As we step into Q4 2024, it’s time to start thinking about year-end to-dos. That includes some tax preparation.
Maybe your company files its taxes in April or is on its own fiscal year. Either way, there are a few steps you can take this fall and winter to limit the amount you owe to the IRS when your tax bill does come due. Optimal tax savings require ongoing effort throughout the year to track things that can qualify for deductions and credits.
With that in mind, we have five steps you can take now to benefit your startup when you file.
#1: Optimize R&D-related tax savings
Companies now have to amortize their R&D deductions over several years — five for domestic R&D or 15 for foreign R&D. That doesn’t mean you should dismiss this tax savings opportunity, though.
Even if you have to spread out the deduction over five years, writing off the salaries of programmers, developers, and even your CTO goes a long way.
Before the year ends, sit down with your accountant to make sure you’re capitalizing on this significant way to reduce your tax bill. Getting everything properly categorized and documented now ensures that you can maximize your R&D credit and prove it to the IRS.
#2: Evaluate your assets
As your company grows, it’s probably adding to its portfolio of fixed assets like real estate, equipment, furniture, and company vehicles. And the amount you paid for those things can translate into tax savings.
Under the Tax Cuts & Jobs Act, businesses could take a bonus depreciation for these kinds of business property. In the beginning, that meant you could get a deduction for 100% of what you paid.
That’s now changing, but this bonus depreciation hasn’t phased out entirely. For tax year 2024, you can deduct 60% of qualifying business expenses.
That means two things. First, you should carefully look back on what you’ve spent so far this year on purchases that might qualify.
Secondly, you might want to purchase new assets that your business needs now. In 2025, you’ll only get to deduct 40% of what you spent.
Our team can help you pinpoint categories that fit this deduction or answer questions about what qualifies. Generally, purchases in the following categories count toward this deduction:
- Company vehicles
- Office furniture
- Equipment, including computers
- Off-the-shelf computer software
- Security systems
- HVAC systems
- Renovations to your office or other workspaces
In 2024, the maximum deduction you can take for expenses in this category is $1.22 million.
#3: Explore cost segregation
If your company built, owns, or has remodeled any property, this strategy could yield serious tax savings.
Primarily used by real estate developers, cost segregation is an advanced tax planning tool. Basically, it gives you a way to accelerate the depreciation of parts of the building faster than the building structure in its entirety.
That means that instead of depreciating every component in the building over the 27.5-year schedule for personal real estate (if you use part of your house for your company) or 39-year schedule for commercial real estate, you shift the timeline for some components of the property.
In this way, you can likely depreciate certain assets on much faster timelines. With cost segregation, you identify building components — like your carpeting, landscaping, and HVAC system — that you can separate out (i.e., segregate) and depreciate over five, seven, or 15 years.
Depreciating those faster means you can take a bigger deduction in each tax year of the building component’s useful life. And as a result, you can free up more cash in your business — a critical move for any startup.
#4: Give back
Charitable donations are tax-deductible for C-corps. So if your startup has been looking for a way to make a positive impact, boost its reputation, and see tax savings all at once, this is a great option.
To qualify, the donation needs to be made to an eligible charity, like a 501(c)(3) nonprofit.
Qualifying donations also can’t be made to political organizations or in exchange for event tickets.
If you’ve been thinking about making a donation, talk with your accountant first. They can confirm that the money you hand over will convert into a tax deduction. They can also tell you what paperwork you need to prove that donation and resulting deduction to the IRS.
#5: Consider going green
Choosing electric vehicles for your company fleet and making energy-efficient changes around the office can pay off when you file your taxes. Under the Inflation Reduction Act, businesses can take advantage of a number of clean energy tax incentives.
Two of the most broadly applicable are the:
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- Deduction for energy efficiency improvements to commercial buildings. If you make your office’s lighting, heating, cooling, hot water, or ventilation system more efficient or you make changes to the building envelope (e.g., installing energy-efficient windows), you can get a deduction for some of what you spend. The amount you can deduct depends on how much you increase efficiency, with the maximum deduction capped at $1 per square foot.
- Credit for qualified commercial clean vehicles. You can get a potentially sizable credit for buying a qualifying clean (read: electric) vehicle. This credit caps out at $40,000, but if the vehicle weighs less than 14,000 pounds, the maximum is $7,500. The Treasury has a handy infographic to help you pinpoint where the vehicle you’re considering will fall.
If you’re thinking about installing solar panels, you can also see savings here — potentially up to 50% of what you invest in installing them. To maximize that credit, you need to meet some pretty specific requirements, so make sure you speak with your accountant before you move the project forward.
These are some broadly applicable suggestions, but every startup is different. For recommendations and guidance tailored to your specific company, schedule some time with our team.
Get in touch today to get started. We’re here to help you wrap up 2024 feeling confident about your tax liability and the steps you’ve taken to shrink it.