Loss Harvesting

This is something usually best left to the pros (your wealth advisor). But tax loss harvesting can save you significant amounts of capital gains tax if you've had some winners during the year. 🔻🔺

Essentially, you look down your investment statement and identify the unrealized losses. To the extent you have realized gains during the year (sold equities at a gain), the losers can be sold and unrealized losses "harvested" to offset the previously recognized gains. 🌾 A wise advisor will then reinvest the proceeds from harvesting in similar equities to maintain the right diversification.

But this can be messed up. I am not a financial advisor and encourage you to engage with the experts to avoid costly mistakes.

Also, an honorable mention for Opportunity Zone investing which can defer capital gains so long as they are contributed to a Qualified Opportunity Zone Fund timely. The deferral would only be for a year - at least based on current legislation. Again - seek an advisor. 🏢

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Charitable Donations

There's a few tricks to this one beyond just giving straight cash money.

The first one - and pretty underrated - is giving of appreciated stock to a donor advised fund (DAF). 👨‍💼 You get credit for the value** of the stock donated and through the DAF get to have a say in how it's spent. The limitations of how much can be deducted against your income (Adjusted Gross Income - AGI) is reduced with appreciated property. But it's still a very viable option.

**Max tax efficiency is when stocks held more than one year are donated - as you don't pay capital gain on the increase in basis but get the full fair value for the charitable donation.

The other charitable donation flex is converting your Required Minimum Distribution (RMD) into a charitable contribution via a Qualified Charitable Donation (QCD). There are limitations to how much of your RMD can be a QCD ($105,000 currently), but it's a great solution to the age-old RMD problem. If you don't know what an RMD is - it's a required distribution amount that must be taken from your retirement account every year after the age of 72. 👴🏻

Note that on QCDs, no funny games are allowed. The trustee must send the distribution straight to the charity and you can't control the assets over there or take loans against them, etc.

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Retirement Accounts

It's low hanging fruit, but max-ing out your retirement plan contributions is a great way to get in last minute tax deferrals.

If you're a solo-business owner, max out your SEP IRA ($69,000) or Solo-401k. If you're an employee, max out your personal contribution ($23,000) if you're looking to save that extra bit this year. 👔

This should always be weighed against your lifetime effective tax rate. Meaning, if you're in a lower bracket than you will be in future years, deferring income isn't always the best strategy. There's also something to be said for giving up a little bit of tax to have flexibility in using liquidity. It's not a great plan to minimize taxes with retirement plan contributions only to need to take a hardship distribution next year to access it.

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Wishing you all a great end of year and holiday seasosn.

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Want to talk one-on-one about anything tax, operating agreements, accounting, CPA firm? Send me an email by replying to this one and I'll send you my Stripe payment link. $500 for up to an hour.

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