As a 6-figure business owner in California, you’re likely juggling client work, growth goals, and compliance deadlines all at once. But when it comes to taxes, waiting until April to get organized can cost you thousands in missed opportunities. The fourth quarter of the tax year is your last chance to implement strategic tax planning, reducing your tax liability and strengthening your financial position going into the new year.
Maximize Retirement Contributions
For nearly all California business owners, retirement contributions can reduce taxable income. Contributions to qualified plans, including a SEP IRA, Solo 401(k), or SIMPLE IRA, are often deductible.
- For 2025, the employee deferral limit for a Solo 401(k) is $23,000, or $30,500 if you’re age 50 or older (IRS source)
- Employer contributions can bring total contributions up to $69,000
These plans must often be set up before the end of the year (e.g., Solo 401(k)s). Check with a California CPA to confirm your deadlines.
Run a Mid-Year S-Corp Payroll Checkup
If your business is structured as an S-Corporation, you’re required to pay yourself a “reasonable salary” before taking distributions. Underpaying yourself can result in IRS scrutiny, while overpaying may increase payroll tax unnecessarily. The fourth quarter is the time to recalculate your compensation and ensure W-2 wages align with year-end business goals.
California also requires timely payroll tax deposits and reporting through the Employment Development Department (EDD). Keeping payroll compliant avoids penalties from both federal and state agencies.
Use Section 179 and Bonus Depreciation Wisely
100% bonus depreciation on eligible business equipment is back starting Jan. 20th, 2025. The state of California does not entirely conform to IRS Code Section 179 or bonus depreciation rules; however, California business owners can still benefit on the state level. The California Section 179 of the Internal Revenue Code places a cap on the deduction for qualifying business equipment at $25,000 (subject to a phase-out threshold of $200,000).
Bonus depreciation can help your business with big tax write-offs on the federal level and some write-offs on the state level.
Prepay Deductible Expenses
If you operate on a cash basis, you can deduct eligible expenses when paid, even if the service is rendered in a future year. Consider prepaying:
- Rent (up to 12 months in advance)
- Subscriptions
- Insurance premiums
- Software or tools you use regularly
This tactic accelerates deductions into the current year and reduces your taxable income. Just be sure not to prepay more than one year of service to remain compliant with IRS rules under IRC Section 263(a).
Review Your Estimated Tax Payments
California business owners usually owe both federal and state estimated taxes. Missing or underpaying quarterly installments can lead to penalties.
Double-check whether:
- You’ve paid at least 90% of your projected 2025 tax liability, or
- You’ve paid 100% of your 2024 liability (110% if your AGI was over $150,000)
The fourth quarter estimated tax payments are due January 15 of the following tax year, but paying them by December 31 can increase your federal deduction for state taxes (limited to $10,000 under the SALT cap). This timing strategy is especially useful in high-tax states like California.
Consider the Pass-Through Entity (PTE) Tax Election in California
One of the most impactful state-specific strategies for eligible S Corps and partnerships is California’s Pass-Through Entity Elective Tax.
Here’s how it works:
- Your business pays a 9.3% tax on qualified net income at the entity level
- This amount is deductible on the federal return, lowering federal taxable income
- You receive a credit on your CA personal return for the tax paid
To make the election, 50% of the total tax must be paid by June 15, with the balance due by March 15 of the following year. If you missed the June deadline, you’ll need to wait until the next tax year. A California-based CPA can help determine if this strategy suits your situation.
Harvest Capital Losses
If you have investments that have declined in value, you may be able to sell them to offset capital gains from other sales. This is known as tax-loss harvesting.
- You can deduct up to $3,000 of capital losses against ordinary income annually.
- Excess losses carry forward to future years.s
- Be mindful of the wash-sale rule, which disallows the deduction if you repurchase the same investment within 30 days.
This can help you manage portfolio risk while delivering tangible savings before the end of the year.
California-based business owners who earn over six figures need to plan for both state and federal taxes. By taking action before December 31, you can make the most of federal and state tax laws, preserve more of your income, and enter the new year on a solid financial footing.
Partner with Hojjati CPA!
At Hojjati CPA, we specialize in guiding high-earning entrepreneurs through strategic tax planning tailored to California’s unique tax landscape. Let’s work together to reduce your liability and strengthen your business for the year ahead.
