Year End Tax Planning for Closely Held Businesses

Lesson 1

Two Kinds of Year End Moves

Most year end tax articles hand you a list of tips. This one starts somewhere more useful, which is the distinction that actually governs your December: some things are still movable, and some were decided months ago whether you thought about them or not.

Still movable in November and December: when you send invoices and when customers pay them, when you pay vendors, whether you buy and install equipment, how much of a bonus you declare, whether you fund certain retirement accounts, and whether you make one more charitable gift.

Already locked by the time December arrives: your entity type for the current year, whether you elected S corporation treatment for this year, payroll deadlines that have already passed, and any documentation that had to be created as things happened rather than reconstructed later.

They are the things that quietly stopped being fixable in the spring, long before anyone was thinking about taxes.

One thing shapes everything below: whether your books are on the cash method or the accrual method. On the cash method, timing follows the money, so a deduction generally lands when you pay and income lands when you receive. On the accrual method, timing follows the obligation, so income is generally recorded when earned and expenses when incurred, regardless of when cash moves. The same December move can produce completely different results under each. If you are not certain which method your business uses, that is the first question to ask, because most of this course depends on the answer.

Lesson 2

Moving Income, Expenses, and Charitable Giving Across the Line

The oldest move in the book is deferring income into next year and accelerating deductions into this one. It still works, within limits, and the limits are where people get into trouble.

Deferring income. A cash basis business can delay December invoices so payment arrives in January. What you cannot do is have the money available to you and simply decline to take it. If a check is sitting in your mailbox on December 30, it is your income in December, whether or not you open the envelope. The same is true of funds credited to your account or set aside for you without restriction.

Accelerating deductions. A cash basis business can pay expenses before December 31 to deduct them this year. Two practical points.

First, a charge on a bank or general purpose credit card is generally deductible when you charge it, not when you pay the card, so a late December purchase still counts even if the bill arrives in January. The reason is that the card company has paid the vendor on your behalf and you now owe a third party. That logic does not carry over to a store’s own charge account, where you have only promised to pay the same vendor later, so those are generally deductible when paid.

Second, prepaying is not unlimited. You generally cannot deduct a payment for benefits extending well beyond the coming year, though there is a rule that permits deducting certain prepayments where the benefit does not extend past twelve months or the end of the following tax year.

Bonuses, if you are on the accrual method. An accrual basis business can sometimes deduct a bonus declared this year and paid early next year, provided the obligation was genuinely fixed by year end and payment happens within a set window after year end.

The word fixed is doing real work there. If the bonus still depends on something that has not happened, most commonly a requirement that the employee still be working there on the payment date, then the obligation was not fixed at year end and the deduction generally waits.

This generally does not work for bonuses to related owners. Where the recipient is a related party, the deduction generally waits until the amount is actually included in the recipient’s income. And for an S corporation this is broader than most owners expect: every shareholder counts as a related party, regardless of how small the ownership stake. So an accrued but unpaid bonus to any S corporation shareholder is not a current year deduction.

Charitable contributions, and where they actually land. A December gift is one of the easier year end moves, but the effect depends on your entity, and this is a common misunderstanding.

If your business is a partnership or an S corporation, the contribution does not reduce business income. It passes through to the owners and lands on their personal returns, so the benefit depends on what is happening there.

That personal side changed for 2026 in ways worth knowing before you decide an amount. Owners who itemize now generally deduct charitable contributions only to the extent the total exceeds a small floor based on income, so the first slice of giving produces no deduction. Owners who do not itemize regained a limited deduction for certain cash gifts, up to $1,000, or $2,000 on a joint return.

A C corporation deducts contributions at the entity level, and for 2026 that comes with a floor as well: a 1% of taxable income floor along with the existing 10% ceiling, with a carryforward for amounts above the ceiling.

None of this makes giving through the business wrong. It just means the tax result is not automatic, and it is worth knowing which return the deduction lands on before you decide the amount or the timing.

Lesson 3

Equipment, Vehicles, and the Three Words That Matter

Buying equipment before year end is the most common December move, and it is also where the most money gets lost to a technicality. Three words decide the outcome: placed in service.

Writing the check does not create the deduction. Signing the purchase order does not either. The asset has to be ready and available for its intended use by December 31. A machine delivered on December 28 that requires installation and is still sitting uninstalled in its crate on January 3 was not placed in service this year, no matter when you paid for it. A vehicle purchased in December but not delivered until January is a next year deduction.

If a December purchase matters to your tax picture, the delivery and installation date matters as much as the invoice date. That is the conversation to have with your vendor in November, not the last week of the year.

Assuming you clear that hurdle, there are three ways the cost can come off faster than a normal depreciation schedule:

• Bonus depreciation currently allows a 100% first year deduction for qualifying property acquired and placed in service after January 19, 2025, subject to the applicable rules. It generally applies automatically unless you elect out.
• Section 179 expensing lets you elect to deduct the cost of qualifying property up to an annual dollar limit, which phases out once total purchases for the year exceed a threshold. It is also generally subject to a business income limit, so the full deduction may not be usable in a low income or loss year, though unused amounts may generally carry forward. The dollar limits are adjusted for inflation and have changed recently, so confirm the current figures rather than working from a number you remember.
• The de minimis safe harbor lets you expense low cost items outright rather than capitalizing them, up to a per invoice or per item limit that depends on whether you have an applicable financial statement.

The de minimis election is worth a specific note, because it is widely misunderstood in a way that costs people deductions they were entitled to.

The election itself is made on your return each year, so there is nothing you need to file in advance. What has to already be true is different: your accounting procedures had to be in place at the start of the tax year, and the items had to actually be expensed on your books rather than capitalized.

That second condition is the one that usually decides it. The election blesses how you already treated the items on your books. It cannot reclassify something you capitalized all year.

Here is the part that surprises people. The written policy requirement applies only if you have an applicable financial statement, which generally means audited financial statements or statements required by a government agency. Most closely held businesses do not have one. If that is you, the procedures have to exist, but they do not have to be in writing. A consistent practice of expensing items under a threshold on your books can support the election.

So if nobody wrote a policy but the bookkeeping has consistently expensed small purchases all year, the election may well be available to you. Put a written policy in place before January 1 anyway. It costs nothing and removes the question entirely.

Lesson 4

Retirement Plans and the Deadlines That Differ

Retirement contributions are among the largest deductions available to a profitable closely held business, and the deadlines are genuinely confusing because they are not the same across plan types.

The important distinction is between establishing a plan and funding it. Some plans must exist by December 31 even if the money goes in later. Others can be both created and funded after year end, up to your filing deadline including extensions. Getting these backwards is a common and expensive surprise.

A few general shapes, all of which need confirming against your specific plan and situation:

• SEP plans are the most forgiving on timing and can generally be established and funded up to the tax filing deadline including extensions.
• Solo 401(k) plans got more flexible under recent legislation, but the flexibility is not unlimited, and the treatment of employee deferrals versus employer contributions is not the same. If a solo 401(k) is part of your plan for this year, ask now rather than in March.
• Defined benefit and cash balance plans can produce very large deductions for the right business, and they carry the most ongoing commitment. Recent legislation gave more room on the formal adoption deadline, but that has not made them a late year decision: plan design, actuarial work, and funding all take real lead time. These are a fall conversation, not a December one.

This is a team decision, not a tax decision alone. Choosing a plan involves more than the deduction. Someone has to weigh investment options and costs, and if you have employees, the plan has to satisfy coverage and nondiscrimination requirements that shape who must be included and at what cost. Defined benefit and cash balance plans require an actuary. In practice this works best as a conversation among your CPA, a financial advisor, and where the plan calls for it, a third party administrator. Your CPA can model the tax effect of a contribution. That is a different question from whether the plan is the right one to put in place and maintain.

If a retirement plan is going to be a meaningful part of your tax picture, the practical rule is simple: start the conversation in the fall, and get the deadline for your specific plan type confirmed in writing. This is one of the few areas where a date you were unaware of can cost five figures.

One related item worth raising in the same conversation: if your children work in the business, their earned income opens up retirement options of their own. Lesson 5 covers how to do that correctly.

Lesson 5

Owner Pay, Paying Your Kids, and the S Corporation Trap

If you own an S corporation, this is the lesson that matters most, and the deadline is real.

An owner who works in an S corporation has to be paid reasonable compensation as wages, running through actual payroll. Distributions are not a substitute. The reason this belongs in a year end course is that current year payroll needs to be handled before December 31. If you discover a year of missed owner payroll on January 15, you may still be able to correct the reporting, but you cannot make the late payroll or deposits timely after the fact, and the cleanup may involve amended payroll returns and penalties.

So if you have been taking distributions all year and have not run owner payroll, that is a November problem to solve, not a February one.

Two related items on the same deadline:

• Health insurance for a more than 2% shareholder generally has to be paid or reimbursed by the S corporation and included in the shareholder’s year end wages for the usual self employed health insurance deduction to work. Both halves matter, and it is a year end payroll item that is commonly missed.
• Accountable plan reimbursements. If the business reimburses you for business use of your vehicle, a home office, or other expenses, those reimbursements need to run under a proper accountable plan with substantiation. Done right, they are deductible to the business and not income to you. Done as a flat reimbursement with no requirement to substantiate the business expenses, or if the expenses are not substantiated within a reasonable period and any excess returned, the payment is generally treated as wages.

There is also an interaction worth knowing about. The qualified business income deduction, which lets many pass through owners deduct a portion of business income, can be affected by how much you pay yourself in wages. Higher wages reduce business income but may support the deduction in certain situations, and lower wages do the reverse. There is no universal right answer, and the calculation depends on your income level and industry. It is a modeling exercise rather than a rule of thumb, and it is worth running before December rather than discovering the result on the return.

Paying your children. If your children genuinely work in the business, putting them on payroll can be one of the better moves available to a family owned company. The wages are deductible to the business, and a child with modest earnings often owes little or no federal income tax on them.

The reason is the standard deduction. A dependent’s standard deduction against earned income generally runs up to the regular standard deduction amount. If the child has little or no other income, wages up to roughly that figure can come out of the business as a deduction and often land with the child at little or no federal income tax cost. That amount is adjusted for inflation every year, so use the current figure rather than one you remember, and note that state income tax may still apply depending on where you are.

There can also be payroll tax savings, though this depends heavily on how your business is organized. Those exemptions are generally available when the business is a sole proprietorship run by a parent, or a partnership in which the only partners are the child’s parents. They are not available once you are operating as an S corporation or a C corporation.

What matters here is how the business is taxed, not what it is called. A single member LLC that is disregarded and reported on the parent’s own return is treated as a sole proprietorship for this purpose and can qualify. The same LLC after an S corporation election cannot. If you formed an LLC and are not certain how it is currently taxed, that is worth confirming before counting on this.

The requirements are where this succeeds or fails. The work has to be real, age appropriate, and actually performed. The pay has to be reasonable for the work being done, judged the same way you would judge paying a stranger for it. And it has to run through payroll properly, with the same records you would keep for any other employee: a job description, time records, and actual wage payments run through payroll rather than a year end journal entry or an informal transfer between family accounts.

What a December 1099 actually costs. A common approach is to reach December, recognize that the kids helped out during the year, and issue them a 1099 for a round number rather than running payroll. It is understandable. Payroll takes setup, and a single form at year end feels like the simpler path.

It is worth understanding what that choice does, because the effects run in the opposite direction from what most owners expect.

It changes who owes what. A 1099 treats your child as an independent contractor running their own business. That generally makes the income subject to self employment tax once net earnings pass a low threshold, at roughly 15%, and there is no family exemption from self employment tax the way there is for payroll tax in some family arrangements. So the shortcut tends to produce a tax the child would not otherwise have owed, along with a filing obligation of their own.

It does not match the arrangement. A child working under your direction, on your schedule, using your equipment, generally looks like an employee. That is not a judgment about intent, it is just how the relationship is characterized, and the form you issue does not change the underlying facts.

It does not solve the records problem. A lump sum reported in December for a year of undocumented work has the same substantiation issue as any other reconstruction. What was done, when, and whether the amount is reasonable for that work are the questions either way.

The alternative is not more work overall, it is work distributed differently: payroll run during the year, with ordinary records. Most payroll providers handle a family employee without difficulty, and the setup is a one time cost.

That puts this squarely in this course. You cannot decide in December to have paid your child for a year of work that was never documented and may never have happened. What you can do in December is make sure the wages for work that was actually performed run through payroll before the year closes, and set the arrangement up properly for next year.

One more benefit worth naming: a child with earned income can generally fund a Roth account, which starts a very long compounding runway. That is a conversation to have alongside the financial advisor discussion in Lesson 4.

Lesson 6

What You Cannot Fix in December

This is the shortest lesson and probably the most valuable, because it is the list of things that need to happen earlier than most owners realize.

Your entity choice for this year. If you are operating as a sole proprietorship or partnership and would have been better off as an S corporation, December is generally too late for the current year. The election to be treated as an S corporation is due early in the tax year it applies to, not at the end of it. There is relief available for late elections in some circumstances, but relief is a process with requirements, not a checkbox.

Payroll deadlines that have already been missed. You cannot backdate payroll or make an earlier payroll deposit timely after the fact. But if the year is still open, there may still be time to address current year owner compensation before December 31. That is why Lesson 5 treats missed S corporation payroll as a November or December problem rather than a filing season problem.

Documentation that is much stronger when kept contemporaneously. Mileage logs, time records supporting participation in a business or rental, and similar records are far weaker when reconstructed in the spring than when kept as things happened. You can improve your records going forward. You cannot go back and make last March contemporaneous.

Estimated tax payments you did not make. Underpayment penalties are generally calculated by quarter, so a large payment in January does not undo a shortfall from April. What you can still do is reduce further damage and understand where you stand.

There are safe harbor amounts that protect you from penalties even if the current year turns out much larger than expected. They are generally based on either your prior year tax or a percentage of the current year. The detail that catches people is that the prior year safe harbor requires a higher percentage once your income passes a threshold, so an owner who had a strong year and is relying on last year’s number may be short without realizing it. If your income jumped this year, that is worth checking now rather than in April.

There is one useful exception worth knowing. If you have wages or another payment from which federal income tax can be withheld, increasing withholding late in the year can sometimes reduce an earlier shortfall, because withholding is generally treated as having been paid evenly throughout the year. A late estimated payment does not get that treatment. For an owner who takes a salary from the business, this can be the difference between a penalty and none. Ask before assuming an earlier shortfall is permanent.

Accounting procedures for the de minimis safe harbor. Covered in Lesson 3. The procedures had to exist at the start of the year, and the items had to be expensed on your books during it. Neither can be created in December, though the procedures need not be written unless you have an applicable financial statement.

Sources

Where This Comes From

The parenthetical references throughout point to published guidance available free from IRS.gov and eCFR.gov:

• Publication 334, Tax Guide for Small Business.
• Publication 15 (Circular E), Employer’s Tax Guide. Family employment rules and payroll tax treatment.
• Publication 501, Dependents, Standard Deduction, and Filing Information. How the standard deduction applies to a dependent’s earned income.
• Publication 538, Accounting Periods and Methods. Cash versus accrual, and the timing rules that follow from each.
• Publication 946, How To Depreciate Property. Bonus depreciation, §179 expensing, and placed in service.
• Publication 560, Retirement Plans for Small Business.
• Public Law 119-21, sections 70424 to 70426, the 2026 charitable contribution changes.
• Publication 526, Charitable Contributions.
• Publication 542, Corporations. Entity level treatment of charitable contributions.
• Publication 505, Tax Withholding and Estimated Tax. Safe harbors and underpayment penalties.
• Treasury Regulation §1.451-2, constructive receipt.
• Treasury Regulation §1.263(a)-4(f), the 12 month rule for prepaid expenses.
• Treasury Regulation §1.263(a)-1(f), the de minimis safe harbor election.
• Treasury Regulation §1.162-3, materials and supplies. A separate route for items the safe harbor does not reach.
• IRS, Tangible Property Final Regulations, on IRS.gov. Plain language guidance on the safe harbors and what each requires.
• Instructions for Form 2553, Election by a Small Business Corporation.