What should businesses know as they prepare for year-end tax planning to optimize tax positions, ensure compliance and mitigate future risks?

GHJ’s Tax Practice has developed a comprehensive 2024 Year-End Tax Guide to help businesses and individuals navigate key tax considerations before closing out the year. Each installment in this series addresses critical topics that will help taxpayers plan proactively.

Businesses can maximize deductions through fixed asset planning, accelerate compensation expenses and evaluate potential savings through accounting method changes. Additionally, there are important compliance updates that can help companies prepare for an informed and successful tax season.

FIXED ASSET PLANNING

Strategic planning for fixed assets can provide immediate tax benefits and improve cash flow. These provisions allow businesses to expense qualifying purchases and maximize deductions in the current tax year.

• Section 179: Businesses are allowed to fully deduct the purchase price of qualifying equipment, software and leasehold improvements bought or financed during the tax year. Rather than depreciating these assets over multiple years, Section 179 permits businesses to expense the entire cost upfront, which offers immediate tax benefits. For 2024, the maximum allowable expense under Section 179 is $1.22 million, although the deduction begins to phase-out when additions exceed $3.05 million.

• Bonus Depreciation: Outlined below is the bonus depreciation available by year, with most businesses eligible for a 60-percent allowance. This can be utilized in conjunction with Section 179 through an annual election by asset class on the tax return.

  Placed-in-Service Year	Bonus Rate	Longer Production Period Property and Certain Aircraft
  2022	100 percent	100 percent
  2023	80 percent	100 percent
  2024	60 percent	80 percent
  2025	40 percent	60 percent
  2026	20 percent	40 percent
  2027	None	20 percent

RECOMMENDED ACTION: Provide a detailed list of assets to be placed in service in 2024. GHJ’s Corporate Tax Practice can assess tax savings opportunities for both the 2024 tax year and future years while evaluating potential state tax implications.

ACCELERATE DEDUCTIONS OF ACCRUED COMPENSATION, BONUS, VACATION AND SEVERANCE

The deductibility of deferred compensation is governed by Section 404, not Section 461. Generally, deferred compensation is not deductible by the employer until the employee includes the amount in income. Since individuals are typically cash-basis taxpayers, employers cannot claim a deduction until the amounts are actually paid,. As a result, liabilities for accrued compensation-type items are not deductible at year-end unless specific exceptions apply.

Under the 2.5-Month Rule, timely payouts allow deductions in the year services were provided (rather than the year in which the amount is paid). Amounts paid to employees within 2.5 months after year-end are excluded from the definition of deferred compensation and can be deducted by the payer in the prior year under Section 404.

• If Paid Within 2.5 Months: These amounts are not treated as deferred compensation and are deductible in the prior year.
• If Not Paid Within 2.5 Months: These amounts are considered deferred compensation and cannot be deducted until paid.

RECOMMENDED ACTION: To maximize deductions for 2024, ensure that payments for accrued compensation liabilities are made within 2.5 months after year-end (which is March 15, 2025). This includes regular pay, vacation pay and certain retirement plan contributions, among others.

ACCOUNTING METHOD CHANGES

Changing accounting methods can present valuable tax-saving opportunities. For instance, switching from accrual to cash basis may allow businesses to defer income, thereby reducing taxable income in the current year. Adjusting inventory or depreciation methods can increase deductions by accelerating expenses and improving cash flow. 

While the IRS permits numerous accounting method changes through automatic procedures, certain commonly used changes must still follow non-automatic procedures. Calendar year-end taxpayers who have identified a non-automatic accounting method change they need or wish to implement for the 2024 tax year must submit Form 3115 by Dec. 31, 2024 (the year the change is to take effect).

Examples of non-automatic changes are:

• Income recognition change within five years of a previous method change
• Revenue recognition change for long-term contracts
• Change to cash to accrual method (Note: Changing from overall cash to accrual is an automatic procedure.)

Following IRS procedures (via automatic or non-automatic processes) ensures that these changes are compliant, which gives businesses the benefit of tax savings while avoiding penalties. 

RECOMMENDED ACTION: In general, a non-automatic accounting method change requires more detailed information on Form 3115. And the complexity of the issue, along with the taxpayer’s specific facts, may extend the time needed to collect data and complete the application form. Therefore, taxpayers intending to file non-automatic accounting method changes effective for 2024 should start gathering the necessary information and preparing the application as early as possible.

ENERGY TAX CREDITS

The Clean Energy Tax Credits under the Inflation Reduction Act (IRA) of 2022 offer major tax-saving options, including:

• Refundability and Transferability: Options for direct pay or credit sale, which make credits accessible even for non-taxable entities.
• Bonus Credits: Enhanced credits (up to 5x) for projects meeting requirements such as PWA (Prevailing Wage and Apprenticeship requirements), energy community location or domestic content.
• Carryback and Carryforward: Credits carried back three years or forward 22 years, maximizing flexibility in credit usage.

Notable investment and production credits: 

• Section 48 - Investment Tax Credit (ITC): Applies to renewable energy investments (e.g., solar, biogas) started by Jan. 1, 2025, with a base credit of 6 percent and potential increases to more than 30 percent for qualifying projects. Refundable, transferable and carries forward/backward.
• Section 45 - Production Tax Credit (PTC): Focused on electricity from qualified resources, such as renewable sources like municipal solid waste (IRC 45(c)(6)). This credit is refundable, transferable and can be carried back three years or forward 22 years, which provides flexibility in tax planning.

RECOMMENDED ACTION: Maximize benefits by ensuring PWA compliance, meeting bonus criteria and strategically timing projects before Jan. 1, 2025, to qualify. Consider carryback/carryforward to optimize tax benefits in various fiscal years.

THRESHOLD FOR ADDITIONAL FILING REQUIREMENT

To ensure compliance and avoid penalties, it is important to understand filing requirements and key regulations.

• Section 163(j): Business Interest Expense: A taxpayer with business interest expense must generally file Form 8990 unless an exemption applies, such as the small business exclusion. This exemption applies to a taxpayer that is not a tax shelter (as per Section 448(d)(3)) and meets the gross receipts test. The gross receipts test is met if the taxpayer has average annual gross receipts of $27 million or less for the three prior tax years.
• Section 263A (UNICAP): If the taxpayer does not qualify as a small business taxpayer, they must complete and attach Form 1125-A if the applicable entity reports a deduction for the cost of goods sold. A small business taxpayer is a taxpayer who (a) has average annual gross receipts of $25 million or less (indexed for inflation) for the three prior tax years and (b) is not a tax shelter (as defined in section 448(d)(3)).
• Estimated Payment Calculation for Large Corporation: A large corporation is defined as one with taxable income of $1 million or more in any of the prior three tax years. Large corporations must base their second quarter estimated tax payment and subsequent payments on 100 percent of the current year's tax liability. The interest rate for penalty calculation for large corporations (10 percent for 2024) is higher than that for non-large corporations (8 percent for 2024).

RECOMMENDED ACTION: Businesses should monitor gross receipts to meet Section 163(j) and 263A requirements and stay tuned for further updates on the Beneficial Ownership reporting requirement.​ Large corporations should ensure they pay 100 percent of their anticipated 2024 tax liability by 12/15/2024 to avoid incurring penalties.

QUALIFIED SMALL BUSINESS STOCK PURCHASES

The Small Business Jobs Act of 2010 offers significant tax advantages for investments in Qualified Small Business Corporations (QSBCs). Gains on QSBC stock (a) purchased and issued after Sept. 28, 2010 and (b) held for at least five years are fully exempt from federal income tax — up to $10 million or 10 times an individual’s basis, whichever is greater.

This 100-percent-of-gain exclusion is also effective for Alternative Minimum Tax (AMT) purposes. Gains from QSBC stock purchased between 1993 and Sept. 28, 2010, may qualify for either a 50-percent or 75-percent exclusion from capital gain (up to $10 million dollars). 

To meet the definition of a QSBC, the corporation:

• Must have always been a C corporation with assets under $50 million before and immediately after the stock was purchased
• Does not provide services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services 
• Is not a business of operating a hotel, motel, restaurant or similar business, a real estate investment trust or a real estate mortgage investment conduit
• Is not a cooperative of corporations that own real property the value of which exceeds 10 percent of its total assets or portfolio stock, or securities the value of which exceeds 10 percent of its total net assets 

To learn more about how businesses can set themselves up for success, please contact GHJ’s Corporate Tax Practice.