As 2024 approaches its end, it’s the perfect time for business owners to review their finances and explore tax-saving strategies. End-of-year planning not only reduces tax obligations but also prepares you for a successful start in the new year. As a professional tax accountant and financial consultant, I’ve helped several business owners maximize their tax-saving potential. Here are a few ways business owners can optimize their taxes before December 31st.
1. Leveraging Capital Purchases
In Canada, some capital purchases, like equipment or technology, can be claimed for an immediate expense deduction or accelerated depreciation, which allows for larger deductions in the year of purchase. If your business has been planning to make a big purchase, consider purchasing it now to save on your taxes.
2. Tracking Eligible Business Expenses
Many business owners forget to claim tax deductions on their daily expenses. The end of the year is a good time to review expenses such as office supplies, utilities, insurance, marketing costs, and even business travel expenses. Home-based businesses are allowed to claim a certain portion of home-office expenses like rent, electricity, and internet based on the percentage of the space used for business. Tracking these expenses can save you time and money in the long run.
3. Saving for Retirement
A retirement savings plan provides great tax benefits to business owners. By contributing to a Registered Retirement Savings Plan (RRSP), business owners can lower their taxable income and save for retirement. For incorporated business owners, an Individual Pension Plan (IPP) may provide even greater tax benefits, allowing for larger contributions, especially as you age. Additionally, contributions to employee retirement plans can be tax-deductible, helping you support your team while reducing your taxable income.
4. Splitting Income in Family Businesses
For family-owned businesses, income splitting can be an effective method of cutting down taxes. By hiring family and paying them a reasonable salary, business owners can transfer earnings from the high-earning family member to the lower-earning member which consequently results in a decrease in tax on the family. This is helpful especially for families in lower brackets of tax since it becomes more beneficial when more income is taxed at lower rates. However, it’s essential to document their roles and ensure salaries align with the work performed to comply with tax regulations.
5. Donating to Charities
End-of-year contributions to charities benefit the community and provide tax benefits. Charitable contributions are eligible for a tax credit that may be utilized against individual or corporate income tax. Incorporated entities can deduct charitable contributions from their taxable income, but they must obtain receipts and ensure the contributions comply with the deduction. Choosing local charities or causes that resonate with your business values can also help strengthen community ties.
6. Deferring Income or Accelerating Expenses
Depending on the business’s financial position, one can opt to defer income or escalate expenses for tax planning. For instance, postponing sending a client invoice to January or prepaying certain expenses such as rent or insurance could help decrease taxable income. This approach can be useful for businesses expecting a higher tax bracket next year or those anticipating changes in tax laws.
Planning for A Tax-Efficient 2025
Effective tax planning is not a one-off activity—it’s an ongoing process. As a professional tax accountant and financial consultant, I help business owners develop effective year-round strategies that optimize tax positions and support long-term growth. By focusing on tax efficiency now, you’ll start the new year with the right mindset and a solid financial foundation.