With 2024 over and tax season upon us once more, business owners like you have an opportunity to assess your financial health and implement last-minute strategies to help reduce your tax burden this year, and potentially in the years to come.
Year-end tax planning isn’t necessarily what you might think it is, however: it doesn’t just have to be about minimizing what you owe the IRS, but about aligning your taxes with your overall life and financial goals — making sure they fit with the big picture vision of who you are and what you value most as a business owner.
With that in mind, this article will cover four essential strategies for year-end tax planning, mostly from the perspective of business owners, but with a few more generalized tax planning tips thrown in as well:
- Catch-up contributions and Backdoor Roth IRAs.
- Avoiding common misconceptions around business expenses.
- Determining whether the standard deduction or itemized deduction is best for you.
- Optimizing your holdings by understanding their tax implications (using ETFs and mutual funds as an illustrative example).
Each of these four strategies could reduce your overall tax liability while helping to ensure that your financial plan aligns with your broader business and personal goals.
1. Catch-Up Contributions & Backdoor Roth IRAs
Retirement planning (i.e. long-term thinking) can be one of the most effective ways to save on taxes (a present-day necessity). Year-end tax planning in particular could offer the perfect time to reassess any retirement funding opportunities available to you.
For instance, if your overall retirement savings are currently way off your goal amount, or if you are generally looking to max out on tax-advantaged contributions out of discipline and habit, catch-up contributions and Backdoor Roth IRAs could become powerful tools in your tax arsenal.
Catch-Up Contributions — 401(k)s, 403(b)s and IRAs
Let’s start with the bad news, follow it up with some good news, and finish with some even better news:
- The bad news: if you’re reading this, it’s too late to make catch-up contributions to your 401(k) or 403(b); the deadline for that was December 31st, 2024. Sorry about that.
- The good news: you can still talk to whoever manages your 401(k) or 403(b) to pre-emptively max out on your 2025 regular contributions (i.e. to make sure the right amount is going out of your paycheck each month). This is important, as the annual contribution limits are increasing in 2025, up to $23,500 (versus $23,000 in 2024).
- The (contextually) better news: while the 401(k) catch-up contribution limit for 2025 will still be $7,500 for those 50 years of age or older (meaning people in that age bracket could contribute up to $31,000 in 2025), a rule change brought about by SECURE 2.0 means that there will actually be an even higher catch-up contribution limit of $11,250 for those aged 60, 61, 62 or 63, bringing your total possible contribution to $34,750 in 2025.
- The (universally) better news: no matter who you are, if you have an IRA, you can still make catch-up contributions for 2024! You have until your tax filing deadline to max out on those (the 2024 tax year annual limit for IRA contributions is $7,000, with an additional $1,000 catch-up contribution allowed for those over 50).
Making sure that you get these contribution arrangements in place — either as a pre-emptive move for the rest of 2025 or, in the case of IRAs, as a catch-up strategy before the tax filing deadline for the 2024 tax year — you could bolster your retirement savings and also potentially reduce your total taxable income (in the case of Traditional IRAs).
As Greg Liszka (CFP®, RICP®), President & Advisor at Iron Point Financial would say, “It’s an important action step; just do it! You really don’t want to miss a year. If you pass the IRA contribution deadline in the next few months, that’s it. After April 15th, there’s no way to say, ‘Oh, I want to do last year’s IRA…’”
Backdoor Roth IRAs
While the above information could be helpful for most people with a 401(k) or IRA, there is a particular category of people that advice might not apply to: high-income earners, many of whom might also be business owners.
If that’s you, and you don’t qualify for direct Roth IRA contributions, don’t worry, we have potentially good news for you too: a ‘Backdoor Roth IRA’ could be a good way for you to take advantage of tax-free growth.
Here’s how the Backdoor Roth strategy works:
- First, you contribute non-deductible funds to a traditional IRA (this will be nondeductible if you’re above income limits).
- Then, you immediately convert (‘rollover’) those funds to a Roth IRA…
- While making sure that you pay taxes on any gains during that conversion process.
With step 3 in mind, you might be wondering, “Why would I do this? Why would I decide to pay extra taxes now?” The basic answer is pretty simple: once those funds are in your Roth IRA, they can grow tax-free, and qualified withdrawals during your retirement will be tax-free too.
Beyond that, there could be other benefits; as Greg explains:
“You can tactically overfund your IRA to get money stashed away because, as a business owner, you need cash flow, right? That way, instead of taking a shareholder distribution, you could just take it as a paycheck and cycle it through as income.”
Greg is also quick to clarify, however, that,
“It can get quite complicated, and you can never do this in an account where you’ve already got deductible IRA dollars, because the last thing you want to do is mingle those funds — that would create an accounting nightmare. And there are important ratios to follow in terms of how much you convert.”
Notwithstanding those important caveats, if you’re a business owner, and you have pressing cash flow needs, or you figure you might fall into a higher tax bracket during your retirement years, a Backdoor Roth IRA could well be a great, tax-efficient strategy for you to consider with your tax advisor and financial planner.
Year-End Tax Planning Tip
Get your contributions in order! Simply talk to whoever manages your 401(k), IRA or other retirement funds, and make sure they are set up to max out for 2025, and make any catch-up contributions while you still can, if you have an IRA.
2. Avoiding Expenses Misconceptions
“All roads lead to Rome…” but which way is the most tax-optimized? Many business owners believe that the best route to cut down on their tax bill is to lean on expense-related deductions, but that may not be the best solution in 2025.
Here’s a common scenario Greg comes across with the business owners he works with in Pennsylvania, Ohio and West Virginia: “Clients tell me, ‘I don’t want to pay taxes, so I’m going to buy a new truck, or maybe some new tools. If I buy those, I won’t have to pay any taxes this year.’”
The problem with this kind of thinking is that modern tax rules no longer validate it — not since 2023, anyway — which means you will almost certainly have to pay some taxes, whichever path you choose. Take the hypothetical truck purchase as an example:
Let’s just say, for easy math, we had $100,000 that we wanted to avoid taxes on. Well, if you spent all $100,000 on that truck… then you spent all $100,000 on that truck. That means the $100,000 is not in your pocket, and now you have a depreciating asset. You’re losing money the moment you drive out of the lot.
Depending on what tax bracket you’re in, you’ve probably saved like a third with that transaction — so maybe $30,000 in taxes — but you’ve also spent $100,000 to save that $30,000. Was that expenditure worth it?
If you really needed the truck, or tools, or whatever, then sure, go buy it. But I don’t think it makes sense to make that purchase just because you were going to owe taxes. Net, at the end of the day, you would have had $70,000, or maybe even $75,000 in your pocket.
The two key issues here are that 1) in most cases, you can no longer avoid taxes through a single large deduction, and 2) it may be better to pay some taxes and keep the remainder, depending on your unique business goals (e.g. if you have pressing cash flow needs for the next tax year, that $75,000 could really come in handy).
*The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. Actual investment results may be more or less than those shown. This does not represent any specific product [and/or service].
Section 179 Deductions
Let’s dive into the specifics of trying to deduct a vehicle purchase, just to make the point crystal clear. The first thing to understand is that Section 179 treats vehicles of different weights differently. The general principle here is that, the heavier the vehicle, the more you can deduct up-front:
- Light vehicles (less than 3 tons): deduction limit of $12,400 in the first year of use, plus up to $8,000 in bonus depreciation, which means a total maximum deduction of $20,400 in 2024. This covers most passenger cars, small-to-mid-size SUVs, and some small trucks.
- Heavy vehicles (more than 3 tons but less than 7 tons): deduction limit of $30,500, but with up to 60% bonus depreciation in 2024 [N.B. this will drop to 40% in 2025]. This covers most pickup trucks, commercial vans, and large SUVs.
- Ultra-heavy vehicles (more than 7 tons) or vehicles specifically modified for non-personal use: up to a 100% deduction. Modified vehicles include 1) delivery vans with a 6-ft cargo area not accessible from the passenger seats, 2) shuttle buses designed to carry nine or more people behind the driver, and 3) any vehicle with a completely enclosed driver area, no seating behind the driver, and a large cargo area behind the driver area.
The eligibility requirement for the first two categories is that you must use the vehicle more than 50% of the time for business purposes. Assuming that holds true in our truck example, we would still need to work out 1) which weight category it falls into, and 2) what depreciation bonus, if any, would be applicable.
In other words, unless you’re purchasing an ultra-heavy vehicle, the whole “I’ll just buy a truck so I don’t have to worry about taxes” idea doesn’t hold up. For instance, if you bought a ‘light’ utility truck (less than 3 tons) for $100,000, you would only be able to deduct $20,400.
And if you went one category up, to a ‘heavy vehicle’, you might be able to combine your 60% bonus depreciation with the $30,500 deduction limit to write off a larger proportion of the expense, but even that would be unlikely to get you all the way to $100,000, and it could end up being quite a complicated calculation for tax purposes.
Other Common Misconceptions
- “Everything is Deductible!” — Not all purchases are deductible, either in part or in full, even if they benefit your business indirectly (see the truck example above).
- “Home Office Deductions Are Always Risky” — While home office deductions used to get red-flagged for IRS audits, they are an increasingly safe and valid option, provided you meet the IRS criteria.
- “Co-mingling Funds is Perfectly Fine” — Unlike the home office deduction, mixing personal and business accounts is always likely to make both record-keeping and deductions more complicated. It could be wiser and easier to separate the two.
Year-End Tax Planning Tip
It might sound basic, but it’s the simple things that can make the most difference: take the time to review expenses in your year-end tax planning to ensure they are properly categorized (e.g. HSA contributions, charitable deductions), so that you can work out the best tax strategy, and so that any conversation you have with your fiduciary financial advisor, account, or tax professional is as simple as possible (if you get your paperwork right, it’s easier for them to give you the best advice, quickly).
3. Itemized or Standard Deduction? Making the Right Choice
One of the most significant — but also one of the simplest — decisions in year-end tax planning is whether to claim the standard deduction or to itemize your deductions. Working out which option is best for you could have a big impact on your tax liability.
The Standard Deduction
As most people know, the standard deduction is a fixed amount you can deduct from your taxable income without having to itemize expenses. For 2024, the standard deduction amounts are:
- $14,600 for single filers or married taxpayers filing separately;
- $21,900 for the head of a household; and
- $29,200 for married couples filing jointly.
Since the Tax Cuts and Jobs Act of 2017 (TCJA), around 90% of all US taxpayers have elected to take the standard deduction, simply because it’s unlikely your deductible expenses will be greater than this figure.
That’s a large part of the reason the TCJA made this change to the tax code: to encourage people to file the standard deduction, and to reduce the amount of paperwork individuals and the IRS have to work through come year-end tax planning time.
Itemized Deductions
If you happen to be in the 10% who could benefit from itemized deductions, then it’s worth knowing that you can deduct the following:
- Mortgage interest.
- State and local taxes (up to $10,000).
- Charitable contributions.
- Medical expenses that exceed 7.5% of your adjusted gross income.
If you do go this route — if you really could save more this way — just make sure you have all the records and documentation you need to hand, so that your tax preparer can do their job, and so that the IRS doesn’t come after you further down the line.
Year-End Tax Planning Tip
When it comes to summarizing this obligatory either-or decision, Greg hits the nail on the head: “If you want to make an extra contribution to the church, or the Red Cross, or something, great: do it out of the kindness of your heart. DO NOT do it because you think you’ll get a deduction; that won’t make sense for 90% of people.”
4. Optimizing Your Holdings: ETFs vs. Mutual Funds
If you’re a business owner who holds investments, you would do well to pay attention to their tax implications. Depending on the kind of assets you have in your portfolio, you could be increasing or decreasing your overall tax bill. As part of your year-end tax planning, therefore, it’s important to review your investments and optimize them for tax efficiency.
One tangible way to think about this is to compare two common investment holdings and their respective tax consequences: Exchange-Traded Funds (ETFs) and mutual funds. While we believe each person is different, and each conversation about your investments will depend on your unique circumstances and strategy, this side-by-side comparison can help us think through the topic with a little more clarity.
ETFs: A Tax-Efficient Choice
Good ETFs are often more tax-efficient than mutual funds because of their unique structure. Most ETFs use an “in-kind” creation and redemption process, which minimizes the number of taxable events for shareholders. On top of that, ETFs typically have lower capital gains distributions than mutual funds, making them an excellent choice for taxable accounts.
Mutual Funds: Consider the Tax Implications
Although mutual funds sound familiar to many people, most are not aware that they can result in higher tax liability because of their frequent capital gains distributions, which occur whenever the fund manager buys and sells securities within the fund. All shareholders are required to pay taxes on any gains that result from these transactions, even if they were not involved with the specific decision-making process.
Year-End Tax Planning Tip
As Greg would say,
You’ve just got to make sure it’s the right thing, for the right reason, at the right time. If you can stick to that principle, then you should be fine. Different asset classes are taxed in different ways. So what do we want to hold in an after-tax account? Probably ETFs, because they’re more tax-efficient.
And what would you want to hold in a traditional IRA? Something that has a high turnover rate, or something that produces some weird tax that you want to avoid because, in an IRA, none of those matter. Asset placement matters in portfolio construction, because taxes can hurt.
Year-end tax planning is as good a time as any to talk with your financial advisor about your investment holdings, to make sure they align with that three-fold principle: right option, right reason, right time.
At Iron Point Financial, we believe that it’s better to align your asset holdings with a coherent, overarching strategy than it is to have them arranged at random. That means having a wealth management strategy that makes sense of who you are, what you care about, and what your unique goals are.
Year-End Tax Planning with Iron Point Financial
Whether you are a business owner weighing up the pros and cons of Section 179 deductions, you’re wondering which of mutual funds or ETFs are better to include in your investment portfolio, or you just need to know which of the standard or itemized deduction is right for you, we are here to help with your year-end tax planning needs.
At Iron Point Financial, we specialize in helping business owners like you craft personalized tax strategies that align with your goals and values. Our fiduciary advisors are committed to providing transparent, tailored advice that considers every aspect of your financial life.
Beyond our personalized, friendly service, all year-end tax planning clients who work with us gain access to the full suite of Iron Point software resources, including:
- The AdviceWorks Client Portal
- The IPF Education Suite
- Interactive Financial Calculators
- Interactive Goal Planning
- All-in-one Account Linking
- Secure Document Vault
- Budget & Expense Tracking
If this is an area you need help with, don’t hesitate to reach out and schedule an appointment to start building a tax strategy that can help set your business up for long-term success. Together, we can help you work towards your financial goals while keeping your values at the core of your wealth management plan for years to come.
If you enjoyed this article on year-end tax planning for business owners, why not sign up for email updates here, so you don’t miss future blog posts?
Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.
Related Reading
Resources Referenced
Disclosures
General Disclosures
-
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
-
A diversified portfolio does not assure a profit or protect against loss in a declining market. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
-
Information is provided by Iron Point Financial and written by Clearsound Consulting LLC, a non-affiliate of Cetera Advisor Networks LLC.
IRA-Specific Disclosures
- Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
- Retirement Plans: Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.
Roth IRA-Specific Disclosures
- Converting from a traditional IRA to a Roth IRA is a taxable event.
- A Roth IRA offers tax free withdrawals on taxable contributions.
- To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum).
- Depending on state law, Roth IRA distributions may be subject to state taxes.
Mutual Fund & ETF Disclosures
- Investing in mutual funds and ETFs are subject to risk and loss of principal.
- There is no assurance or certainty that any investment strategy will be successful in meeting its objectives.
- Investors should consider the investment objectives, risks and charges and expenses of the funds carefully before investing.
- The prospectus contains this and other information about the funds. Contact Gregory Liszka at 4 Village Park Dr., #170, Grove City, PA, 16127 or 724-458-5090 to obtain a prospectus, which should be read carefully before investing or sending money.
- Cetera Advisor Networks LLC exclusively provides investment products and services through its representatives.
- Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business.
- This information is not intended as tax or legal advice.
