Tax Strategies For Closing Out The Fiscal Year

Article Summary

Closing out the fiscal year demands strategic tax planning to minimize liabilities and ensure compliance with federal and state regulations. For businesses and individuals in the U.S., timing income recognition, accelerating deductions, and leveraging tax-advantaged provisions can yield immediate savings while avoiding penalties. Small business owners, investors, freelancers, and high-net-worth individuals face unique challenges, such as navigating the Tax Cuts and Jobs Act (TCJA) limitations on state and local tax (SALT) deductions, Section 179 expensing thresholds, and complex record-keeping rules. Failure to optimize these strategies risks overpayment, audit triggers, and lost opportunities for multi-year tax efficiency.

What This Means for You:

• Immediate Action: Review year-end income deferral and expense acceleration opportunities before December 31.
• Financial Risks: Missing deduction deadlines or misapplying TCJA rules (e.g., $10,000 SALT cap) may increase taxable income.
• Costs Involved: Professional tax preparation fees ($200–$2,000+) but often offset by savings from optimized strategies.
• Long-Term Strategy: Align deductions with future income projections; e.g., deferring income to lower-tax years under IRC §451.

Explained: Tax Strategies For Closing Out The Fiscal Year

Under U.S. federal law (IRC §162), a tax write-off is an “ordinary and necessary” business expense deductible in the current tax year if incurred or paid by the fiscal year-end. Expenses must relate directly to trade, business, or income-producing activities—e.g., office supplies, wages, or depreciation. State rules vary: California conforms to federal definitions but limits certain deductions (e.g., home office expenses under FTB guidelines), while New York disallows federal qualified business income (QBI) deductions for specific professions.

”Tax Strategies For Closing Out The Fiscal Year” Principles:

The “ordinary and necessary” principle (IRS Publication 535) mandates that expenses be common and accepted in your industry, as well as helpful for profit generation. Mixed-use expenses (e.g., a home office or vehicle) require strict apportionment: Only the business percentage is deductible. For vehicles, the IRS requires either standard mileage (65.5¢/mile in 2023) or actual expense tracking. Undocumented personal use may trigger audits under IRC §274(d).

Standard Deduction vs. Itemized Deductions:

Individuals must choose between the federal standard deduction ($13,850 single; $27,700 joint in 2023) or itemizing deductions. Itemizing benefits those with mortgage interest, charitable gifts exceeding $600 (requiring Forms 1098/8282), or medical expenses surpassing 7.5% of AGI. Businesses must itemize all deductions on Schedule C or Form 1120. Key state variations: Texas has no income tax but high property taxes (capped federally), while California taxes income but allows uncapped mortgage deductions on state returns.

Types of Categories for Individuals:

Common individual deductions include unreimbursed employee expenses (if exceeding 2% of AGI pre-TCJA), investment interest expenses (Form 4952), and casualty losses (federally restricted to disaster zones per IRC §165). State-specific breaks include California’s college savings plan deductions (up to $529,000) and New York’s 50% property tax credit (for incomes under $250,000).

Key Business and Small Business Provisions:

Businesses should maximize:

• Section 179 expensing ($1.16 million for 2023) for equipment purchases.
• Bonus depreciation (80% in 2023, reducing annually) for new assets.
• Accrual-based expense deductions under IRC §461 for liabilities incurred by year-end.

Sole proprietors may leverage the 20% QBI deduction (IRS Form 8995), subject to income thresholds and trade restrictions.

Record-Keeping and Substantiation Requirements:

Federal law (IRC §6001) requires keeping receipts, invoices, and mileage logs for 3–7 years. California requires documentation for 4 years (FTB Notice 2023-01). Insufficient records during audits lead to deduction denials and penalties (20–40% of underpayment). Digital records via IRS-compliant software (e.g., QuickBooks) are acceptable if unaltered.

Audit Process:

IRS audits begin with a notice (CP2000 for discrepancies) and typically request receipts via mail (correspondence audit) or in-person (field audit). States like California proactively audit high-risk areas like R&D credits. Under IRC §7491(c), the burden shifts to the IRS if taxpayers provide contemporaneous records.

Choosing a Tax Professional:

Select a CPA or Enrolled Agent with expertise in year-end business strategies and state nuances (e.g., California’s LLC fee deductions or NY pass-through entity tax elections). Verify credentials via IRS PTIN Lookup and state boards.

Laws and Regulations Relating To Tax Strategies For Closing Out The Fiscal Year:

• Federal: IRC §162 (expenses), §179 (expensing), §280A (home office).
• IRS Publications 535 (expenses), 946 (depreciation).
• California: FTB Pub 1136 (expense guidance), NY: TSB-M-18(5)I (SALT workarounds).

People Also Ask:

Q: Can I deduct home office expenses if I work remotely?
A: Employees cannot deduct home offices post-TCJA. Self-employed individuals may deduct under IRC §280A if space is regularly/exclusively used for business. California requires prorated rent/mortgage based on sq. footage.

Q: Should I prepay expenses in December?
A: Yes, if cash-basis (small businesses). Prepaying 2024 expenses (e.g., rent, insurance) in 2023 may accelerate deductions. Accrual-basis businesses must meet “economic performance” tests under IRC §461(h).

Q: Can I deduct my vehicle if I use it for Uber?
A: Only the business-use portion. Track mileage with apps like Everlance. Federal/California require logs showing date, purpose, and miles per trip.

Q: How do retirement contributions affect year-end taxes?
A: Traditional IRA/401(k) contributions reduce taxable income. For 2023, max 401(k) is $22,500 ($30,000 if 50+). SEP-IRAs allow up to 25% of net earnings (max $66,000) deductible by tax filing date.

Q: Are charitable donations still deductible?
A: Yes, but itemizing is required. For donations over $250, obtain written acknowledgment per IRC §170(f)(8). California offers no state deduction for non-itemizers.

Extra Information:

IRS Publication 535 (Business Expenses) clarifies deductible costs. CA FTB Publication 1136 details state-specific business deductions. IRS Bonus Depreciation Guide explains declining rates through 2026.

Expert Opinion:

Proactive year-end tax planning is critical to unlocking deductions, avoiding penalties, and aligning multi-year financial goals. Tailoring strategies to federal and state law nuances ensures compliance while maximizing cash retention.

Key Terms:

• Year-end business tax deduction strategies
• Section 179 expensing limit 2023
• State-specific SALT deduction workarounds
• Record-keeping requirements for IRS audits
• Small business tax planning before fiscal year-end
• Accelerating deductions cash basis taxpayer
• CFO year-end tax optimization tactics

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