A business can have a profitable year and still be caught off guard by its tax bill. Revenue may be up, clients are paying, and there is money in the business account. Everything seems to be going well until you realize that a portion of that money may already be spoken for.
October is a good time to find out where you stand. Year-end tax planning for business owners is not simply about finding deductions or reducing what you owe. It is about understanding your financial position, anticipating tax obligations, and making decisions while you still have time to do something about them.
Your CPA plays an important role in that process. But the conversation needs to happen before you are gathering documents to file your tax return.
Tax Preparation and Tax Planning Are Not the Same Thing
When your CPA prepares your tax return, the focus is primarily on reporting what already happened. Income was earned, expenses were paid, and financial decisions were made. By the time you file, many opportunities to influence the previous year’s tax results have already passed.
Tax planning is different. It looks at where you are today, where you expect to finish the year, and whether there are decisions worth making before December 31.
Not every CPA automatically provides proactive tax planning as part of a tax preparation engagement. If you haven’t had that conversation, I recommend reaching out and asking to schedule a year-end tax planning meeting.
You can start with something as simple as, “I’d like to understand my projected tax liability for this year and whether there are any decisions I should be making before year-end. What information would you need from me to prepare for that meeting?”
The earlier you have that discussion, the more time you have to consider your options. Some opportunities have deadlines before the end of the calendar year, while others may remain available when you file your return. Your CPA can help you identify which deadlines apply to your particular circumstances.
Year-End Tax Planning for Business Owners Starts With Accurate Numbers
One of the biggest mistakes business owners make is assuming that the balance in their business checking account tells them how much money they have available.
It doesn’t necessarily tell you how profitable the business is, what you will owe in taxes, or how much you can comfortably distribute or invest.
Before meeting with your CPA, make sure your bookkeeping is current, and your financial statements reflect what has actually happened in the business. If your records are several months behind, getting them updated should be your first priority.
Your CPA will generally want to review your year-to-date income and expenses, anticipated income for the remainder of the year, estimated tax payments, withholding, and retirement contributions. Your prior-year tax return is also important because it may affect how much you are required to pay during the current year.
If you are married and file jointly, the analysis may also need to account for your spouse’s income, investment earnings, and other financial circumstances outside the business.
One question I would specifically ask is whether you have paid enough in estimated taxes to avoid an underpayment penalty.
Federal tax rules generally provide safe harbors based on a percentage of your current-year tax or the tax shown on your prior-year return, subject to applicable requirements and exceptions. Higher-income taxpayers may have different thresholds. California also has its own estimated-tax requirements, including a different installment schedule and special rules for certain high-income taxpayers.
Your CPA should evaluate both your federal and California obligations, including whether your payments were made on time. A large payment at the end of the year does not necessarily eliminate penalties associated with earlier underpayments.
More importantly, you want to understand how much money you should be setting aside now so that next year’s tax bill does not interfere with your business operations or personal financial plans.
What Should You Be Asking Your CPA Before Year-End?
Once you have a reasonably accurate financial picture, the conversation can move beyond estimating what you owe.
I would begin by asking your CPA what your projected tax liability looks like if you make no additional changes. That gives you a starting point for evaluating whether any adjustments make sense.
From there, the discussion should focus on the opportunities that actually apply to your business.
Retirement contributions are one area worth reviewing. Depending on your business structure, the type of retirement plan you maintain, and whether you have employees, additional contributions may offer tax advantages while helping you build long-term financial security.
However, retirement planning involves more than deciding how much you want to contribute. Certain plans require employer contributions for eligible employees, and the applicable deadlines and contribution calculations can vary. For example, a SEP IRA generally can be established and funded by the applicable tax-return filing deadline, including extensions, while other retirement-plan actions may need to occur earlier.
Another consideration is how you are compensating yourself. If you own an S corporation and work in the business, reasonable compensation requirements should be part of your discussion with your CPA. Taking distributions instead of wages does not eliminate those requirements, and compensation decisions can affect payroll taxes, retirement contributions, and other obligations.
You may also want to ask whether your projected taxable income affects your eligibility for particular deductions or credits. The federal qualified business income deduction, for example, may provide a deduction for certain eligible business owners, but it is subject to limitations and does not apply equally to every business. California does not conform to that federal deduction, which is another reason to evaluate federal and state consequences separately.
Business purchases deserve consideration as well. Depending on the asset and applicable requirements, purchasing equipment or making other business investments may provide depreciation or expensing benefits. Federal law currently allows substantial first-year deductions for certain qualifying property, but California does not necessarily follow the same rules.
That does not mean you should rush out and buy equipment simply to reduce your taxes.
Spending $10,000 to save $2,500 in taxes still means you have spent $7,500. If the purchase is necessary and financially appropriate, the deduction may be an added benefit. If you do not actually need what you are buying, the tax savings alone rarely justify the expense.
I would much rather see a business owner make a sound financial decision that also has favorable tax consequences than make an unnecessary purchase simply because December 31 is approaching.
Your Tax Decisions May Also Affect Your Legal Planning
Although your CPA should be guiding the tax analysis, some year-end decisions may have legal consequences that deserve attention.
For example, changing how owners are compensated, bringing a family member into the business, transferring ownership interests, or restructuring an entity may involve more than tax considerations. Your operating agreement, shareholder agreement, corporate records, and other governing documents may need to be reviewed or updated.
I also encourage business owners to think about how these decisions affect their personal estate planning.
If your business has grown substantially, its value may be very different from what it was when you originally created your estate plan or signed a buy-sell agreement. Changes in ownership, business structure, or succession arrangements may also affect what happens to your interest if you die or become incapacitated.
These are matters I review with business owners as part of their legal and succession planning. The goal is to make sure that a decision intended to improve one part of your financial picture does not create an unexpected problem somewhere else.
Your CPA, attorney, financial advisor, and other professionals each have different responsibilities. When a decision affects more than one area, it makes sense to involve the appropriate people before implementing it rather than trying to correct problems afterward.
Make the Meeting Count
Before ending your meeting with your CPA, make sure you understand what needs to happen next.
If a retirement contribution is recommended, find out how much you can contribute, what it will cost, and when it must be completed. If your estimated payments need to change, confirm the amount and payment deadline. If a particular strategy requires additional documentation, another professional’s involvement, or action by your payroll provider, identify who will handle it.
You should also understand which recommendations are time-sensitive and which can reasonably wait until next year.
And remember that a tax projection is based on the information available at the time. A new contract, unexpected expense, significant change in revenue, or change in household income can affect the numbers. Ask your CPA whether an updated projection will be appropriate before the year ends.
October is an opportunity to make thoughtful decisions rather than react to a tax bill several months from now. Even if your CPA determines that no significant changes are necessary, you will have a much clearer understanding of your financial position and what to expect.
At Cheever Law, I work with California business owners to protect what they have built through thoughtful business and succession planning. If your year-end review reveals that your business agreements, ownership arrangements, or estate plan need attention, we can help you address those legal issues while coordinating with your other professional advisors.
Good planning involves understanding how today’s business decisions may affect both your company and the people who depend on it.