With 2025 drawing to a close, one of the most important exercises for small and mid-size businesses (SMBs) and startups is a comprehensive review of overall tax strategy. The fourth quarter represents a vital window to make critical decisions that can significantly lower tax liability for that year, helping to free up cash flow and position businesses for greater financial latitude and success in the coming year. With year-end upon us, here are five key tax considerations for SMBs and startups.
1. Consider Year-End Asset Purchases. In the many tax changes made in the One Big, Beautiful Bill Act (OBBBA) a provision with particular significance to all businesses (including SMBs and startups) is the return of 100% bonus depreciation for most tangible property with a recovery period of 20 years or less, including used assets, acquired after January 19, 2025. The OBBBA also expanded §179 expensing to include certain types of properties and updates generally not eligible for bonus depreciation, such as HVAC systems and roofs.
Permitting businesses to immediately deduct the cost of these purchases in the first year they are placed in service (rather than over a multi-year depreciation or amortization schedule) frees up more capital in the present year. This allows businesses to invest more in themselves earlier, increasing profitability over time while avoiding value degradation as a result of inflation and “lost opportunity” cost.
So if your business is having a strong year and you know you’ll need equipment or other capital improvements soon, purchasing before year-end can be beneficial. Buying a certain amount of qualifying equipment in December could reduce your taxable income by that full amount for the current year, even if you finance the purchase into the next year or beyond.
2. Switch From Cash and Accrual Method of Accounting. In the cash method of accounting, income and expenses are recorded only when cash is actually received or paid, unlike the accrual method, which records them when earned or incurred. Companies can use either option so long as they do not exceed the gross receipts threshold (although certain businesses can still pick either option even if they exceed the threshold), with SMBs and startups often opting for the cash method.
Cash-based accounting offers many benefits. Even if a business has invoiced a customer for services rendered, they do not have to report the income until the payment is received. Cash-based accounting also gives businesses greater control over when income and expenses hit their books. For example, a business can postpone income by holding off on sending invoices until the next tax year (and therefore delaying receipt of payment) or pull deductions into the current year by paying expenses early, even just a few days prior to the due date.
Accrual-based accounting, on the other hand, may offer less flexibility in managing timing, but it also provides some advantages. For instance, at year-end, if a company’s accrued income is consistently lower than its accrued expenses, this may result in less tax liability. Further, these businesses can deduct year-end bonuses in the current year, even if they are not given out until early the following year; and can defer taxes on unearned revenue (for instance - if an advance payment is received in December 2025 for work scheduled for February 2026, the company can defer the recognition of the cash received as income until 2026).
3. Review S Corp Election Timing. If your business is operating as an LLC or partnership but would benefit from S Corp taxation, you can file Form 2553. The standard election deadlines are two months and 15 days after the beginning of the tax year (for new entities) or the 15th day of the third month (March 15) of the tax year for which the election is to take effect. For existing entities (a C Corp or an LLC taxed as a partnership/sole proprietorship converting to an S Corp), obtaining S Corp status can help a sole proprietor save significant money on self-employment tax.
While the standard S Corp election deadlines may have passed, the IRS often allows late elections if you meet specific requirements that aren’t overly difficult to satisfy. We’ve seen companies gain S Corp status for a given tax year even after that calendar year has ended, or even several years after that. It can be a mistake to automatically assume it’s too late to file for S Corp treatment.
4. Maintain Proportional Distributions (for S Corps). For S Corps, distributions must match ownership percentages to maintain compliance with the “one class of stock” requirement and avoid reclassification issues by the IRS. The S Corp “one class of stock” requirement mandates that all outstanding shares confer identical rights to profits, distributions and liquidation proceeds.
If a disproportionate distribution happens by mistake, the recommended course of action is to make “equalizing distributions” within that tax year to correct the imbalance as soon as possible, and document the steps taken. While a single or accidental disproportionate distribution may not automatically terminate S status (especially if quickly corrected), when companies exhibit a pattern of such actions, they risk losing their S Corp election which subjects them to corporate-level taxation and potentially other unintended consequences.
5. Optimize for the §199A Deduction. The §199A deduction allows eligible pass-through businesses to deduct up to 20% of qualified business income. This deduction has a limit of up to 50% of W-2 wages paid by the business, so the more W-2 wages paid, the higher the deduction limit. So, increasing employee bonuses or owner’s salary before year-end can be beneficial. As a bonus, raising federal withholding on those added wages can help avoid underpayment penalties for the year.
An end of year tax strategy review can seem daunting—but identifying and leveraging transient opportunities to optimize tax positions for the current year will set them up for greater financial success in the years to come.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Brian Fine is a CPA and partner at Alpine Mar.
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