Ask most owners when they do their year-end tax planning and the honest answer is somewhere in the last few weeks of the year, usually in a conversation that starts with “is there anything I can still do?”
There usually is something. It is rarely the thing that would have made the most difference.
Most of the decisions that meaningfully change a tax bill have a lead time: a plan to adopt, an asset to take delivery of, a salary to run through several payrolls. By the time the question gets asked, those have mostly closed. What remains is the least valuable move there is: spending money the business did not need to spend in order to deduct part of it.
Do you actually know what this year will cost you?
Planning without a projection is guessing. With three quarters of the year on the books, and books that are actually current, the full year can be projected with reasonable confidence. That projection answers the questions every strategy depends on: roughly what the business will earn, where that lands in the brackets, and whether next year looks higher or lower. Without it, “should we buy the truck this year?” has no real answer.
If the books are not current enough to project from, that is the first problem to solve, and it is one of the reasons a real month-end close matters well beyond the monthly statements.
The one deduction where you keep the money
Retirement contributions are one of the few deductions that do not require spending money on something else. The money is still yours afterwards. But the plan has to exist first, and when it has to exist depends on the type.
Some can wait. A SEP-IRA can generally be opened and funded after year-end, up to the extended due date of the return. The IRS sets out the rules in its guidance on SEP plans.
Others cannot. A safe harbor 401(k) meant to apply to the current year generally has to be in place at least three months before the plan year ends. Any plan that covers employees also needs a plan document, a provider, payroll integration and notices to staff, and none of that happens in a week. The IRS 401(k) plan overview is a reasonable starting point.
If a new plan, or a change to an existing one, is on the table for this year, the decision needs to be made while the calendar still allows it.
Paid for in time, delivered too late: the equipment trap
With 100% bonus depreciation now permanent, the cost of qualifying equipment can generally be deducted in full in the year it is placed in service. The phrase that matters is placed in service, meaning delivered, set up and ready for use. A machine ordered and paid for before year-end but delivered after it is a deduction for the following year, not this one. IRS Publication 946 covers the definitions in detail.
Two points are worth making before buying anything for tax reasons.
A deduction is worth your tax rate, not the price. Spending $50,000 to save roughly a third of it only makes sense if the business needed the equipment anyway.
And taking the whole deduction in one year is not always the best result. If this year’s income is unusually low, or next year’s is expected to be higher, spreading it out may be worth more. That is a projection question, which is another reason to have one.
Why one big final paycheck worries the IRS
For S-corp owners, the salary figure is the single largest planning lever and the one most likely to be wrong. If profit has moved materially from what was expected, the salary may need to move with it, and that adjustment has to run through payroll, with withholding and deposits, before the year closes. A single oversized final paycheck is possible, but it looks exactly like what it is.
How the figure should be set in the first place is covered in Reasonable compensation is where most S-corp savings go wrong, and the IRS’s own position is summarised on its page on S corporation compensation.
Withholding also has one useful quirk. It is generally treated as paid evenly through the year, whenever it actually happens. An owner who has fallen behind on estimated payments can often close the gap by increasing withholding on the remaining paychecks, which a late estimated payment cannot do. IRS Publication 505 explains the mechanics. Changes like this are routine for our Payroll & Compliance clients, provided they are made in time.
Overpaying the IRS, or about to be penalized?
Underpayment penalties are generally avoided if withholding and estimated payments together cover at least 100% of last year’s tax (110% if last year’s adjusted gross income was above $150,000) or 90% of this year’s. The IRS explains how the underpayment penalty is calculated.
For a business having a strong year, the prior-year figure is usually the easier target, and it is already known. For a business having a weak one, paying on last year’s number may mean lending the government money for twelve months. The projection tells you which situation you are in. Payment dates by entity type are on our Tax Due Dates page.
So what does a plan that works look like?
A current projection of the year. A short list of decisions with a date attached to each one. The reasoning written down at the time, not reconstructed later.
That is all a useful planning conversation needs to produce. A stack of ideas is not a plan, and if a strategy cannot be carried out before the deadline that governs it, it is not a strategy for this year.
If you cannot say today roughly what the business will earn this year, that is worth an hour of someone’s time now, while there is still room to act on the answer. That projection is where our Tax Planning & Strategy work begins.