What are key year-end tax planning strategies for business owners in 2023?

Key strategies include accelerating deductions and deferring income, maximizing retirement plan contributions, taking advantage of bonus depreciation before further phase-down, reviewing Section 199A qualified business income positioning, evaluating entity election changes, and implementing charitable giving strategies before December 31.

How is bonus depreciation phasing down after 2023?

First-year bonus depreciation dropped to 80% for property placed in service in 2023 and continues declining by 20 percentage points annually—60% in 2024, 40% in 2025, and 20% in 2026—before expiring completely in 2027 unless Congress acts to extend the full expensing provision.

Year-End Tax Planning for 2023: Key Moves for Business Owners | Lynch Law

As the calendar turns toward the final weeks of 2023, business owners face a familiar but critical question: what steps can be taken before December 31 to reduce the overall tax burden for the year? Year-end tax planning is not a one-size-fits-all exercise. The right moves depend on entity structure, income levels, capital expenditure plans, and the broader legislative landscape. But the underlying principle is universal — a dollar of tax saved through lawful planning is a dollar that remains available for reinvestment, debt reduction, or distribution.

This post walks through the key planning considerations for business owners as 2023 draws to a close, with particular attention to provisions that are changing in the near term.

Accelerating Deductions and Deferring Income

The most fundamental year-end strategy remains timing. Cash-method taxpayers have significant flexibility to accelerate deductible expenses into 2023 by prepaying certain costs — supplies, insurance premiums (within the 12-month rule), and state and local taxes — while deferring the receipt of income into January 2024 where possible. The goal is straightforward: push deductions into the higher-income year and defer income to the lower-income year.^[1]

For accrual-method taxpayers, the timing game is narrower but not nonexistent. The recurring-item exception under IRC § 461(h)(3) may allow certain liabilities to be deducted in 2023 even if economic performance occurs in early 2024, provided the liability is fixed and determinable and economic performance occurs within 8½ months after year-end. Year-end bonuses are a common application — if the board approves a bonus pool before December 31 and the bonuses are paid by March 15, 2024, the deduction may be claimed in 2023.

Bonus Depreciation and Section 179

The Tax Cuts and Jobs Act's 100% bonus depreciation began its phase-down in 2023. For property placed in service during calendar year 2023, the first-year bonus depreciation rate is 80% — down from 100% in 2022.^[2] This matters enormously for capital-intensive businesses. A business placing $500,000 of qualified equipment in service in late 2023 can deduct $400,000 immediately under bonus depreciation rather than recovering the cost over the property's class life.

Section 179 remains an important complement. The 2023 Section 179 expense limit is $1,160,000, with a phase-out beginning at $2,890,000 of total placed-in-service cost. Unlike bonus depreciation, Section 179 is limited to taxable income from the active conduct of a trade or business. For businesses that have already exceeded or are approaching the bonus depreciation phase-out, Section 179 can still provide immediate expensing within its own limits.

The planning implication is clear: if a business has capital expenditures planned for early 2024, accelerating those purchases to December 2023 captures 80% bonus depreciation rather than the 60% rate that will apply in 2024. This is a one-time decision point that cannot be recovered later.

Retirement Plan Contributions

Maximizing retirement plan contributions remains one of the most effective tax reduction strategies. For 2023, the elective deferral limit for 401(k) plans is $22,500 ($30,000 for those age 50 or older). Employer contributions can bring total contributions to $66,000 ($73,500 with catch-up). SEP-IRA contributions are limited to 25% of compensation, up to $66,000.^[3]

Business owners who have not yet established a retirement plan should note that a SEP-IRA can be established and funded as late as the extended due date of the return. However, 401(k) plans generally must be established by December 31 for employee elective deferrals to count for the current year. If a solo 401(k) or employer-sponsored plan is on the table, the time to act is now.

Qualified Business Income Deduction

The Section 199A qualified business income deduction continues to provide pass-through entity owners with a deduction of up to 20% of qualified business income. For 2023, the income thresholds are $182,100 (single) and $364,200 (married filing jointly). Above those thresholds, the deduction may be limited based on W-2 wages paid and the unadjusted basis of qualified property. For specified service trades or businesses — including law, accounting, consulting, and financial services — the deduction phases out entirely above the threshold range.^[4]

Year-end planning around the Section 199A deduction involves managing taxable income to stay within the threshold range. Strategies include accelerating deductions, making retirement plan contributions, and — for married couples — timing charitable contributions to bunch deductions in alternate years.

Review Entity Elections

The end of the year is the natural checkpoint for evaluating entity structure. S corporation elections, in particular, should be reviewed annually. If a sole proprietor or partnership has grown to the point where self-employment tax savings would be meaningful, an S election for 2024 should be filed on Form 2553 by March 15, 2024. Conversely, if an existing S corporation no longer benefits from the election — perhaps because the Section 199A deduction is fully phased out and the shareholders are paying themselves reasonable compensation — reverting to C corporation status or partnership taxation may be worth modeling.

Late S elections are available with reasonable cause relief, but the cleanest approach is to make the decision before the new year begins and file timely.

Charitable Giving Strategies

For business owners with charitable intent, year-end is the time to execute. Cash contributions by individuals remain deductible up to 60% of adjusted gross income. Contributions of appreciated property — including publicly traded securities — are deductible at fair market value with a 30% AGI limitation, and the capital gain is never recognized. A donor-advised fund can serve as a vehicle for bunching multiple years' worth of charitable giving into a single tax year, producing an itemized deduction that exceeds the standard deduction in the giving year while allowing grants to charities over subsequent years.^[5]

Business owners should also consider whether direct corporate charitable contributions might be advantageous for C corporations, which face a 10% of taxable income limitation but generate a deduction at the entity level.

Looking Ahead

Year-end tax planning for 2023 takes place against the backdrop of significant changes on the horizon. The bonus depreciation phase-down will continue — dropping to 60% in 2024 and 40% in 2025. The Section 199A deduction, the increased standard deduction, and numerous other TCJA provisions are currently scheduled to expire after 2025. While legislative action may extend some or all of these provisions, planning based on current law is the only responsible approach.

Business owners who take the time to review their situation before December 31 — particularly around capital expenditures, retirement contributions, and entity structure — position themselves to realize savings that would otherwise be left on the table. The conversation with your tax advisor should be happening now, not in April.

References

^[1] The basic timing strategies are subject to the economic substance doctrine and must have a bona fide business purpose beyond mere tax reduction. See IRC § 7701(o).
^[2] IRC § 168(k)(6). The phase-down applies to property placed in service after December 31, 2022. The applicable percentages are 80% (2023), 60% (2024), 40% (2025), 20% (2026), and 0% (2027).
^[3] IRC §§ 402(g), 415(c). The catch-up contribution limit for 2023 is $7,500 for 401(k) plans.
^[4] IRC § 199A(d)(2)-(3). The phase-out range for 2023 is $50,000 above the threshold (single) and $100,000 above (MFJ).
^[5] IRC § 170(b)(1)(A), (B). Donor-advised fund contributions are treated as public charity contributions, eligible for the 60% (cash) or 30% (appreciated property) AGI limitations.