Year-End Tax Planning for Cash-Based Businesses

As the year ends, cash-based businesses need to focus on tax planning. Cash-based businesses record income and expenses when they receive or pay the money. To avoid surprises during tax season, proper planning can help you maximize deductions and lower your tax burden.

Steps You Can Take

Here are some critical steps to help you get started.

1. Review Your Income and Expenses

Now is the time to review your records carefully. Make sure you record all income and expenses accurately. If you’re missing any receipts or payments, gather them before year-end.

• Check for any unrecorded sales or income.
• Review your expenses to ensure you have receipts for everything.
• Separate business expenses from personal expenses.

2. Take Advantage of Tax Deductions

Cash-basis businesses can deduct ordinary and necessary business expenses in the tax year as long as they are paid for during that calendar year.

Here are several cash-based business expenses to consider:

• Prepaying eligible 2026/2027 expenses (like rent, utilities, or supplies) before December 31, 2026.
• Using Credit Cards: Charging a business expense to a credit card in 2026 counts as a deduction for 2026, even if you do not pay the credit card bill until 2027.
• Standard Mileage Business Rate: January 1 – June 30, 2026, use 72.5 cents per mile; July 1 – December 31, 2026, use 76 cents per mile.
• Take advantage of 100% bonus depreciation and the expanded Section 179 deduction (up to $2.56 million) for immediate write-offs on qualifying tools, machinery, and equipment placed in service.
• Standard Operating Expenses: 100% deductible categories include advertising, software subscriptions, legal/professional fees, contract labor, business insurance, rent, and utilities.
• Qualified Business Income (QBI): Eligible sole proprietors and pass-through entities can claim up to a 20% QBI deduction.
• Meals and Entertainment: Client meals are generally 50% deductible, while traditional entertainment expenses remain 0% deductible.

3. Defer Income or Accelerate Expenses

One way to manage your taxes is to adjust when you receive income or pay expenses. If possible, delay receiving income until the next year or pay some expenses before the year ends.

• If you expect to earn more next year, delay payments until January.
• Prepay January expenses such as rent, insurance, or utility bills.
• Purchase supplies or equipment now to deduct this year.

4. Contribute to a Retirement Plan

Contributing to a retirement plan can reduce your taxable income while helping you save for the future. You can set up a SEP IRA, SIMPLE IRA, or a solo 401(k) if you don’t have a plan.

• Make contributions to your retirement plan before the year ends.
• Deduct these contributions from your taxable income.

Save Money and Avoid Stress

Proper year-end tax planning can help your cash-based business save money and avoid stress. Review your finances, take advantage of deductions, and consider deferring income or prepaying expenses. By planning, you’ll be ready for tax season and save money.

Year-end is around the corner. Schedule your tax-planning meeting with us soon.