Business owners tend to think of December 31 as one big tax deadline. But it doesn’t really work that way.
Some decisions have to be made early enough that you still have time to act. You may need to purchase equipment, arrange financing, or get an asset placed in service before the end of the year. Other decisions can reasonably wait until later in the quarter, once you have a clearer picture of where the year will finish. And some important work can even happen after January 1st.
The best approach is to work backward from what actually has to happen by the end of the year. That tells you what needs attention early, what can wait until later in the quarter, and what can properly carry into the new year.
Start early with anything that needs time to execute
Start with the items that need to be addressed early in the quarter. These are decisions where making the choice is only the beginning. You still need time to complete the transaction.
Equipment purchases are a good example. Let’s say you already expect to buy a $100,000 machine. If you want the depreciation to affect the current tax year, simply deciding to buy it in December may not be enough.
For Section 179 and bonus depreciation, qualifying property generally needs to be placed in service during the current tax year.
That means the machine may need to be ordered, delivered, installed, and ready for business use before year-end. If financing is involved, or the equipment has a long lead time, that is not a decision you want to start making in December.
The same thinking applies to other transactions that involve outside parties. If a strategy requires financing, legal documents, an appraisal, a plan administrator, or another professional, give yourself enough runway to actually complete it.
The tax deadline may be December 31st, but the practical deadline could be in October.
Use your updated forecast to make decisions that can wait
Then, the second group may come into focus once you have a better estimate of where the year will finish. This is where October and November forecasting become important.
Let’s say you expected about $500,000 of income for the year. By October, you are now forecasting something closer to $700,000. That change may affect how you think about retirement contributions, compensation, charitable giving, capital gains and losses, and other year-end strategies.
You don’t necessarily need to make all of those decisions in October. But you do need enough information to know which decisions belong on your list.
Retirement planning is a good example. Depending on the plan and your situation, an elective deferral decision may need to happen before the end of the year. The actual contribution may be funded later. So November or early December may be perfectly reasonable for making that decision.
Waiting until tax preparation is different. By then, you may still be able to fund certain contributions, but you may have lost the ability to make an election that had to happen during the prior year.
That’s why the forecast comes first. You want to make these decisions when you have enough information to make them intelligently, but still enough time to act.
Separate the decision from work that can happen next year
Finally, identify the tax work that can wait until next year. This last group is important because not everything needs to be finished in December. Some actions can legitimately happen after January 1st, even if you made the underlying decision earlier.
Certain employer retirement contributions, for instance, can be funded after the end of the year.
A Section 179 election is generally made with the tax return, even though the property itself needs to have been placed in service during the relevant tax year.
An S corporation election is another good example. Let’s say your existing calendar-year business wants S corporation treatment beginning January 1st. The federal election generally doesn’t have to be filed by December 31st. But you still want to make the decision before the new year begins. Your payroll may need to be set up correctly by then. You need to think about reasonable compensation. Bookkeeping, estimated taxes, and owner distributions may also change. So, the filing deadline tells you when the form is due. But your business tells you when you actually need an answer.
That distinction is important throughout fourth quarter planning. Decide early enough to preserve the strategy, then complete the pieces that are allowed to happen later on the proper schedule.
What to do now
A useful fourth quarter planning process should follow the calendar.
Early in the quarter, identify anything that requires lead time. Look at equipment purchases, financing, legal work, and transactions that need to close before the end of the year.
Then, update your full-year forecast and use that information to make the decisions that can reasonably wait until November or December.
Finally, separate those decisions from the contributions, elections, and filings that can properly carry into the new year.
That’s the real point of fourth quarter planning. December should not be the month when you suddenly start making every tax decision. By then, the items that need lead-time should already be underway. The decisions that depend on your year-end forecast should be getting finalized. And anything that can properly wait until next year should already have a clear next step.
The goal is not to get everything done by December 31st; it’s to make sure you don’t lose an option simply because you started too late.
If you have questions or would like to discuss your unique situation, please contact our office to speak with one of our advisors.
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