The end of 2025 is rapidly approaching, and that means the window for tax-saving moves is closing. For small businesses using cash-based accounting (where income is counted when received and expenses when paid), the next few weeks present valuable opportunities to manage taxable income and reduce 2025 tax liability. Thoughtful year-end planning, even at the last minute, can help your business capture savings. This month, we offer you a practical, tactical guide to reducing your tax obligation.
Deferring Income and Accelerating Expenses
The core advantage of cash-basis accounting is flexibility. You can potentially defer income and accelerate expenses to minimize taxable profits in the current year.
Deferring income: If possible, delay invoicing clients until January. In cash-based accounting, income is counted when actually received, not when earned, so payments arriving after December 31 land on your 2026 tax return, not 2025’s.
Accelerating expenses: Review vendor bills, office supply needs, marketing materials, and equipment purchases. You can pay these before year-end and deduct them this year, even if the goods or services are used later.
This strategy is especially effective if you expect to be in the same or a lower tax bracket next year. If higher-income years are ahead, consider the reverse tactic for maximum long-term or lifetime tax savings.
Inventory Management at Year-End
For businesses carrying inventory, year-end is the perfect moment to scrutinize what’s on the shelves. Obsolete, damaged, or slow-moving inventory not only takes up space but also directly impacts your cost of goods sold (COGS) calculation and your taxable income.
Why it matters: COGS is deducted from gross receipts to arrive at taxable profits. Writing off obsolete or unsalable inventory increases your COGS for the year, effectively lowering taxable income.
Action steps: Conduct a physical count before December 31. Identify inventory that’s truly worthless or unsalable. Document these items and, where appropriate, write them off in accordance with IRS requirements. This often means removing them from your books and not including them in the year-end inventory valuation.
Not only does this provide a tax benefit, but it also gets your shelves (and business) ready for the new year.
Maximizing Your QBI Deduction
If you’re operating as a sole proprietor, partnership, S corporation, or LLC, you may be eligible for the Qualified Business Income (QBI) deduction, which lets many small business owners deduct up to 20% of net business income from their taxes.
Balancing act: Since the deduction is based on your taxable business income, accelerating expenses (see above) not only reduces what you owe but also—paradoxically—can slightly reduce your QBI deduction, since a lower profit means less eligible for the 20% break. You’ll need to find the optimum balance.
Optimize salary/draws: If you’re an S-Corp owner, review your reasonable compensation: The IRS only allows QBI on the business income after owner wages. Adjusting your year-end salary could fine-tune your balance, but check with your accounting professional first.
QBI phase-outs can be complex if income passes certain thresholds, particularly for service-based businesses. If you’re close to the limits, some well-timed expense payments or retirement contributions (which lower taxable income) can keep you under the cap.
Reviewing Your Business Structure
The end of the year is a natural time to make assessments, not just on financial goals, but on other foundational considerations, as well. For example, is your current legal or tax structure still the best fit?
Evolving needs: A fast-growing business might benefit from converting from a sole proprietorship to an LLC or S corporation, optimizing taxes and limiting liability.
Deadline awareness: Some structure changes, like electing S corporation status, require filing early in the new year to take effect for the full tax year, so it’s wise to evaluate now.
Consider a consultation with your accountant to review profits, payroll, and future plans. Structure shifts are best made deliberately—with both compliance and long-term tax savings in mind.
Smart Year-End Retirement Plan Moves
For cash-based businesses, funding a retirement plan before December 31 can mean sizable deductions for the current year. Here are some to consider:
Traditional IRAs and SEPs: Depending on the plan, contributions for 2025 might be made as late as your tax-filing deadline, but making them before year-end locks in the deduction and helps lower 2025’s taxable income.
Solo 401(k)s: Plans often must be established by year-end, even if contributions can be made later. Max out salary deferrals and consider an employer contribution to boost your deduction.
Retirement plans reward both the business and your future self, while creating efficient tax savings today.
The Case for Pre-Paying Expenses
Another flexible year-end tactic for cash-based taxpayers is prepaying expenses you expect to incur in the coming year.
Eligible expenses: Common candidates include insurance premiums, rent, subscriptions, software licenses, marketing retainers, and office supplies.
Limitations: The IRS generally allows the deduction of prepaid business expenses if the benefit does not extend beyond 12 months.
Prepaying is an easy way to lock in deductions now, especially if cash flow allows and you anticipate lower profits or higher expenditures this year.
Putting It All Together
Year-end tax planning doesn’t have to be overwhelming or time-consuming, but it absolutely pays to focus your attention before December 31. Small, practical moves, from inventory clean-outs and retirement funding to prepaying ordinary expenses, can provide meaningful savings and kick off the new year organized and financially fit.
Ready for a personalized plan? Reach out to our team today. There’s still time to make smart, last-minute tax choices for your business.