As the year comes to a close, many of us will start totaling numbers to see how 2025 will turn out. Naturally, this is when any of the end-of-year moves for tax purposes become very attractive. A lot has changed this year related to the taxes of business owners. Even though there are new rules and restrictions, there are still clear areas where you can properly end the year on a good tax planning foundation. When you get to review your year in the next few weeks, go through these 5 steps to cover most of what may be needed this year.

Key Takeaways

• Evaluate whether your current legal and tax entity structure (LLC, S-Corp, C-Corp) is still the most beneficial for your business. You’ll want to consider potential tax savings, compliance requirements, and long-term strategies such as future exit planning and eligibility for QSBS tax advantages.
• Planning year-end taxes around total income is critical to determining your Qualified Business Income (QBI) deduction.
• Use year-end contributions to retirement, HSA/529 accounts, or charitable giving to shift profits into tax-advantaged buckets and reduce taxable income while supporting long-term goals.
• Review expenses and year-end purchases, potentially using 100% bonus depreciation, and consider whether paying state/local taxes through a pass-through entity (PTET) is beneficial, given new SALT deduction limits.

1. Review Your Entity Structure

Starting with the biggest picture first, many owners need to understand what the entity structure of the business is and whether it is appropriate. For example, many owners forget that an LLC status applies only for legal protection, and for tax purposes, they must choose another entity for tax filing (corporation, partnership, or disregarded entity). Sometimes, small business owners could have a good reason to switch their tax election to an S-Corp and save thousands on self-employment taxes. There are more requirements to make the switch, but usually a simple calculation should explain whether it makes sense for the specifics of an individual business.

It also may make sense to consider switching the entity structure to a full corporation, especially if you are considering exiting the company at some point in the future. The Qualified Small Business Stock (QSBS) of C-Corporations could potentially allow a small business owner to sell their business for millions of dollars while reducing or even eliminating capital gains tax consequences. This could save thousands on taxes and requires years of planning, but starting this year could be beneficial.

2. Review The Income

Following the conversation about the S-Corp election, year-end tax planning is largely dependent on how much income was received in the year. Taxes, deductions, and expenses all hinge on how much income was received. This becomes even more important when determining your Qualified Business Income (QBI) and the ensuing deduction. Small businesses can generally deduct up to 20% of their QBI, a massive deduction for many owners. However, there are income limits, and for those close to losing the 20% deduction, it could be well worth making moves by year-end to stay within range.

There are always trade-offs, and the S-Corp election is a good example. The QBI Deduction is dependent on the wages paid out in the business. So, for each dollar of wages you may pay yourself to reduce your self-employment tax, you could potentially reduce your 20% deduction accordingly. Ask your accountant how you can optimize the wages of the company.

3. Review The Cash On-Hand

Many deductions can simply be claimed by moving your profits into certain buckets as well. Contributions to retirement accounts are perhaps the easiest example. The end of the year is the perfect time to max out your retirement accounts to simultaneously take a massive deduction while saving for retirement. HSA and 529 accounts could fit here as well, for those with access.

The holiday season also brings out a lot of generosity in people. Charitable contributions can be a great way to give back to a good cause while claiming some tax benefits for doing so. Whether that is giving money to charity, funding a donor-advised fund, or donating appreciated stock, it could be a great year to donate extra to charity simply to offset an unusually large income year.

4. Review The Expenses

After factoring in the income for the year and adjusting the deductions for contributions to various accounts, then cleaning up the books and reviewing the expenses takes priority. Owners can benefit from deducting many of the purchases throughout the year. With the recent tax bill, the government has reinstated the 100% bonus depreciation for certain physical property. This means that it could be possible to write off the entire purchase of certain assets, like a new car or truck. Check with your accountant to make sure this is appropriate for you.

One of our largest expenses as business owners is simply paying the taxes we owe on the federal, state, city, and/or local levels. Many pass-through entities have the option to pay for the personal state and local taxes (SALT) of the owner through the business, known as the Pass-Through Entity Tax (PTET). The main benefit to doing this, as opposed to just sending a payment from the personal checking account, is that the business can claim a tax deduction for the full amount. Until the recent tax bill, individuals could also claim the same deduction, but up to only $10,000. With the recent bill, that limit has increased to $40,000 for a few years, making PTET less relevant for those with under $40,000 in state and local taxes.

5. Plan For The Future

From a cash flow perspective, the earlier you can set cash aside for the quarterly tax payments, as well as the payroll taxes, the easier paying taxes can be. As the end of the year approaches, your accountant should be able to generate a rough estimate of your total 2025 tax liability. Working through all the income, expenses, contributions, deductions, etc., for the year can hopefully produce a rough taxable liability for 2025. Then, comparing that against any current tax payments already made can help you know if you have paid the government enough this year or not. Knowing now, instead of in the spring right before the due date, can give you more time to plan and slightly ease the pain of tax payments.

At the end of it all, compare your tax liability this year to what you have experienced in the last few years and/or what you see going forward. If you had an unusually low income this year but know that income will return, it could be worth proactively converting some retirement money from IRA to Roth. Knowing that a conversion would increase your income for the year, a low-income year would hopefully mean a smaller tax rate for those converted dollars, which is generally the goal for Roth Conversions.

Your Year-End Process

Start with the big picture and work down from there, since the entity structure of the company isn’t the easiest flip to switch. Then look at how 2025 turned out, review the income, and see where distributions and payouts have settled so far this year. Then turn your attention to the expenses and contributions in the company to find what deductions you are using. Finally, tax planning is about looking ahead and considering not just this year but all years. Having the ability to control your income, even slightly, can help you better plan for your taxes from year to year.