In this year-end update, we summarise the 2024 year-end planning opportunities that should be considered by US connected businesses.
The purpose of year-end tax planning
Year-end tax planning helps businesses mitigate any immediate tax liabilities, improve overall financial positions, and maximise the potential use of tax assets in future years. Careful consideration of tax strategies and preparing for compliance changes ensures a business’ readiness for the next tax year.
Year-End Tax Planning Considerations
Although the US federal corporate tax rate has been applied at a flat rate of 21% since 2017 and is intended to remain consistent in the immediate future, a common year-end planning consideration is the deferral of income and acceleration of business expenditure across the tax year-end date.
Deferring Income to the next tax year can lower the current year’s tax liability and provide cash flow advantages to a business. This can be particularly useful if a business anticipates realising lower revenue, increased costs or even a net loss in the next tax year.
Business owners should be aware that deferring income is not as simple as deferring sending an invoice when the accrual basis of taxation is applied. Revenue is required to be recognised as work is performed, meaning that the deferral of income is only really possible when considering advance payments for services.
Similarly, accelerating expenditure into the current year can also reduce the current year’s tax liability and is commonly applied to capital expenditure and other asset purchases.
Business owners should be aware that capital expenditure is deducted in line with depreciation rules, and while generous accelerated depreciation deduction rules exist in the US, it is possible that capital expenditure incurred by a business may only be deducted in part for current year federal tax purposes.
In addition to accelerating capital expenditure, many businesses consider any Bad Debts outstanding at year end. Writing off any receivables that are partially or wholly worthless can crystalise a deduction for corporate tax purposes which will further reduce the current year taxable income.
Business owners should be aware that any bad debts written off in the current year which are subsequently recovered will generate taxable income in the year they are recovered.
It is also common for many businesses to recognise a Year-End Employee Bonus, even if the actual bonuses are not paid to employees until the following tax year. A year-end bonus like this can be fully deductible in the current tax year as long as the liability for the bonus to the business is fixed at year-end and the business is unable to cancel the bonus after the year-end.
Business owners should be aware that all bonuses recognised in the current year must be actually paid to the employees within 2 ½ months of the year end in order to be deductible in the current year.
Many businesses may consider making year-end Charitable Contributions, but its important business owners are aware that US Corporations may only deduct charitable contributions made during a year up to 10% of their taxable income. Any contributions in excess of this 10% limitation are carried forward for deduction in a future tax year.
Business owners should be aware that in order for a charitable donation to be deductible it must be made to a US organisation, and that organisation must meet strict qualification criteria which apply to its legal and tax classification, purpose and operations.
Finally, transatlantic businesses should take time at year end to consider their Intercompany Agreements to ensure the correct intercompany charges are accrued. This ensures the appropriate profits are recognised in each tax jurisdiction, matching the profits with the value in the business.
Impact of the Recent US Election Results
President Trump has suggested that he would like to further reduce the US corporate tax rate in future tax years, which means that deferring income and accelerating expenditure into the current tax year could result in both immediate cashflow benefits and future tax savings. However, business owners should be aware that we have very little details about the new President’s tax plans and there is no guarantee that any corporate tax rate reduction will actually be enacted.
