Preparing for the End of a Tax Year

As the end of the marina or boatyard operation’s tax year approaches, thoughts should be turning to tax planning. Basically, year-end tax planning involves legitimately maneuvering income and deductions to produce the lowest possible tax bill in both the current tax year and the next.

Fortunately, every marina/boatyard owner and operator have at their disposal a number of strategies that can help. One standard, but tricky move involves accelerating income, or deferring earnings, based on profit projections.

Shifting Income
Generally, a profitable marina or boatyard will want to accelerate deductions and defer income. Others might want to claim income early to count it in the current tax year and take advantage of the lower tax rate that usually accompanies a less profitable year.

For example, a business operating on a cash basis can stop billing customers prior to the end of the tax year (December 31, for most). Because no one can pay what they have not been billed for, that means no incoming cash payments and no taxable income.

Shifting Expenses
While deferring or postponing income to a later year makes it possible to minimize the current year’s tax bill, income isn’t the only thing that can be shifted to produce lower tax bills this year or next. Several examples follow.

Pay expenses with checks and mail them a few days before year end. The tax rules allow expenses to be deducted in the year the checks are mailed, even though they won’t be cashed or deposited until early next year. For big-ticket expenses, sending checks via registered or certified mail is recommended to provide proof they were mailed this year.

Before year-end, prepay some expenses. As long as the economic benefit from the prepayment does not extend beyond the earlier of: (1) 12 months after the first date on which the business realizes the benefit or (2) the end of the next tax year. For example, this rule allows you to claim 2025 deductions for prepaying the first three months of next year’s office rent or prepaying the premium for property insurance coverage for the first half of next year.

Advance payments for goods. A marina or boatyard using the accrual method of accounting can either account for certain advance payments and include them in taxable income in the year received (the full-inclusion method) or include the payment in taxable income in the next year (the deferral method). The deferral method requires the business to determine the portion of revenue earned in the year of receipt, which may be an administrative burden.
Investing in Equipment and Supplies

Depreciation is the income tax deduction that allows a boatyard or marina to recover the cost of property. It is an annual allowance for the wear and tear on property, such as buildings, machinery, vehicles, furniture and equipment. Also depreciable is intangible property, such as patents, copyrights and computer software.

As the end of the tax year approaches, a marina or boatyard can reduce its taxable profits by purchasing equipment, supplies or other assets and claiming accelerated write-offs such as Section 179, first-year expenses or by using bonus depreciation. A business expecting profits to increase in the years ahead should opt for depreciation deductions spread over the useful life of the purchased asset.

Placing qualified property into service before the end of the year is necessary to take advantage of immediate write-offs including:

Section 179: For 2024, Section 179 allows a business to immediately write-off up to $1,220,000 with a cap if total capital asset purchases reach $3,050,000.

Bonus Depreciation: Originally created as a write-off of 100% of the cost of all qualified purchases, the bonus depreciation write-off for the 2024 tax year is set to drop to 60%. If writing off the cost of those newly acquired assets would be more beneficial by reducing future taxable income, regular depreciation with its spread-out write-offs might be advisable.

The $2,500 Rule: The unique de minimis safe harbor is an annual tax election that allows business owners (and real estate investors) to automatically treat as an expense any item under $2,500.

Business Income or Not
Partners or S corporation shareholders in entities that have a loss for 2024 can deduct that loss only up to their basis in the entity. They can, however, take steps to increase their basis to allow a larger deduction. Basis in the business entity can be increased by lending the entity money or contributing capital by the end of the entity’s tax year.

Repairs and Maintenance
Generally, repairs and maintenance expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) are able to take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or per invoice). Businesses with applicable financial statements are able to deduct $5,000.

Rewards for Workers and Owners
If a marina or boatyard is looking for another legitimate write-off to reduce the operation’s current tax bill, think about the benefits offered to employees, including:

Employee Bonuses: A bonus paid to an employee in 2024 is generally deductible by the marina or boatyard and taxable to the employee in 2024. A business using the accrual method of accounting may be able to deduct bonuses paid as late as March 15, 2025, if the bonuses are not contingent on any post year events.

Retirement Plans: Perhaps changing the operation’s retirement plan or other benefits plans makes sense. Many businesses keep using the same retirement plan year-after-year. Because the business may have outgrown its existing plan or its tax objectives changed, this might be the time to consider another, possibly better, retirement plan such as 401(k), profit sharing, SIMPLE IRA, SEP IRA, ESOP, cash balance plan, non-qualified deferred compensation, personal traditional or Roth IRA.

Converting Investments: Marina/boatyard owners or operators might consider converting their traditional IRA or 401(k) to a Roth IRA and start paying taxes at a lower rate without paying taxes on withdrawals in the future. Regardless of income, the owner can convert as many dollars as desired. However, the owner or operator’s tax bracket and the amount in the IRA should be considered prior to any switch.

After all, the marginal tax bracket must be kept in check. As long as the election is made before December 31, it can be reversed by April 15. Thus, those getting gunshy later or finding themselves unable to pay the expected tax can change their minds and hit the reset button.

Plan deadlines: Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2024.

Don’t Lose Track of Losses
Now might be a good time to think about potential losses. Remember that only a marina, boatyard or other business operating as a regular C corporation can deduct excess business losses. What’s more, if any business realizes a net operating loss (NOL), it can no longer be carried back to offset earlier, already-taxed income. That NOL can, of course, be carried forward indefinitely, subject to a limit of 80% of taxable income.

The boatyard or marina’s bad debts may come in handy, and now is the time to think about them. A boatyard or marina using the accrual method of accounting should analyze its accounts receivable for any that are totally or partially worthless. By identifying bad debts that can be written off, they should qualify as a tax deduction, if needed.

Hiring Discounts
It’s not exactly tax planning, but any boatyard or marina owner or operator thinking of adding employees might want to take advantage of the Work Opportunity Tax Credit (WOTC), a federal tax credit available to employers for hiring individuals from certain targeted groups.

Any business, regardless of size, may claim the WOTC of 40% of the first-year wages of up to $6,000 for a maximum $2,400 credit per qualified worker. Because there is no limit on the number of workers who can be hired, there is also no cap on the number of credits that can be claimed.

Tax Savings This Year and Next
While 2025 is knocking on the door, there is still time to make changes that could save the marina/boatyard business, and its owner/operator, money. As mentioned, the marina or boatyard can defer certain earnings into next year, pushing income into 2025 and giving the business much-needed tax relief for the current year. When that deferred income is eventually reported, in all likelihood the business will be in a lower income tax bracket.

Obviously, having the right tax strategy can greatly aid the year-end tax planning process. Keeping ahead of changes to the tax laws, provisions and new legislation presents tax challenges but also offers additional opportunities to reduce a marina or boatyard’s tax burden, this year and next.

Remember however, year-end tax planning might require the help of the boatyard/marina operation’s accountant and/or tax professional to maximize every legitimate step necessary to reduce the operation’s, and its owner’s, tax bill.

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