As we approach the close of 2024, businesses have an excellent opportunity to optimize their tax positions through careful year-end planning. By accelerating deductions or deferring them where advantageous, companies can improve cash flow and maximize tax savings. The following strategies outline key areas where accrual-basis taxpayers may find opportunities to reduce their taxable income. It is essential to take necessary actions and make adjustments before the end of the taxable year.

Bonus Accrual

One area to consider is the deduction of accrued bonuses. In many cases, it is preferable to deduct bonuses in the year they are earned rather than when they are paid. To achieve this, taxpayers should review their bonus plans and consider revising terms to eliminate contingencies that might prevent the liability from meeting the “all events test” under Section 461. Strategies such as using a bonus pool with mechanisms for reallocating forfeited bonuses or implementing a minimum bonus strategy can help secure accelerated deductions while retaining the employment requirement for payment. It is important to fix bonus amounts through binding corporate actions or formulas based on financial data available by year-end. Additionally, scheduling bonus payments within 2.5 months after the tax year ends ensures compliance with Section 404 requirements, making these amounts deductible in the service year.

Prepaid Expenses

Another opportunity lies in the deduction of prepaid expenses. Under the “12-month rule,” certain prepayments, such as insurance, taxes, licensing fees, and software maintenance, may be deducted in the year of payment rather than being capitalized. This rule applies if the benefit period does not extend beyond the earlier of 12 months after the benefit begins or the end of the following taxable year. Identifying and addressing eligible prepaid expenses can provide an immediate deduction benefit, although this may require adopting a new method of accounting.

Inventory Write-Offs

For inventory-related deductions, companies holding obsolete, damaged, or unsellable inventory should consider disposing of these items by year-end to recognize associated losses. An exception applies to subnormal goods, defined as items unsellable at regular prices due to damage, imperfections, or other reasons. These goods may be written down to their actual offering price within 30 days after year-end, less selling costs, even if not sold by that time. Businesses should evaluate inventory levels and take the necessary steps to secure these deductions.

Bonus Depreciation

The continued phase-out of bonus depreciation also merits attention. In 2024, the bonus depreciation percentage drops to 60%. Companies should review fixed asset accounts to identify costs that can be deducted as repairs or maintenance rather than capitalized. Immediate expensing options under Section 179 and methods to reduce recovery periods should also be explored to maximize deductions for new assets placed in service during the year.

Pass-Through Entity Tax for High-Net-Worth Individuals

Finally, high-net-worth individuals participating in pass-through entities (PTEs) should evaluate the potential benefits of state pass-through entity tax (PTET) elections. These elections allow certain PTEs to bypass the $10,000 federal cap on state and local tax deductions. However, not all PTET elections are advantageous. A thorough analysis of federal and state tax impacts is necessary, taking into account the residency status of members and the availability of tax credits for nonresidents in their home states. Evaluating these factors and modeling potential outcomes can help PTEs determine whether a PTET election would be beneficial and avoid unintended tax consequences.

Year-end tax planning provides a valuable opportunity to refine tax strategies and maximize savings. Each of these options requires thoughtful evaluation and action before December 31, 2024. For assistance navigating these opportunities, reach out to your tax service provider.