The fourth quarter is here, but business owners shouldn’t wait until December to start thinking about taxes. For many owners, September is the better time to begin. By then, enough of the year’s financial picture is in focus to make meaningful projections and to take action.
On today’s episode of Business Trends Today, David A. Perez, Enrolled Agent and CEO of Tax Maverick, joins us to break down what business owners should, and shouldn’t, do before the year ends to put themselves in the best possible tax position.
Start forecasting in September
The planning window opens earlier than the calendar quarter suggests. Perez recommends starting in September, when owners can begin projecting the year’s results with greater accuracy. The closer the year gets to closing, the more likely those projections are to reflect reality.
"There's fourth quarter, October, November, December, but I would include September in this fourth quarter just for the sake of talking about planning."
Owners often begin the year with ambitious projections, then see the actual numbers come into focus as the months go by, Perez said.
The most common mistake he sees is owners waiting too long to run those numbers. A prior year’s tax liability provides a useful reference point, while owners who filed an extension have much of the year available to work with their accountant or tax professional.
The goal is to walk into January with as much of the previous year already wrapped up as possible. That leaves the first months of the new year for building the business instead of scrambling to reconstruct the old one.
Spending is not a strategy
The second mistake business owners make is confusing spending with planning, and buying things they don’t need simply to reduce their tax bill.
Perez pointed to a medical practice that purchased a new set of beds to avoid paying taxes, even though the beds the practice had purchased five years earlier were still working just fine.
A reflexive year-end vehicle purchase falls into the same category, he said. Buying a truck solely for the tax deduction, without a legitimate business need or broader financial plan, is among the weakest moves an owner can make.
The first test for any purchase is necessity, Perez said. Equipment and materials the business genuinely needs may provide a legitimate tax benefit, but buying something simply because it creates a deduction doesn’t make it a good investment.
Owners should stop asking how much they can spend and start asking how much they can invest.
Q4 is a fair time to revisit your structure
Business owners often assume the window for changing their business structure closed months ago. But Perez says the fourth quarter is still worth a second look.
The standard deadline for an S-Corporation election generally falls earlier in the year, but owners who missed it may still have options for a late election, depending on their circumstances and whether they meet the applicable requirements. The right choice also depends on the business’s current structure and financial situation.
"As long as you do it before December 31st, you can make those elections happen for the entire year."
A sole proprietor may be ready to consider an S-Corporation election. Another business owner may find that a C-Corporation or another structure makes more sense.
The important point is not to assume the opportunity has passed without talking to a tax professional.
Because entity elections can involve specific IRS rules and deadlines, owners should discuss the timing and eligibility requirements with a qualified tax professional before making a change.
Pay yourself a defensible number
S-Corporation owners face another important consideration. When an owner works materially in the business, the IRS generally expects the owner to receive reasonable compensation for those services.
Reasonable compensation is measured against the work being performed, not simply the owner’s title. Perez says owners should consider the position they hold, the scope of their responsibilities and the revenue and circumstances of the company.
He offers a simple example. An owner running a company with $500,000 in revenue decides the CEO role justifies a $250,000 salary. That figure may be difficult to justify based on the company’s size and the work being performed.
The issue matters because of how S-Corporation income is treated. Compensation paid through payroll is subject to applicable payroll taxes, while properly reported business income that passes through to the owner generally is not subject to self-employment tax in the same way.
That makes reasonable compensation an important part of S-Corporation tax planning. Owners should work with a tax professional to determine a defensible amount based on their individual circumstances.
AI finds the options, an advisor picks them
Tax professionals are increasingly using AI to help identify potential strategies, and Perez counts himself among them. His firm uses AI to surface possibilities early and often for clients.
What the technology speeds up is identification. AI can generate a list of potential strategies much faster than a human could research them individually. Determining which strategies actually apply, and which ones make sense financially, still requires professional judgment and knowledge of the client’s business.
"You should be meeting with somebody who knows your situation so they can tell you which ones apply to you."
Business owners can use AI on their own, but only up to a point. Perez says asking an AI model what options might be available can be a useful starting point for research. The result will be a list of possibilities, some of which may apply and others may not.
The takeaway isn’t that business owners shouldn’t use AI. It’s that AI can help identify the questions to ask, while a qualified professional can help determine the answers that fit the business.
The real fix runs all year
Business owners who don’t want to get caught in a year-end time crunch can avoid much of the headache by staying on top of their books throughout the year.
Perez says owners should stop treating financial management as an expense to avoid and start treating it as a top-line investment. Budget for bookkeeping and financial management the same way you budget for payroll, and consider hiring someone to keep the books current throughout the year.
The benefits extend well beyond tax savings. Owners who want to scale eventually need to borrow. They may need lines of credit, equipment financing or other access to capital—and those opportunities don’t necessarily arrive on the owner’s schedule.
Getting that financing often requires current, reliable financial statements. Owners who wait until tax season to organize their books can find themselves scrambling to produce the same information when a lender or other financing opportunity comes along.
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